One of the most significant features of the Great Depression was the collapse of private domestic investment. On a gross basis, it fell from 19.6% of GNP in 1929 to 4.4% in 1933—thanks, in part, to a dramatic drop in business inventories. By 1932, net private domestic investment was negative, indicating that the economy’s capital stock was shrinking.

Profits are the reward of the active capitalists—the
entrepreneurs. In contrast, interest is the reward of the
passive capitalists. The impact of inflation and deflation on
the distribution of income to these two types of capitalists is
noteworthy. Profits are derived from purchasing something at
a particular time and selling it later at a higher price. When all
prices are rising, this is relatively easy to do; when all prices are
falling, it’s very difficult. Accordingly, deflation shifts income
from profits to interest. The surge in the portion of national
income going to “net interest” (from 5.6% in 1929 to 10.4% in
1933) and the decline in the portion going to profits (from
11.3% in 1929 to -3.8% in 1933) was as unsurprising as it was
catastrophic.

The Great Depression was one of the most extraordinary
episodes in U.S. economic history, if not the entire capitalist world.
To compare the current crisis to the Great Depression is stretching
the facts beyond the breaking point.

And that’s all not. The purveyors of Great Depression
myths—such as this year’s Nobel laureate in Economics Paul
Krugman—assert that the fiscal stimulus which accompanied
World War II rescued the economy from the Great Depression.
In fact, the Great Depression was followed by a spontaneous
recovery, with the unemployment rate falling from 24.7% in 1933
to 14.2% in 1937. This recovery was interrupted by a sharp slump
in 1938-1939. It was concentrated in the manufacturing sector
and was associated with a decline in gross private domestic
investment.

Even though a spontaneous recovery occurred before World
War II, it is important to stress that scholarship by Robert
Higgs, and other economic historians, shows that—contrary
to legend—the New Deal held down the spontaneous recovery
and contributed to the 1938-1939 slump. Indeed, Higgs’
evidence demonstrates that investment was depressed by New
Deal initiatives because of regime uncertainty—“a pervasive
uncertainty among investors about the security of their property
rights in their capital and prospective returns.” (Robert Higgs,
Depression, War and Cold War: Studies in Political Economy. New
York: Oxford University Press, 2006, p.5).

In short, investors were
afraid to commit funds to new projects because they didn’t know
what President Roosevelt and the New Dealers will do next.
This brings us to the Troubled Asset Relief Program (TARP).
This $700 billion bailout program is, among other things, a
bureaucratic nightmare that is as confused as it is confusing.
Add to that Treasury Secretary Henry Paulson’s major shifts in
the TARP’s direction, as well as the circus on Capitol Hill, and
we have all the ingredients for a royal case of regime uncertainty.
It shouldn’t be surprising, therefore, that each time Secretary
Paulson makes a pronouncement or the Congress performs
another act, the stock market takes a dive.