Higgs on the Great Depression
Dec 15 2008

Robert Higgs, of the Independent Institute, talks with EconTalk host Russ Roberts about the Great Depression, the New Deal, and the effect of World War II on the American economy. Using survey results, financial data, and the pattern of investment in the 1930s, Higgs argues that New Deal policies created a climate of uncertainty that prolonged the Great Depression. Using consumption data, he argues that prosperity did not return during wartime, but rather after the war when government intervention in the economy subsided.

Explore audio highlights, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Barry Kelly
Dec 15 2008 at 7:19am

You should consider inviting more guests that have different opinions to yourself, Russ. There’s too much of a risk of the show being composed of tedious bias confirmation when you restrict your guests to those whom you already agree with.

Dec 15 2008 at 8:44am

Really looking forward to this podcast. @ Barry : I agree, Naomi Klein would make an excellent guest.

Russ Roberts
Dec 15 2008 at 10:43am

Barry Kelly,

You might enjoy the Eric Rauchway podcast of two weeks ago. Rauchway’s perspective on the New Deal is very different from Higgs’s.

Dec 15 2008 at 11:14am

I am enjoying these podcasts on the Great Depression and look forward to others. I read the Rauchway book and agree that it offers a different perspective.

Thanks for EconTalk

Dec 15 2008 at 5:29pm

Very interesting podcast, and certainly Higgs’s points about the delusory nature of the wartime “expansion” are hard to argue with. A lot more beef than the Rauchway podcast, which was pretty much the ABC’s of the conventional wisdom on the depression. Also very interesting that evidence is so abundant that market participants were reluctant to take risks and invest in the fact of so much policy uncertainty.

I wish you had been able to address two other important and much debated issues. One is the money supply; one gets the impression Higgs does not think the collapse in the money supply from ’29 to ’32 was very important. If it wasn’t, why not? Second, another depression-era shibboleth is making a comeback: the “paradox of thrift.” It’s being widely suggested by pundits that the fall in asset prices will lead to a rise in savings and a resulting decline in economic growth in the U.S. How valid is that fear, especially in a global context (e.g., if our increased savings is offset by increased buying by, say, China, are we back to the happy start?) If the depression-era reluctance to invest was due to the uncertainty caused by Roosevelt administration policies, is the paradox of thrift just another myth?

Dec 15 2008 at 9:13pm

Good podcast I guess but I continue to be bothered by the idea of the “non-interventionist” who focus so much on the problem with the recovery while giving no mention to what started the whole mess in the first place.

It’s kind of an, “I can’t believe what a bad job these guys are doing of putting back together the vase we shattered” mentality.

Is it really fair to talk of the poor quality of shoes falsely elevating FDR’s GDP numbers while assuming the 1929 peak is some gold standard as opposed to a speculative bubble based on assets far over valued then the shoes worn during FDR’s time.

Bottom line for me is I’d put more value in the peoples opinion of time to re-elect FDR and Truman over and over again then a revisionist history written 70 years hence.

And the businessmen of the time concerned with FDR’s socialist/communist leanings… Obama would tell you nothing has changed.

Dec 16 2008 at 10:05am


Quoting P.G. Wodehouse in such an important academic setting as Econ Talk? I believe a slap on the wrist is warranted…perhaps having to spend a weekend at Totleigh Towers with Gussie Fink-Nottle.

On a serious note, another very interesting podcast. Per an earlier comment, I welcome an occasional guest with whom you agree because it (a) lets the listener know you’re not on an intellectual island; (b) presents the viewpoint in a different manner/style; and (c) offers different evidence than what you alone posit.

Further, I think the more you can do to compare and contrast the failures of the past with the same policies being tried today, the better.

Russ Roberts
Dec 16 2008 at 10:29am


I have always found a weekend at Totleigh Towers with Gussie to be something of a restorative. Just don’t confuse him with Tuppie Glossop. Our relationship has been strained since that unfortunate episode at the Drones Club.

Thanks for the other feedback. Much appreciated.

Josiah Neeley
Dec 16 2008 at 11:20am

I actually debated yesterday whether to listen to EconTalk or to a Wodehouse audio CD I have checked out from the library. Little did I know that by listening to EconTalk, I would be listening to Wodehouse.

