The Great Depression That Did Not Happen

Economist David Friedman debunks a widely believed but fictional view of the Great Depression. The myth was that in part because the United States was on the gold standard, the Herbert Hoover administration had to cut back on spending and raise taxes in the late 1920's plunging the country into the Great Depression. Mr Friedman shows that in fact, Herbert Hoover increased spending.

Mr. Friedman contrasts a period ten years earlier:

From 1920 to 1921, the unemployment rate increased by 6.5 percentage points and prices fell by more than 10%. Seen without the benefit of hindsight, it was obviously the beginning of a depression. Comparing the increase in unemployment and decrease in prices from 1920 to 1921 to the almost identical figures for 1930 to 1931, it was going to be a Great Depression.

President Harding acted as President Hoover is supposed to have acted. By 1923, federal expenditure had been reduced to about half its 1920 level. The table shows the result. The unemployment rate that peaked at 11.7% in 1921 had fallen, by 1923, to 2.4%. One year of high unemployment instead of 11 years under Hoover and then Roosevelt.

It was the Great Depression that didn't happen.

The message is clear that increased spending and increased taxes, a la Obama plan, is exactly the wrong way to cure the country's economic woes.

David Friedman is the son of Milton and Rose Friedman. Milton Friedman is a Nobel Laureate in economics.