Government Spending Did Not Get Us Out of the Great Depression

So say economists, Harold Cole and Lee Ohanian. They had a fascinating op-ed in the Wall Street Journal a couple of weeks ago that everyone should read. The economic history they tell is pretty compelling:

But boosting aggregate demand did not end the Great Depression. After the initial stock market crash of 1929 and subsequent economic plunge, a recovery began in the summer of 1932, well before the New Deal. The Federal Reserve Board's Index of Industrial production rose nearly 50% between the Depression's trough of July 1932 and June 1933. This was a period of significant deflation. Inflation began after June 1933, following the demise of the gold standard. Despite higher aggregate demand, industrial production was roughly flat over the following year.

This information is especially important because most of the contemporary powerful economic policy makers, be they President Obama or Ben Bernanke, enthusiastically embrace the idea that boosting aggregate demand was crucial for alleviating the Great Depression and they think that a similar solution is in order for our current mess. I have already explained why that is not the case.