The Great Depression: An International Disaster of Perverse Economic Policies.

• Author: Selgin, George
• Position: Review

By Thomas E. Hall and J. David Ferguson. Ann Arbor: University of Michigan Press, 1998. Pp. xvii, 194. $42.50.

Many people - some economists included - still view the Great Depression as proof of the failure of the capitalist system and of the corresponding need for big government. According to them, the depression was the price the public paid when their governments subscribed to laissez-faire economic doctrines. Recovery required governments to play a more active part in directing economic activity.

One problem with this popular way of thinking about the Great Depression is its implicit assumption that governments can be guilty only of sins of omission by failing to play a large enough role in economic affairs. In truth, governments can also be guilty of sins of commission-acting perversely and thereby making things worse than they might have been had the governments let market forces do their thing.

Miami University economists Thomas E. Hall and J. David Ferguson argue that the Great Depression is best understood as the consequence of "an incredible sequence of . . . misguided economic policies." Although Hall and Ferguson believe that classical laissez-faire policies and institutions (adherence to the gold standard in particular) played an important part in generating depression, they also find many cases in which government intervention made the depression deeper and longer lasting than it might otherwise have been. Indeed, government errors were so extensive as to make one wonder whether the depression was inevitable and whether it would have earned the epithet "Great" had governments limited themselves to a classical "hands-off" approach.

Hall and Ferguson trace the roots of the depression to World War I, when the belligerent nations of Europe abandoned the gold standard. Gold payments were resumed during the 1920s but at parities that were generally inconsistent with international equilibrium: The pound was overvalued while the dollar and franc were undervalued, causing a gold outflow from Britain that was worsened by American and French attempts to sterilize gold inflows. Although the Fed did switch to an expansionary policy, for Britain's sake during 1927, it reversed policy a year later in response to gold outflows and advancing stock prices. This reversal is supposed to have initiated the depression by triggering the U.S. stock market crash. The depression then continued to deepen because of falling stock prices and in response to a continuing decline in the quantity of money, which the Fed (influenced by the real-bills doctrine) failed to prevent. In the meantime, Congress passed the Smoot-Hawley...