Thank you for this, Bob. I think these free market advocates have selective amnesia in terms of the history of recessions and economic downturns. I think Keynes was right in his economic theories. It baffles me how people can have such faith in unfettered free markets to get us out of this economic mess when the markets are what got us in this mess in the first place.

I just got an email from someone who read my comment and disagrees with both my comment and Bob's blog. I'll reply here, as Bob's blog is a good argument and I could refer to his blog.

The recession that we are having right now is not an anomaly in the history of our free market system. In the course of this country's history, the United States has had periods of serious economic crisis in 1837, 1857, 1873, 1893, 1907, 1919, 1929 and last year. They were mostly the result of overspeculation, whether it be in the railroad industries in the 19th century or the real estate market today, and they resulted in sever downturns in the economy. The market system just naturally goes through these boom and bust cycles, and during these downturns, the poor and working class suffer the most.

Bob is right when he wrote:

"Americans are not spending. Many have little or nothing to spend. Some are too nervous. With a capitalist-consumerist system, that means trouble - more jobs are lost, and the downward spiral grows, and grows, and grows. "

Bob is right in pointing out that Keynes was trying to save the capitalist system, not overthrow it. The capitalist system has many benefits, but it's not perfect. Unfettered free markets tend to self destruct. Without government intervention and regulations to help the poor and the middle class, the economic benefits of capitalism tends to get shared by a smaller group of people.

Reread Bob Hooper's blog. I can't write things more clearly than Bob does on the strengths of Keynes arguments for temporary deficit spending to pull the economy out of worsening economic downturns. I think the Bush and Clinton administrations share equal blame for weakening the banking regulations set up during the New Deal and for placing too much trust in unregulated free markets.

Free markets have their benefits. But without some government regulations, markets will always crash, as they've done in 1837, 1857, 1873, 1893, 1907, 1919, 1929 and 2008.

Your narrative about the Great Depression and the allegedly beneficial effects of the “New Deal”, deficit spending, etc. is erroneous and highly misleading.

The best history of this period was written by Benjamin M. Anderson in a book titled, “Economics and the Public Welfare: A Financial and Economic History of the United States, 1914 - 1946”.

Anderson, born in 1888, was the chief economist for Chase Manhattan Bank during this period of history and authored the widely respected Chase Economic Bulletin issued weekly. He not only witnessed the events of this period, he participated directly in many of them, including testifying before Congress.

Anderson’s book is packed with figures and statistics from institutions such as the Federal Reserve, Department of Labor, Department of Commerce, etc. He uses these facts and figures to explode the many leftists myths and fallacies about this period. He demonstrates, beyond doubt, the following points:

1) That the Depression of 1920 - 1921 was the result of a huge bubble in commodity prices and corresponding economic distortions caused by government spending in the years preceding -- a bubble that popped when said spending could no longer continue -- resulting in a depression.

2) That the subsequent recovery from that depression -- managed completely by the private sector -- with no federal government involvement, no “bailouts”, no Keynesian stimulus, with government spending actually going DOWN -- said recovery was fast and erased most of the unemployment problem in only a year.

In summation, a hands-off, laissez-faire approach by the government permitted the private markets to resolve this depression in relatively short order.

3) Anderson shows that the Great Depression was brought on by more “bubbles” in various markets created by the policies of the Federal Reserve, which for the first significant time in its history began to engage in massive “open market” operations from 1922 - 1928 that created a vast expansion of credit.

This expansion of credit was funneled into two areas: international loans to foreign nations who used the loans primarily to purchase exports from the U.S. (such credit being made more necessary by tariff increased in the early 1920s) -- thus causing an artificial and unsustainable boom in exports. The second area that absorbed a great deal of this excess credit was the stock market, which soared to completely unjustified prices as a result in 1927 - 1929.

The Federal Reserve eventually became alarmed at these bubbles and switched to a “tight money” policy in 1928, which eventually popped the stock market bubble in 1929. This was a severe economic blow, but as Anderson shows, by itself it was not enough to cause the Great Depression. More was needed to trigger the Depression -- and Hoover provided it.

In 1930, Hoover signed into law the Smoot-Hawley tariff . The results were disastrous.

To fully understand how and why this tariff was disastrous requires an understanding of international trade and finance -- which Anderson provides. In short, there was a huge amount of international, nation-to-nation debt by 1930. Most of it was compiled during the 1920s. Anderson points out that an expansion of credit always means an expansion of debt -- there can be no credit without a corresponding debtor. The Federal Reserve’s massive “open market” operations of the 1920s were in many cases matched by similar expansions of credit among the major European countries -- so a huge amount of debt was created.

Ultimately servicing this debt depends heavily on international trade. The ability to pay off debt to another country depends on an ability to sell products in that country and thereby acquire its currency to repay the debt.

But Smoot-Hawley, which inspired similar protectionist legislation across the world, completely wrecked international trade. Anderson shows that such trade collapsed.

(One immediate effect of this collapse in international trade was a collapse in commodity prices in the U.S.. Agriculture, which at that time still accounted for 40% of U.S. economic activity, was hit hard and a severe recession was triggered in the U.S. as a result -- a recession that Anderson demonstrates was immediately aggravated by Hoover‘s demands that wages be maintained even in the face of crashing demand.)

The collapse in international trade also brought immediate pressures on the central banks of most nations. For instance, when it became apparent that the central bank of Germany might not repay its debts -- because it could no longer export its products -- no one would extend it further credit and many depositors started withdrawing their funds. In short order, Germany was forced to abandon the gold standard -- as was Austria and then, finally, in 1931, even England abandoned the gold standard.

The shock of England’s action in abandoning gold and allowing the sterling to plummet only increased the fear and uncertainty that by now were gripping the major economies of the world. If you couldn’t trust the pound sterling, what could you trust? Anderson demonstrates how this caused private capital investment to virtually disappear. And it stayed gone throughout most of the Depression.

Anderson demonstrates clearly that the Great Depression -- far from being the result of a non-existent “laissez-faire capitalism” -- was in fact caused by the U.S. government’s interventionist economic policies and actions together with similar policies and actions on the part of many other governments around the world.

4) Anderson then proceeds to demonstrate the utter destructiveness of the additional “New Deal” programs that were implemented by Roosevelt.

Anderson shows that what little economic recovery occurred under Roosevelt generally happened only when his policies were defeated. For instance, Anderson details the recovery that got underway from January - July 1933 -- BEFORE Roosevelt was able to implement much of his “New Deal” -- and how this recovery was then aborted by the National Industrial Recovery Act (NRA). He demonstrates how the recovery was able to somewhat resume when the NRA was found unconstitutional in 1935, only to again be aborted when the Wagner Act -- written by the New Dealers to reinstate the most egregiously harmful labor aspects of the NRA -- was found constitutional and labor was unleashed to cause economically-crippling strikes in the automobile industry.

Anderson also complete refutes the myth that a reduction in deficit spending caused the great “recession within a depression” of 1937. Using Treasury Department figures, he shows that deficit spending continued unabated throughout the crash.

The above barely begins to skim the content of this book. It is 597 pages of small print -- for a reason. It is packed with figures, facts and details that prove Benjamin Anderson’s points about the value of free markets and free trade versus the destructive effects of government’s economic interventions. John Maynard Keynes is thoroughly eviscerated by this presentation of facts.

Benjamin Anderson died in 1949, the year after his book was publishes. Were he alive today, I’m sure he would be horrified to see today’s “progressives” repeating virtually all of Hoover’s, Roosevelt’s and the Federal Reserve’s disastrous mistakes of the past. We ignore his lesson at our peril.