Franklin Delano Roosevelt’s First Inaugural Address diagnosed the essential weirdness of recessions: “our distress comes from no failure of substance,” he noted. “Plenty is at our doorstop, but a generous use of it languishes in the very sight of the supply.” The reason for this? “Primarily this is because the rulers of the exchange of mankind’s goods have failed…they have tried, but their efforts have been cast in the pattern of an outworn tradition.”
This last factor, that in the grip of a massive decline in production, employment, and consumption, the world’s leaders decided to maintain the gold standard and free exchange of currency by balancing budgets, cutting spending, and raising taxes and then to do it over and over again, despite the failure of that policy to show any positive result, is to my mind an absolutely critical one. For all that the critiques of John Maynard Keynes and other dissident economists were eloquent and correct, the reality was that they had been making their arguments for over a decade to no avail.
Today, we seem to be stuck in a similar pattern, where the conventional wisdom on economic policy fails to produce results, but retrenches even more strongly despite this.
Why is this?