Mises Wire

The Great Depression and Great Depression II: Similarities, Differences

Comparing Great Depression I with the current Great Depression II, the cause has been the same, and the responses have been similar.

But it’s important to not take the parallels too far. The circumstances differ, so the impacts will differ.

First, the similarities.

Same Cause, Similar Responses

Both depressions, like recessions, originated with unsustainable booms. Great Depression I was preceded by the government and financial cronies creating 62 percent more money over eight years. Great Depression II was preceded by the government and financial cronies creating 303 percent more money over sixteen years.

Great Depression I was stretched out from a time-limited recession to an interminable depression by governments. Great Depression II is being transformed likewise by governments.

In October, overall, the fraction of jobs to population was down 0.17 percent. Counting only the new jobs, both full time and part time, more than one in three were in governments.

As economist Daniel Lacalle recently pieced together, Fed credit is much costlier but still is inflating to keep zombie banks and lenders alive. Financiers’ credit to families and producers is much costlier and is contracting.

If the Fed holds rates constant or increases them, families and producers will contract further. If the Fed cuts rates, families and producers will still be hurting and won’t rebound and borrow like they had anytime soon. The Fed simply has, for now, used up its ability to take control actions that will make a difference.

(If the Fed’s people would realize this and take no action, that would be good. But when their control actions have made a difference, they have chosen to make most sectors’ numbers look deceptively good in the short term, at the cost of supporting massive waste in the long run.)

For now, families and producers are hostages to the financial sector. Financial zombies aren’t being allowed to die and fertilize productive companies because the Fed instead plays election-cycle politics and favors finance insiders. And yet, despite the Fed people’s culpability for their actions favoring big government politicians and cronies, in the overall system the Fed people aren’t the biggest culprits but rather are caught in the web of the strongest predators.

The problem is spending, and the apex predators are the big government politicians, who make up the majorities of both parties.

Our predecessors lived through a similar problem in Great Depression I. Back then, the direct, open impact of governments through spending was far overshadowed by the indirect, more-hidden impact of governments through regulation. A selection by economic historian Robert Higgs of major regulatory acts, which were central to Great Depression I since they reduced or threatened property rights, totaled thirty-nine acts in seven years.

This regulatory storm was devastating. In 1929, net private investment had been $8.3 billion. In Great Depression I, under property rights uncertainty from big government politicians of both major parties, net private investment was −$3.1 billion total from 1930 through 1940; it recovered to $9.7 billion in 1941, was suppressed by wartime controls from 1942 through 1945, and only returned to satisfying families’ wants and needs at predepression rates starting in 1946.

Then and now, the same government money creation originated the depressions, and similar government regulation or spending held people down from working their way up and out of the depressions.

Now, though, some moving parts are different. Some of the news is good, but some serious risks could well be worse.

Different Circumstances

People are entering into Great Depression II considerably more productive. Gross domestic product per person, in 2022 dollars, was $14,000 in 1929 but $71,000 in 2022. More is more.

Still, as economist Sam Peltzman has called attention to, more income (memorably: “opulence”) fuels more regulation. Total revenues of governments in all jurisdictions as a fraction of gross national product through 1913 had never exceeded 8 percent, and as people entered Great Depression I still were only 13 percent. As we enter Great Depression II, the total spending of the governments in all jurisdictions as a fraction of gross domestic product is 38 percent. Bad government behavior has long been passed down to us and now seems normal. Now we must characterize not only the problem of the regulatory state, which Peltzman stressed, but also solutions to limit it.

At the same time, our governments are also entering into Great Depression II treating us as considerably more indebted. The US’s current national government burdens its people with slightly more debt now as a percent of the gross domestic product than the past national government ended up burdening its people with at the end of the sixteen years of Great Depression I, including the whole of the resulting total World War II—120 percent in peacetime now, versus 119 percent postwar then. So, where people entered Great Depression I with the US’s national government debt being only 44 percent of gross domestic product, we are entering Great Depression II with none of that same capacity to withstand massive error.

One changing but as yet unproven possible saving grace could be that there is far less tolerance for war by people in modern nations nowadays,including by people in our potential enemy, China.

Beauty contestants emblematically call for world peace but aren’t clear on how to achieve it. The path turns out to be simple, although not as easy as falling into instability and war: peacefully limit our governments, and steadily grow wealthier than potential enemies.

As Stein’s law observes, “If something cannot go on forever, it will stop.” We won’t be pushed down deeper into this pit forever. Our challenge is to put an end to this now—to overpower our captors by overcoming their party system and break free.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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