Anyway, bravo to Prof. Higgs, who provided a useful supplement to Prof. Rauchway’s talk a couple of weeks back.

Daniel Klein
Dec 16 2008 at 10:33pm


Higgs tops my list for econ Nobel prizes, even ahead of Gordon Tullock.

He never got to his third body of evidence, the bond spreads.

Higgs’ schooner would sail much farther under the banner “rules uncertainty” than under “regime uncertainty.”

“Rules uncertainty” can be part of the canon of ordinary microeconomics, and hence generalize to macro.

“Regime uncertainty” doesn’t scale as well; it has narrower application.

Thanks as ever to Econtalk.

Mike Montchalin
Dec 17 2008 at 11:31pm

Didn’t George Schultz say that some really smart guys should revamp economic measures. It seems that measures really go awry during wartime.

There is no need to for you to have guests who disagree with you. I have been listening to them all of my life. This is fresh and fascinating.

@muirgeo: Re-electing the likes of FDR & Nixon doesn’t reflect well on the candidates. It reflects poorly on the voters.

Dec 18 2008 at 2:34pm

I just had to comment on this one. This was an enjoyable podcast and does a great job of reframing an analysis of wartime economics for a non-economist.

Maybe I am missing the point, but I do have to say though that I never had an impression that the wartime would be compared with other times in the development of the US economy. A concensus view that war time economic measures of prosperity are relavent kind of indicates that the goal of entering the war was to exit the depression. I don’t see it that way at all. If anything, it seems to me that the prevalent historical view is that the US delayed entering the war in a more neutral stance until Perl Harbor congealed a concensus regarding defending liberty.

The direction of production might be thought of as one big company coordinating suppliers to achieve optimal production of wartime materials so that limited resources and capacity would be able to compete with the limited resources and capacity of opponents. That coordination would be market oriented to the extent that markets were used to procure resources in the successive steps in the production value chain much like an auto company using material requirement palnning or lean techniques with suppliers to produce an auto. The civilian economy had to respond to the residual scaricity as the wartime company crowded out other resources but winning the war was definitily a valued good by the consumer. Also, I would bet that many of the 6 million soldiers volunteered for the effort.

Finally, the war may have helped many countries exit the depression by restoring market economies, democratic liberties, and freerer trade after the war. I think there was a lot of autocratic socialism in many countries that was limiting liberties and worse.

Know one should want to start a war or other less serious non-roductive activities (many examples in the depression era) to improve an economy but it seems like it would have to be expected that when free individuals are defending themselves, resources would be allocated away from a conusmer economy as an investment in continuing the enjoyment of liberties.

Russ Roberts
Dec 18 2008 at 4:23pm


I don’t think many people argue that Roosevelt entered the war to fix the economy. It’s just that a lot of people believe that getting into the war had the side benefit of helping the economy. What Higgs argues is that the last point simply isn’t true–the war wasn’t good for the economy. It was good for the companies that made the weapons. But the non-military side of the economy didn’t improve as a result. If anything, it got smaller, making life difficult.

Dec 18 2008 at 4:40pm


Thank you for the claification. My mental model always was that the war was a difficult time of scarcity and sacrifice as a result of resources being diverted to wartime production – guns vs butter. I can understand how others without a great deal of thought might think otherwise much like the belief that a weather catastrophe is good for the economy rather than an opportunity cost.

And thank you for the podcasts!

Richard, Tokyo Japan
Dec 19 2008 at 1:38am


I love your podcasts. If I could make a suggestion for a future show, I think you should a do on Madoff’s massive Ponzi scheme. I would like to hear an economist’s perspective on it.

Richard, Tokyo Japan

Dec 20 2008 at 3:55am

As I truly enjoy your podcasts, perhaps I could a make a couple of suggestions on very interesting people with interesting ideas:
– Dan Ariely from the book Predictably Irrational
– David Einhorn from the book Fooling Some of the People All of the Time: A Long Short Story
– Burton Malkiel from the book Random Walk down Wall Street
They should make very interesting interviews!
Thanks and regards
Erik – Amsterdam – The Netherlands

Dec 21 2008 at 2:00pm

Excellent interview. Rauchway seems to favor inteventionism whereas Higgs does not. So according to Higgs, government spending for the war didn’t help the economy but in fact made things worse. This is pretty much the direct opposite of conventional wisdom. I thought Higgs made a good case for this.

