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Deja Vu All Over Again: Depression-Era Justifications for Government Intervention

Samuel Staley
June 26, 2009, 7:29am

The Ludwig Von Mises Institute recently reprinted an article by economist Hans Sennholz (1922-2007) on the causes of the Great Depression. It's a good read, particularly since it provides a nice summary of Austrian business-cycle theory and explains how government manipulation of the economy led to booms and busts. The same lessons and insights apply to today's financial crisis.

But, the following passage in the introduction also caught my eye:

"Many Americans are convinced that the Great Depression reflected the breakdown of an old economic order built on unhampered markets, unbridled competition, speculation, property rights, and the profit motive. According to them, the Great Depression proved the inevitability of a new order built on government intervention, political and bureaucratic control, human rights, and government welfare. Such persons, under the influence of Keynes, blame businessmen for precipitating depressions by their selfish refusal to spend enough money to maintain or improve the people's purchasing power. This is why they advocate vast governmental expenditures and deficit spending — resulting in an age of money inflation and credit expansion."

It seems to me the Obama Administration practically took this passage as their playbook. But, if they did, they didn't read the next paragraph or the rest of the article, because Sennholz writes:

"Classical economists learned a different lesson. In their view, the Great Depression consisted of four consecutive depressions rolled into one. The causes of each phase differed, but the consequences were all the same: business stagnation and unemployment."

He goes on to explain how government manipulaton of the money supply and other interventions triggered these booms and busts and eventually led to the Great Depression.

The article is a reprint of Sennholz's essay in the October 1969 issue of the Freeman.

Reason Foundation's work on the bail out, financial crisis, and stimulus an be found here.


Samuel Staley is Research Fellow


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