In today’s Wall Street Journal, Harold Cole and Lee Ohanian try to teach us some lessons from the Great Depression. According to Cole and Ohanian, those of us who believe that increasing aggregate demand had anything to do with recovery from the Great Depression are totally misguided.
[B]oosting aggregate demand did not end the Great Depression. After the initial stock-market crash of 1929 and subsequent economic plunge, 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 flat over the following year.
Though not wrong in every detail, the version of events offered by Cole and Ohanian is still a…
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