Michael Smith
Dec 21 2008 at 2:35pm

Russ, thanks for the podcast. It was very informative, along with the link to the Higgs article in The Independent Review.

I think Higgs makes a great case that “regime uncertainty” played a major role in extending the Depression. I also think we’re suffering some amount of “regime uncertainty” right now — uncertainty over how many of Obama’s disastrous campaign promises he will keep.

Dec 21 2008 at 3:19pm

Thanks Russ and Dr. Higgs. I tend to side with Dr. Higgs but when asked about evidence, it seemed that references were provided but not the contents of the references were not discussed much.

I would also add that the war was a monumental shock to our way of life and the entrepreuerial spirit needed to survive the war could have been a factor in people refocusing and believing in their ability to create value in our social networks after the war.

Dec 22 2008 at 6:31am


If you could get Rauchway and Higgs on at the same time, then we’d have a great podcast. Would you consider doing something like that?


Dec 22 2008 at 1:14pm

I wish Russ had spent a lot more time acting as a mainstream foil pushing Higgs on various points, as he does when he is more skeptical (like for instance with Robin Hanson on signaling).

First off, it is never clear if Higgs is really disagreeing with the mainstream take on the war. Higgs made a lot of nice points about measuring GDP, but is this really ignored and out of the mainstream as he suggests. Well, Mankiw’s famous and most widely used “principles of economics” textbook as a whole chapter on measuring GDP and then a second chapter on cost of living, with such subtitles as “Is GDP a good measure of well-being?” Then he makes a totally separate argument along the lines of “GDP stopped measuring prosperity because GDP includes planes and bombs and those don’t add to prosperity.” How mainstream is that argument? Well, it was in my high school textbook. (can’t tell how mankiw deals with it from the TOC). But it is really just an application of the broken window fallacy, which is discussed in just about every first year econ class usually in the first week.

What Higgs doesn’t make clear is how he disagrees with the more standard story that the economy in the 1930s was essentially broken in that it couldn’t make anything. It couldn’t make anything because it was stuck in a deflationary trap (or a liquidity trap) sending market clearing interest rates below zero. It would have been really nice if Hitler could have been stopped with Teddy Bears and Model Ts, but there’s little evidence that was in the relevant policy space. It is one thing to say “world war II was not a generally prosperous time” and quite another to say “during world war II we made a lot of stuff, and we weren’t able to make a lot of stuff before.” To pretend that mainstream economics doesn’t understand the difference is a ridiculous canard, and certainly demands some form of evidence.

I also thought there were major problems with the regime uncertainty part in two areas. First, he said that he meant for it to be a compliment to other depression research, but he makes no effort to argue the importance of regime uncertainty. If we had appropriate monetary policy (or fiscal policy), but still had regime uncertainty how would the alternative history have looked. Basically, there was no attempt at quantifying how big of a deal the regime uncertainty was. Also, did we really not view survey data more skeptically than that? Wow, that was confirmation bias! A Harris poll in 2007, found that 42% of people polled thought it was “likely” that a nuclear bomb would go off in a U.S. city. Is fear of nuclear attack a serious drain on investment? Is there any doubt that if I offer up a poll on the odds of life as we know it ends in the next 10 years, that we will come up with a probability much higher than the one with which people actually seem to act.

Second, there was no attempt to tease out regime uncertainty to good old-fashioned uncertainty. Americans had no idea how long the US would be mired in recession, had no idea what future growth in profits would be, had no idea if the US would be dragged into a European war, had no idea how long that war would end up lasting, had no idea who would win or what winning would look like, had no idea and not much theory about how a post-war economy would work. There was lots of REAL uncertainty. It seems this uncertainty would likely have dwarfed regime uncertainty, but there is no mention of it in the podcast. Is there any doubt that real uncertainty trumps regime uncertainty in the real economy? That the market cares much more about where housing prices will end up, how high employment will go, how bad future world economic growth will look, as well as political uncertainties around the world (tensions between india and pakistan for instance, gov’t rule in china) than they care about whether Obama will raise cap gains 5% or institute a canadian-style health care plan?

