Government Expansion and the Ratcheting Phenomenon

           There are several theories regarding the interwar economy in the United States and the causes of the Great Depression.  Economic historians continue to examine the economic and non-economic factors that lead to the Great Depression and prompted the recovery to better understand and predict future economic downturns and recoveries.  Economic historians have examined the macroeconomics of the Great Depression, the nonmonetary effects which perpetuated the Great Depression, the stock market boom and crash that is often the focus of the general knowledge of the period, and the monetary expansion, the expansion of government and Roosevelt’s New Deal, coming out of the Great Depression.

            It appears that several factors were at work during the interwar period which contributed to the Great Depression.  In a 1995 article Ben S. Bernanke examined the monetary policy of the Great Depression in the U.S. and abroad.  He found that “the evidence shows that countries that left the gold standard recovered from the Depression more quickly than countries that remained on gold.  Indeed, no country exhibited significant economic recovery while remaining on the gold standard.”[1]  Bernanke also highlighted the opinions of investors and the effect that public opinion had on the economy.  When public opinion was optimistic and that the banking system     was stable, money stock remained high; however, when investors and the public “became ‘pessimistic,’ anticipating bank runs and devaluation, these expectations these expectations were to some degree self-confirming.”[2]

            In an earlier 1983 article Bernanke explored the effect that the credit market had on the Great Depression.  The contraction of monetary policy and public opinion resulted in a change in the granting and administration of loans.  Banks were more careful to loan money only to those who were most likely to repay the loans, and actively reduced the number of loans approved to keep a higher margin of liquid assets available.  Thus, those who were better off and had well defined projects that had economic promise, were funded, but poor farmers that were trying to make ends meet likely would not receive the needed loans to remain solvent.

            In the study of all the factors that were involved in the interwar period, the Great Depression and the recovery going into World War II, what stood out is the politics and growth of government during this period.  Robert Higgs proposes that “we view the expansion of the scope of governmental as path dependent,” in effect the actors responsible “were motivated and constrained . . . by their appreciation of that moment’s dangers and potentialities, which derived in turn from past events as they understood them.”[3]  Higgs goes on to explain that a return to normalcy is unlikely after a crisis for a number of reasons, not the least of which is a change in the understanding of events which prompted the institution of the government expansion.  He explains that “the underlying behavioral structure could not revert to the status quo ante because the events of the crisis created new understandings of and convictions about the potentialities, workings, dangers, and desirabilities of governmental action; that is, each crisis altered the prevailing ideological climate.”[4]  Changes adopted during a crisis produce on a temporary basis result in permanent changes and bigger government.  Higgs describes this tendency as a “ratchet phenomenon.”[5]  Although details of crisis and actions taken may vary, each episode has five stages according to Higgs: 1) precrisis normality, 2) expansion, 3) maturity, 4) retrenchment, and 5) postcrisis normality.[6] 

            The first stage in this rachet phenomenon needs little explanation. The precrisis normality is the baseline.  The expansion in stage two, involves the expansion of government in response to a crisis, be it mobilizing for war, responding to an economic crisis, or addressing a health crisis like COVID-19.  The public allow the expansion of government, and in some cases request this expansion to address the needs created by the crisis.  Why would the public tolerate the expansion of government and the cost of new programs and departments?  Higgs hypothesizes that the public allows the expansion of government because the cost of the expansion is often hidden.  In developing this hypothesis, Higgs assumes the character of the America political system “possesses a substantial degree of autonomy in its policymaking.”[7]  The ideology and interests of public officials also plays a role in the establishment of the public policies.  Higgs explains that citizens must be willing to bear the cost of the policies and this willingness often declines as the costs rise.[8]

            Once government expands and policies are put into place, reaching maturity, step three, retrenchment, stage four, of an existing government policy put into place during the crisis is difficult.  As Higgs reiterates, “bureaucracies are more easily created than destroyed” in large part due to the office holders established which often hold sufficient clout to resist the elimination of the established program when the crisis passes. [9]  A change in ideology by the citizenry, which accepted the policy in the time of crisis, and have grown accustomed to the services provided by the policy or department, can also make retrenchment difficult.  Retrenchment most commonly occurs when the public demands it due to a knowledge and unwillingness to bear the cost, or judicial decisions.  As a result of the difficulty of retrenchment, a precrisis normality cannot be reached.  Instead, a postcrisis normality, step five of the ratcheting phenomenon, establishes a new normality with the expanded government programs in place.

            This ratcheting phenomenon Higgs explores can be seen in the establishment of National Labor Relations act of 1935, the National War Labor Board of World War II, the War Labor Disputes Act of 1943, the Taft-Harley Act, and the New Deal, elements and policies of which still exist in current U.S. Government.  Indeed this ratcheting phenomenon can still be seen in modern politics.

Bibliography:

Bernanke, Ben S. “The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1 (1995): 1-28. https://doi.org/10.2307/2077848.

Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” The American Economic Review 73, no. 3 (1983): 257–76. http://www.jstor.org/stable/1808111.

Fishback, Price.  “The Newest on the New Deal.”  The Economic and Business History Society: Essays in Economics and Business History 34 (2018). https://www.ebhsoc.org/journal/index.php/ebhs/article/view/43.  

Higgs, Robert. "Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon." Explorations in Economic History 22, no. 1 (1985): 1-28. https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-journals/crisis-bigger-government-ideological-change-two/docview/1305246411/se-2.

Romer, Christina D. “What Ended the Great Depression?” The Journal of Economic History 52, no. 4 (1992): 757–84. http://www.jstor.org/stable/2123226.

White, Eugene N.  “The Stock Market Boom and Crash of 1929 Revisited.”  Journal of Economic Perspectives 4 no. 2  (Spring 1990): 67-83. 

[1] Ben S. Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1 (1995): 1–28. https://doi.org/10.2307/2077848.

[2] Ibid: 7

[3] Robert Higgs, "Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon." Explorations in Economic History 22, no. 1 (1985): 2, https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-journals/crisis-bigger-government-ideological-change-two/docview/1305246411/se-2.

[4] Ibid.

[5] Ibid: 3.

[6] Ibid.

[7] Robert Higgs, "Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon." Explorations in Economic History 22, no. 1 (1985): 7.https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-journals/crisis-bigger-government-ideological-change-two/docview/1305246411/se-2

[8] Ibid: 9

[9] Ibid: 13