To my amazement the Great Depression serves as a natural debating point that "justifies"
or "refutes" various economic policies. The Great Depression and the New Deal are
complex topics that are open to many interpretations. The Great Depression was the
worst economic slump ever in U.S. history, and one which spread to virtually all of the
industrialized world.

Seeing the order in which events actually occurred dispels many myths about the
Great Depression. One of the greatest of these myths is that government intervention was
responsible for its onset. Truly massive intervention began only under the presidency of
Franklin Roosevelt in 1933, who was sworn in after the worst had already hit. Although
his New Deal did not cure it, all the leading economic indicators improved during his

To understand the Great Depression, it is important to know the theories of John
Maynard Keynes. Keynes is known as the "father of modern economics" because he was
the first to accurately describe some of the causes and cures for recessions and

In a normal economy, Keynes said, there is a circular flow of money. My
spending becomes part of your earnings, and your spending becomes part of my earnings.
For various reasons, however, this circular flow can falter. People start hoarding money
when times become tough; but times become tougher when everyone starts hoarding
money. This breakdown results in a recession.

To get the circular flow of money started again, Keynes suggested that the central
bank, the Federal Reserve System, should expand the money supply. This would put
more money in people\'s hands (through the multiplier effect), inspire consumer
confidence, and compel them to start spending again.

A depression, Keynes believed, is an especially severe recession in which people
hoard money no matter how much the central bank tries to expand the money supply. In
that case, he suggested that government should do what the people were not: start
spending money. He called this "priming the pump" of the economy. I think that most
economists believe that only massive U.S. defense spending in preparation for World
War II cured the Great Depression.

After the success of Keyne’s economic beliefs were proven, almost all free
governments around the world became Keynesian. These policies have dramatically
reduced the severity of recessions since then, and appear to have completely eliminated
the depression from those who follow such economic beliefs throughout the world.

Events of the 1920s

The Roaring Twenties were an era dominated by Republican presidents: Warren
Harding (1920-1923), Calvin Coolidge (1923-1929) and Herbert Hoover (1929-1933).
Under their conservative economic philosophy of laissez-faire ("leave it alone"), markets
were allowed to operate without government interference. Taxes and regulation were
slashed dramatically, monopolies were allowed to form, and inequality of wealth and
income reached record levels. The country was on the preferred gold standard, and the
Federal Reserve was not allowed to significantly change the money supply. Many try to
blame the worsening of the Depression on Hoover, for supposedly betraying the
laissez-faire beliefs.

As this time line will show, almost all of Hoover\'s government action occurred
during his last year in office, long after the worst of the Depression had hit. In fact, he
was voted out of office for doing "too little too late." The only notable exception to his
earlier idleness was the Smoot-Hawley tariff of 1930.

But much more important, the economy was clearly turning downward even
before Hoover took office in 1929. Entire sectors of the economy were depressed
throughout the decade, such as: agriculture, energy and mining. Even the two industries
with the most spectacular growth - construction and automobile manufacturing - were
contracting in the year before the stock market crash of 1929. About 600 banks a year
were failing. Half the American people lived at or below the minimum subsistence level.
By the time the stock market crashed, there was a excessive amount of goods on the
market, and inventories were three times their normal size. The fact that all this occurred
even before the first act of government intervention is a major refutation of laissez-faire



•During World War I, federal spending grows three times larger than tax collections.
When the government cuts back spending to balance the budget in 1920, a severe
recession results. However, the war economy invested heavily in the manufacturing
sector, and the next decade will see an explosion of productivity... although only for
certain sectors of the economy.

•An average of 600 banks fail each year.

•Agricultural, energy and coal mining sectors are continually depressed. Textiles, shoes,
shipbuilding and railroads