Maybe Higgs’s work addresses a lot of these issues in depth. He seemed like a smart guy, and I doubt I’m the first one that’s raised these questions. But Russ, who usually does a great job, mostly took everything at face as opposed to the Rauchway podcast where he asked a lot of great probing and challenging questions. Perhaps, that is the problem with agreeing too much with the subject of your interview, it is much more difficult to do a good job.


Dec 23 2008 at 10:41am


FDR was losing the election of 1936. Early polls had him losing widely against “any republican”. So, he conducted an experiment. You see, Maine, at that time, held their elections in September. FDR decided to spend money on WPA projects in one county in Maine. A county that had previously been a Republican stronghold. He lost Maine, but won that particular county overwhelmingly.

After that, he spent the next 2 months spending billions of dollars on WPA projects throughout the country. Everywhere people looked, there was signs of FDR appearing to provide jobs, appearing to stimulate the economy.

This won him the election.

And, by the way, it’s a “I can’t believe what a bad job these guys are doing of putting back together the vase they shattered” mentality. I fixed it for you.

Dr. Duru
Dec 23 2008 at 4:05pm

Hi Russ,
I am enjoying EconTalk VERY much ever since a friend introduced me a few months ago. I have consumed a LOT of your archives! I feel like I am getting a great lesson (and refresher) in economics on the cheap. 🙂
Anyway, I am particularly intrigued by the discussions about the Depression. I know you tend to prefer a philosophical/”frame the questions” approach on this blog, but I would love it if some guest could do a hypothetical rollback of the tape and explain how s/he would have handled the economy after 1929, why, and the likely outcomes. It just seems too easy for theorists to poke holes at this or that action from people who felt compelled to act in real-time, under a lot of pressure, etc.. I have the feeling that the policy prescription you would promote is to stand back and let the solution emerge from the chaos. But I have the feeling that when an economic system has swung to an extreme, like a Great Depression, an emergence approach may not work fast enough to prevent massive suffering. Again, I am dying to hear someone speak directly to this.
Finally, I am with “muirgeo”: why assume that the fear of businessmen that America’s political sky was falling represents a fair (rational?) interpretation of FDR’s intent? FDR was fairly eleted by the majority, America remained some kind of capitalistic democracy, and emerged from WWII a dominant world power. In hindsight, I would conclude that those guys should have put more faith in America’s ability to “get it right” eventually.

Dec 31 2008 at 6:48am

I went to University in Australia and took some subjects in economic history. The explanation of the cause of the Great Depression (“laissez faire capitalism gone wrong”) and how we recovered (“saved by the war”) were unsatisfactory then, and remain so today. I thoroughly enjoyed this podcast for challenging some of the accepted wisdom about the Great Depression. I worry that similar explanations to those given by my lecturers have already been accepted as the causes of the state we’re in today.

I trust I am right in thinking that the state we’re in is partly the reason why there has been a series of podcasts on the Great Depression. If so, this leads to a question that intrigues me: the Great Depression of the 1930s normally overshadows the Depression of the 1890s, but should it? Can we equally learn something from the 1890s to help us understand the state we’re in today?

I’m from Melbourne where the 1890s depression was really severe. Probably far more severe than the 1930s depression (at least in Australia). It started rather fortuitously with the discovery of gold which fuelled a land boom, the land boom was followed by a banking crisis that lead to the eventual bust. It all sounds eerily familiar.

Clearly the discovery of gold in Victoria (Melbourne) had a major role to play in the land boom. The podcast with Shiller touched on a similar gold-induced land boom in California in the 19th century, but left me wanting more.

I’ve read a fair bit over the years written by those coming from an Austrian perspective about the merits of the gold standard, but surely a hard currency such as the gold standard can also lead to the sort of asset price bubbles we’ve recently experienced under a fiat currency.

