At the recent Conservative Political Action Conference in Washington, the winner of the straw poll was Rep. Ron
Paul, Texas Republican. One of his best-known positions is support for a return to the gold standard. David Frum, a former speechwriter for George W. Bush and a fellow at the conservative American Enterprise Institute, responded by blaming the gold standard for the Great Depression:
“Threatened with the exhaustion of its gold supply, the government felt it had no choice: It had to close the budget deficit. So, in the throes of a severe downturn, the U.S. government did exactly the opposite of what economists would otherwise advise: It cut spending and raised taxes - capsizing the economy even deeper into depression.”
As Table 1 shows, that version of the history of the Great Depression is entirely fictional. During every year of President Hoover’s administration, from 1929 to 1933, federal expenditure increased. By 1932, expenditure had gone up 50 percent measured in dollars, almost doubled measured in purchasing power, tripled measured as a fraction of national income. If a gold standard makes it impossible to increase federal spending in response to a downturn, Hoover didn’t get the message. If stimulus is the solution to high unemployment, the Great Depression should have ended almost before it began.
This raises an obvious question: What would have happened if Hoover had done what the urban-legend view of history claims he did? For a possible answer, it is worth looking back a decade at a different Great Depression.
From 1920 to 1921, the unemployment rate increased by 6.5 percentage points; prices fell by more than 10 percent. Seen without the benefit of hindsight, it obviously was 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 Warren G. Harding acted as Hoover is supposed to have acted. By 1923, federal expenditure had been reduced to about half its 1920 level. Table 2 shows the result. The unemployment rate that peaked at 11.7 percent in 1921 had fallen by 1923 to 2.4 percent. The country endured one year of high unemployment instead of, under Hoover and then Franklin D. Roosevelt, 11.
It was the Great Depression that didn’t happen.
David Friedman is an economist and law professor at Santa Clara University. His most recent book is “Future Imperfect: Technology and Freedom in an Uncertain World” (Cambridge University Press, 2008).