The New Deal Policies Prolonged the Depression by Creating “Regime Uncertainty”

The Great Depression and the New Deal continue to receive much attention from economists, economic and political historians, and other scholars. In my own research, I focused first on the initial New Deal response to the Depression and on the enduring consequences of the New Deal policies for the growth of government. Later, in the 1997 article reproduced as chapter 1 of this volume, I considered how the New Deal policies prolonged the Depression by creating “regime uncertainty” and how a number of related political changes brought about or hastened by the war diminished that uncertainty enough to permit a resumption of genuine prosperity (as opposed to the spurious “wartime prosperity”) after the war ended.

Since writing the 1997 essay, I have become aware of a major body of evidence bearing on my “regime uncertainty” hypothesis: Gary Dean Best’s Pride, Prejudice, and Politics: Roosevelt versus Recovery, 1933–1938 (1991). The evidence that Best has compiled and organized adds significant weight to the views that I previously documented with regard to how business people and investors perceived the New Deal and the seriousness of its threat to the security of private property rights during the latter 1930s.

How does my interpretation relate to other interpretations of the duration of the Depression, especially to those that characterize the recovery as, like the preceding Great Contraction, little more than a macro-monetary phenomenon? In brief, my interpretation complements, rather than substitutes for, those that focus on macro-monetary relations. I do not claim that the latter are wrong, only that, even if they are correct as far as they go, they are insufficient. If property rights are seriously up for grabs, no amount of pumping money into a depressed economy can bring about genuine complete economic recovery. From 1935 to 1940, such “up for grabs” conditions were precisely the ones that prevailed in the United States; hence, the unevenness and incompleteness of the recovery, even as late as 1940, more than ten years after the onset of the Great Contraction.

Moreover, my interpretation proves its value decisively when one approaches the task, not merely as one of explaining the slow recovery between 1933 and 1941, but as one of explaining several related aspects of a longer span of economic events (e.g., private output, long-term civilian investment, and unemployment) between 1935 and 1948. My interpretation shows how we can incorporate a defensible view of the wartime economy into our understanding of both the incomplete late-1930s recovery and the enormously successful reconversion to civilian production between 1945 and 1947. In this more ambitious endeavor, the first five chapters of this volume constitute essential pieces of one big puzzle, offering at once a new view of the prolongation of the Depression, a new view of the nature of the war production “boom,” and a new view of the transition from wartime command economy to postwar civilian prosperity—all within a single interpretive framework. In the light of these chapters, the old (and still widely accepted) view of how “the war got the economy out of the depression” must be abandoned.

—Robert Higgs, introduction to Depression, War, and Cold War: Studies in Political Economy (New York: Oxford University Press, 2006), x-xi.