The discovery of gold is likely to have a dramatic effect nearest where the gold is discovered (eg Victoria and California in the 19th century). COuldn’t this be similar to a central bank expansion of the money supply (where it benefits most those who get the money first)? I know it’s easier for a central bank to print money than it is to discover gold, but surely neither system is without it pitfalls.

Shiller referred to “contagion” in his podcast and Keynes’s “animal spirits”. I suspect there was a large amount of this going on at the same time as the money supply was being dramatically expanded.

Sorry if this is a little bit off the track of Higgs’s podcast, but I’ve been listening for most of this year and have held back from commenting until now.

One final note: one of my lecturers at university used to say that an explanation can always be found somewhere in Marshall; I say the explanation can always be found somewhere in Wodehouse. More Wodehouse please Russ. I enjoyed Chichester Clam, but I’d love to hear more from Oofy Prosser as well, he’d surely know a thing or two about economics.

Alex Taylor
Jan 6 2009 at 9:33am

I really enjoyed this podcast. Thank you.
Robert Higgs mentioned that manufacturers were compelled to produce military goods. Could someone tell me a little more about the kind of coercion and perhaps a good source or two for further reading on the subject?

About this week's guest: About ideas and people mentioned in this podcast:

Podcast Episode Highlights
0:36Intro. Great Depression, events of 1930s-1940s. Papers, easy reading. Standard view is that WWII got us out of the depression. Argument against that: War supposedly ended depression because it brought the rate of unemployment down; and at the same time, real domestic product was shooting up; consumer well-being rose during the war years even though resources were being diverted to war purposes. Taken to be facts. Squeezed the data; they collapse and don't support those claims. People didn't think very hard about the war's change to the institutional set-up, or about what it meant to be unemployed, produce real output, or have well-being. Used same measures, but those measures had lost their content because of the wartime mobilization. Aside: when asked to explain something, it's always a good idea to see if that something is true. Starting in 1940, Depression was not over. Real GNP was about back to 1929 levels; but 10 years had passed, so just being back to that level doesn't mean the Depression was over. Capacity had grown greatly in those years.
5:43Why had capacity grown? population had grown; lots of new technology had been developed but had not yet been applied. One place we see that is in the still-high rate of unemployment rate in 1940 of 15.7%. Includes those who were working but not counted as unemployed, WPA, non-private sector; make-work jobs. Stanley Leibergott, who put these data together argued it was wrong to count them as employed. If you count them as employed, Michael Darby's number, 9.5%, still very high. Rate of unemployment starts to fall quickly, by 1943 it's in the neighborhood of 1-2%. For fiscal year 1944, starting July 1, 1943, measured unemployment rate was 1.3%, effectively zero. Jobs were very easy to get during the peak war years. Employers beating the bushes to get more employees and keep the ones they had. Question is: what should we make of that? Usually decline in unemployment reflects better economic conditions. In this case, though, starting in 1940 less than 2% were in the armed forces or in munitions production; but by the time we get to 1943-1945, almost 40% in armed force and munitions; 12 million people in the armed forces; similar number to support them; diversion of workforce. Could say: Just another sector of the economy. Buildup hinged on government coercing people into the armed forces. Ten million drafted, and others signed up because they didn't want to get drafted into the infantry; so buildup hinged on coercion of workers. What if today we arrested that many people and put them into prison? We'd have to build the prisons and feed them; the jailed people could work. Gets rid of unemployment, but it's fake. Or people could just be put to work building ditches and filling them in. That was the choice in the 1940s with the draft. Coercion. Automobile industry at the time was compelled to stop civilian vehicles. Leaves only 60% of the rest of the economy to produce goods for the whole economy. Naturally, fewer goods will be produced. Plus, you've removed some of the most productive people--prime age males with labor market experience; replaced in the private labor force by young, elderly, and women who before the war had no experience in the labor force. Astonishing that civilian output would be expected to be maintained or increased. Preposterous that people have believed this.
