Lessons from Economic Recessions- Introduction and Great Depression

History teaches lessons- it allows those of us in the present to see how results in the past worked. Economic recessions are a great teaching tool for policy makers and average citizens, because they teach us how the recession may have happened and how to emerge from the recession and therefore inform us as to the policy actions that we must take and those that we as citizens must support.

The problem is though that policymakers and citizens really only have learned about one historical economic recession, The Great Depression, and the lessons that they have been learned regarding this recession are usually the wrong lessons. There are other recessions that our nation has battled through and the lessons we can learn from them may be more instructive to policy makers and average citizens, especially in light of the current Obama recession.

The version of the Great Depression that most Americans learn is that unregulated capitalism, free trade, lax regulation, and unequal distribution of wealth led to a massive collapse of our economy in 1929, then President Hoover did nothing to intervene and help, and our nation didn't recover until FDR actively and aggressively acted with his New Deal policies of massive spending, massive debt, massive regulation, and massive changes to the American system. The problem with this version of history, and the lessons that it teaches, is that it is almost wholly false.

The Great Depression resulted from government policies- the Federal Reserve messing with rates, the regulations and taxes from the Wilson administration, etc- combined with restrictive trade policies and the collapse of a major economic power (Germany), which resulted in a recession in 1929. President Hoover then acted in a very active and ultimately destructive manner, increasing spending, regulation, and activity by the government, resulting in the recession deepening and lasting until 1932. FDR took these mistakes and expanded on them and enlarged them, and the result was that a real recovery never took place and rather the nation dropped into another recession (1937), leading us to just lump this whole time period together as the 'Great Depression.' Although the world war helped mask many of our economic problems, it wasn't until the death of FDR and the ending of his policies that our nation began to recover in any real economic normal sense, and wealth began to be created again. This is a closer version of events, with entirely different sets of lessons to learn.

But don't take my word for it- check out the following books to become more educated on the Great Depression- America's Great Depression, Great Myths of the Great Depression (this one is great- only $2, a dozen pages, and a great gift for any history teacher to receive), or Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.

In my next post I'll address other economic recessions and the lessons to learn from them.