in public spending taken in response to the crisis. Higher debt burdens imply higher future taxes and higher interest rates, other things equal, pointing to lower levels of investment and slower rates of growth.16The other things equal caveat is a big one. The argument that government deficits leading to higher levels of debt crowd out private investment and depress growth operates mainly through higher interest rates, and there is less than abundant evidence of upward pressure on interest rates in the United States and other advanced economies at the moment.17 Deficit spending directed at recapitalizing a weak banking system and stabilizing economic activity, by restoring confidence, may do more to encourage investment than depress it. The debt ratio may also rise insofar as the economic conditions are depressed and deflationary (that is to say, for other reasons). Slow growth may cause heavy indebtedness rather than the other way around.The 1930s is again an obvious battleground for the competing schools. The US public debt/GDP ratio more than doubled from 17% in 1929 to 40% in 19331937. This was certainly a period of depressed capital formation: stocks of both equipment and structures were lower in 1941 than they had been in 1929. But it was not a period of high interest rates; as in recent years precisely the opposite was true. (See Figure 4) Arithmetically, the main factor behind the rise in the debt ratio was the fall in nominal GDP by nearly 50% between 1929 and 1933. The swing in the federal government deficit as a percentage of Gross National Product between 1929 and 1933 was a relatively modest 4%; this is telling us that the rise in indebtedness was mainly driven by the fall in GDP, not the other way around.Figure 4.US Public Debt and Real Interest Rates. Source: Board of Governors of the Federal Reserve System, Banking and Monetary Statistics 19141941; Global Financial Data; Maddison, A. (2009) Statistics on World Population, GDP and Per Capita GDP, 12006 AD (March update); public debt kindly provided by Carmen Reinhart and Kenneth RogoffFull figure and legend (21K)Top of pagePOLICY UNCERTAINTYThus, those seeking to argue that government policy discouraged investment and otherwise impaired the environment for growth must look elsewhere. In the literature on the 1930s, as in the recent period, they look to the possibility that policy uncertainty increased the option value of waiting. Friedman and Schwartz (1963) argue that business confidence was weakened by uncertainty about the implications of new regulatory measures for the business environment: they cite, among other regulatory interventions, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Glass-Steagall Act of 1933. Higgs (1999) is the definitive modern exponent of this point of view, arguing that pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns depressed private investment from the mid-1930s all the way up to World War II. His list of problematic policies is long. He points to tax policy (the Wealth Tax of 1935, a tax on incorporate dividends, increases in estate and gift taxes,