16:34Keynesian mindset that spending has this big multiplier: idea is that when the government buys something, the money goes racing through the economy many times. Agnostic interpretation: war is not productive, it's destructive, so when you shrink consumer side you expect that side to become smaller. And it did. Non-Keynesian reasons why economy produced more than expected: could use resources more intensively and work week increased. Work week in manufacturing increased to 45 hours per week. Capital stock used double and triple shifts. Underappreciated aspect of the war: work involved tremendous amount of unmeasured capital consumption. Robert Gordon article, 1969, capital accumulation benefited by wartime activities because government built a lot. Turns out that government's contribution to building the capital stock had little or no application than military application. In addition, rapid use of the capital stock, which increased the depreciation more than measured because government accountants just apply a formula. That formula is inappropriate during the war years. Book discussion. The two articles go back to 1992, 1997, and are revised in the book.
21:37One reason people have been misled about the war is that they look at the data: output is growing so we must be better off. What is the mistake? How do we measure the data? Economists look at GDP, don't give a lot of thought to how the number is generated: sum of all currently produced goods and services at market prices. How does the Commerce Department put that together? Arbitrary assumptions, projections, interpolations: unsettling to discover how sausages are really made. Take comfort in idea that the same assumptions are made year after year; but in WWII, those assumptions may have been unusually inappropriate. In 1940 market pricing would have been available to price 90% of the goods and services; but in 1944, only half was at market prices. The prices the government chose to pay were essentially arbitrary. Didn't emerge from interplay of bids and offers. Government commanded or simply confiscated resources or de facto took them by telling people what they had to do and how they had to do it. Paper trail looks like market transactions but those prices don't grow out of market forces. Private sector goods prices were also not meaningful because they often weren't available or were subject to price controls. During the war, price, wage, and rent controls. Persistent demand for labor because producers were not allowed to bid up wages; excess demand for goods was rationed through not market means. People did buy and sell but the prices don't reflect consumers' marginal valuation or producers' marginal costs. Logic of computing GDP breaks down. Prices measured differ from actual prices. If you wanted to get chocolate or tires or silk stockings, there was a price, but it was controlled and arbitrary, so if you multiply the price by the quantity consumed you don't get a meaningful number. Take these calculations and you get a meaningless number. No algorithm for running regressions when variable x is meaningless. Economists: Price indexes are subject to mismeasurement. That's a minor issue here: how do we measure national product? Kuznets, father of national income accounting, worried for years and years about this. Commented through the 1940s and 1950s how the valuation of war output was almost impossible. Not much confidence. Overwhelmed by resource provided by the Commerce Department, during the war the Commerce Department took it over as an aspect of its war planning. After the war, instead of leaving that computational field, Commerce Department stayed in charge of computing GDP and swept away the question of the prices being market prices or not. Skeleton in the closet of macroeconomics since WWII.
32:30Bottom line on consumption and standard of living? On consumption you can try to go back and rework the price indexes. There were real prices that just weren't used to compute GDP because the controlled prices were used; Hugh Rockoff, Milton Friedman, Anna Schwartz have tried to estimate what the actual prices were. Using these estimates, find that real consumer outlay fell from 1941-1943; didn't get back to 1941 level till 1946. Consumers were worse off; but not the whole story. Other things happened that are not captured: deterioration of quality not measured. Price controls cause producers to sell you less good quality. Rent controls cause landlords to cut back on maintenance or do none at all. Housing, clothing, shoes, etc. deteriorated but not taken into account by any who have re-estimated the prices. Also: transactions costs not measured--standing in line to buy rationed goods, ration coupons, looking for where goods are available. Simple takeovers of things like transportation: if it wanted to move troops it put them on the train, so trains weren't available for passengers. Idea that war is not good for the economy dies hard.
