Keynes, The Great Depression And The Coming Great Default

by Gary North

Ideas have consequences, but not in a social vacuum. There are no social vacuums.

Ideas that are held by a minority of fringe academics or polemicists sometimes become the foundations of victorious social movements after existing social institutions are undermined by a social crisis.


There seems to be an inherent optimism in the thinking of most members of the human race. It is the source of men’s sacrifice in the present for the sake of the future. We think the future is going to get better, and therefore it is worth sacrificing present consumption for the sake of future consumption. This is the basis of thrift. This is the basis of expanded capital in our society.

Basic to the success of every social revolution in the West since 1640 has been the doctrine of progress. Each revolution offers hope for the future. Usually, these have been short on details of the transition between now and the new utopia, but there is hope.

The free market was such an idea. Adam Smith was the major promoter. His disciples extended his vision of the wealth of nations. The timing was perfect: 1776. That was about the time that the Industrial Revolution began its transformation of the West and then the world.

Beginning around 1800, and limited to the Eastern shore of the United States and the British Isles, compound economic growth began. By 1820, the economic transformation was leaving irrefutable historical evidence of this transformation. Economic historians debate as to the causes of this growth, but it had never been seen before. By 1850, the world was very different. A series of inventions transformed modern agriculture, modern transportation, and communications. This was visible to everybody by 1851. That was the year of the great London exhibition. Anyone who attended that exhibition realized that the world had fundamentally changed since 1800.

We are now over two centuries into this process. It is almost impossible for us to think of a society made up of human beings who are systematically pessimistic about the future. What began in the English-speaking world of the Atlantic Coast has now spread into the villages of India and China. There is almost nowhere left on earth in which optimism regarding the economic future is not a fundamental presupposition of every village, every tribe, and every family. Economic reality finally caught up with human optimism, and then raced ahead.

There has been only one period in which economic growth has stagnated for more than a decade since 1800. That was the Great Depression, which was followed by World War II. Output of almost all goods and services declined in the 1930’s, and then the war destroyed much of the output of the first half of the 1940’s. This destruction was systematic: bombs, armies, and battles destroyed the output of military factories. Both sides were committed to the destruction of any economic growth on the other side. With the exception of the United States, all nations that were involved in the conflict suffered direct economic contraction as a result of the war. But there was full employment for the survivors — at below-market wages. There was central planning on an unprecedented scale: the ration-book economy.


What was most significant about the 1930’s was not the fact that there was economic stagnation for a decade. What was most significant was the transformation of the thinking of Western civilization. The intellectuals changed their minds; the voters changed their minds.

In Nazi Germany and Fascist Italy, in Great Britain, in Japan, and in the United States, there was a shift of opinion away from the free market in favor of government economic planning. The supreme mark of this transformation was the acceptance of John Maynard Keynes’ unreadable book, The General Theory of Employment, Interest, and Money, which was published in 1936. A new generation of younger economists adopted this book and its outlook, which prevails today. The fascist economic idea of an alliance between government and business became almost universally accepted.

There had always been a tendency for special-interest groups to seek government subsidies. Mercantilism, 1550-1800, was a manifestation of this worldview. But, from an academic point view, economists after Adam Smith were generally not committed to anything like mercantilism. There were some who were, but they were not dominant.

There was always an appeal in the United States for federal finances and subsidies, and the mark of this was Sen. Henry Clay’s so-called American system. Abraham Lincoln was an early convert. But the size of the federal government in the overall economy was so small that these interventions were mainly limited to roads, canals, and transportation projects. In other words, there was a commitment to the government-business alliance, but there was not much government to be allied to. This changed in the 1930’s.

I am probably the only person who has ever noticed the following, but it bears repeating. The Macmillan publishing company in Great Britain published three books analyzing the causes of the Great Depression. The first one was written by a disciple of Ludwig von Mises, Lionel Robbins. He was probably the most prominent British economist favoring the free market in the 1930’s. He was a colleague of F. A. Hayek at the London School of Economics, who was also a defender of the free market, but who was an Austrian. Both of them at the time were followers of Mises. Robbins’ book was titled simply, The Great Depression. It was published in 1934. One year after Keynes’s book, in 1937, Macmillan published another economic analysis of the depression, which was also basically a defensive the Austrian theory of the business cycle. That book was titled, Banking and the Business Cycle. Both of these books are available for downloading or purchase on the website of the Mises Institute. They are both quite readable. Keynes’ book was not readable. Yet so devastated was Robbins by the depression that he repudiated his own book in the 1940’s. It is Keynes’ book that remains in print. The other two books were essentially forgotten by 1940.

The modern fascist economy that dominates the West, meaning an economy sustained by central bank counterfeiting and central government fiscal deficits, was born during the Great Depression. It was conceived much earlier, but it took the Great Depression to provide what we can legitimately call labor pains. Most people today cannot conceive of a world without government intervention, central banking, government guarantees of all kind, and so forth. The Federal Register turns out approximately 80,000 pages of fine print regulations every year. This regulatory order is cumulative. Most of these regulations stay on the books. They are not repealed by the bureaucrats; they are amplified by new rules.

Despite the fact that most economists say they are free marketers, only a handful of Austrian economists favor the shutting down of the Federal Reserve System. Yet in 1900, most economists in the United States were not in favor of a central bank. Institution by institution, crisis by crisis, fascist economics increases its support among academics, and it increases its support among the masses. Social Security and Medicare are simply the most visible manifestations of this outlook. The public is completely in favor of both programs.

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Source: The Coming Great Default –