36:43Move back in time to the thirties, second paper, "Regime Uncertainty." "Great duration" vs. Great Contraction, 1929-1932. Many people argue that the New Deal pulled us out of the Depression. Government tried to get the economy going between 1933-1941. Did Great Depression hang on because it was so deep or because the government actions made things worse? Great Depression didn't drag on so long in other industrialized countries. Paper designed to alert economists: Roosevelt administration behaved in such a way that it created an atmosphere of extreme uncertainty and apprehension among investors. Long term investment never recovered. Trick wasn't just getting back to 1929; take second half of 1920s, about 16% of GDP went into private investment. Economy didn't get back to that level till after WWII. Why did it take so long? Late 1930s was an extraordinary time. Macroeconomists who don't know history are oblivious. Not just another 5-year period. Around 1935, Roosevelt had more or less changed his closest advisers, taken on people who were much more hostile to private property and business enterprise; done so and changed his tack politically because of populistic leftists feelings, Upton Sinclair, etc. kooky schemes during the depression, massive redistribution of wealth, put everybody on the dole, give elderly money that had to be spent by the end of the month, expiring money. Challenge to Roosevelt, so he went them one better. Turned to measures that were menacing to investors and business people. Wagner Act, Social Security, Banking Act of 1935, etc. Many economists like to argue that after Roosevelt the economy was fine, recovered. But why in 1940 are we still not out of the Depression? Answer: problem of 1938, but you can't blame that on the New Deal; it was the result of bad banking action in 1936-1937. But it was the Banking Act that gave the Fed the power to change the reserve requirements, which they then used. Not just bad exogenous policy-making by officials.
45:10Challenge faced in paper: all kinds of uncertainty during the 1930s; story is more than an ex post narrative. Private net investment was negative at the time, depression really deep versus other evidence. Three forms of evidence: doesn't just rely on running a regression but on independent evidence. One: massive historical fact, businessmen, Henry Morgenthal at the time: businessmen were scared that Roosevelt was making the country into a fascist nation. Cannot laugh it off if you look at the evidence. Book by Gary Dean Best: historian, published in early 1990s, evidence in which people are saying they are afraid. Not ex post rationalization, mass of contrary testimony. Could be what people wanted to say because they wanted to turn people against Roosevelt. But much in private outlooks, not just the plutocrats complaining. Many sources, private as well as public. Another kind of evidence: public opinion surveys, just getting started. Fortune had a survey, asking questions relevant to regime uncertainty. Large proportions of business people expecting harm to private property rights. November 1941, quote from poll: business executives: Which of the following comes closest to your prediction, four options: 1. system of free enterprise had only 7%; 2. system under which government will take over much but leave many opportunities to private sector, 52%; 3. semi-socialized society with little room for private economy, 37%; 4. fascist society remainder. Polling neighborhood of 1000 respondents. 40% of businessmen expected the government to take over the economy, discourage you from investing. Munitions contracts, reasons, do business with the government: hundreds said you can't trust the government. Government couldn't get any takers to take the contract. Strike of capital. Changed after Roosevelt after he brought businessmen into the government to run the buildups.
54:32Biases, we all have them. Sympathetic to story; but in today's world, in 2008, feel a little bit of that regime uncertainty, government and the Fed are jerking the economy around. Not widely accepted among economists. Book discussed in blogs in the past year, including Marginal Revolution, Tyler Cowen. Wasn't just a period like now, though we are seeing some of this right now because of government's rapid changes in policy course involving lots of money and the rules of the game, who can do what with what. Government volatility with policy making plays havoc with calculation of risk vs. return. Bankers and individuals don't know what to expect: who will be bailed out, who should you invest in. Toxic assets are said to be unsaleable. Don't need to think about this long to realize you don't want to sell them privately at a low price when the government might buy them from you at a high price. They are not all worthless, but uncertainty has cut them off. P. G. Wodehouse, Joy in the Morning, 1946, reprinted as Jeeves in the Morning. Chichester Clam, businessman wants to meet with him, but Clam is nervous; businessman attributes it to coffee and the New Deal. Quote.
1:00:41What are additional questions for study: contraction, duration, and escape? Seminal economic event of the 20th century. Ability to do misleading analysis is large for only one event. Striking how little we've learned, even in the mainstream. Even among mainstream macroeconomists, lots of disagreement. Regime uncertainty is not just an explanation of the Great Duration but an explanation of why genuine prosperity returns. At the end of WWII, models like Christina Romer's utterly fail to explain what happened in 1945-1948. All variants of quasi-Keynesian with monetarist models. All fail to explain transition from 1945-1947, transition to prosperous economy after the war. Potential for more work. "Great Escape" claim: rules settled down, businessmen brought in shoved out the zealous New Dealers, so after five years businessmen no longer distrusted the government. After war, Truman as president abandoned many of these rules, helped lead businessmen to believe they could manage.

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