American History: A Survey (Brinkley), 13th Edition

Where Historians Disagree - Causes of the Great Depression

What were the causes of the Great Depression? Economists and historians have debated this question since the economic collapse began and still have not reached anything close to agreement on an answer to it. In the process, however, they have produced several very different theories about how a modern economy works.

During the Depression itself, different groups offered interpretations of the crisis that fit comfortably with their own self-interests and ideologies. Some corporate leaders claimed that the Depression was the result of a lack of "business confidence," that businessmen were reluctant to invest because they feared government regulation and high taxes. The Hoover administration, unable to solve the crisis with the tools it considered acceptable, blamed international economic forces and sought, therefore, to stabilize world currencies and debt structures. New Dealers, determined to find a domestic solution to the crisis and ideologically inclined to place limits on corporate power, argued that the Depression was a crisis of "under-consumption," that low wages and high prices had made it too difficult to buy the products of the industrial economy; and that a lack of demand had led to the economic collapse. Other groups offered equally self-serving explanations.

Scholars in the years since the Great Depression have also created interpretations that fit their views of how the economy works and which public policies are appropriate for it. One of the first important postwar interpretations came from the economists Milton Friedman and Anna Schwartz, in their Monetary History of the United States (1963).

In a chapter titled "The Great Contraction," they argued for what has become known as the "monetary" interpretation. The Depression, they claimed, was a result of a drastic contraction of the currency (a result of mistaken decisions by the Federal Reserve Board, which raised interest rates when it should have lowered them). These deflationary measures turned an ordinary recession into the Great Depression. The monetary argument fits comfortably with the ideas that Milton Friedman, in particular, advocated for many years: that sound monetary policy is the best way to solve economic problems—as opposed to fiscal policies, such as taxation and spending.

A second, very different argument, known as the "spending" interpretation, is identified with, among others, the economist Peter Temin, and his book Did Monetary Forces Cause the Great Depression? (1976). Temin's answer to his own question is "no." The cause of the crisis was not monetary contraction (although the contraction made it worse), but a drop in investment and consumer spending, which preceded the decline in the money supply and helped to cause it. Here again, there are obvious political implications. If a decline in spending was the cause of the Depression, then the proper response was an effort to stimulate demand—raising government spending, increasing purchasing power, redistributing wealth. According to this theory, the New Deal never ended the Depression because it did not spend enough. World War II did end it because it pumped so much public money into the economy. This is a liberal, Keynesian explanation, just as the "monetary hypothesis" is a conservative explanation.

Another important explanation comes from the historian Michael Bernstein. In The Great Depression (1987), he avoids trying to explain why the economic downturn occurred and asks, instead, why it lasted so long. The reason the recession of 1929 became the Depression of the 1930s, he argues, was the timing of the collapse. The recession began as an ordinary cyclical downturn. Had it begun a few years earlier, the basic strength of the automobile and construction industries in the 1920s would have led to a reasonably speedy recovery. Had it begun a few years later, a group of newer, emerging industries would have helped produce a recovery in a reasonably short time. But the recession began in 1929, too late for the automobile and construction industries to help (since they had already experienced a serious, long-term relative decline) and too soon for emerging new industries—aviation, petrochemicals and plastics, aluminum, electronics and electrical appliances, processed foods, and others—to help, since they were still in their infancies.

The political implications of this argument are less obvious than those for some other interpretations. But one possible conclusion is that if economic growth depends on the successful development of new industries to replace declining ones, then the most sensible economic policy for government is to target investment and other policies toward the growth of new economic sectors. One of the reasons World War II was so important to the long-term recovery of the U.S. economy, Bernstein's argument suggests, was not just that it pumped money into the economy, but that much of that money contributed to developing new industries that would help sustain prosperity after the war. This is, in other words, an explanation of the Depression that seems to support some of the economic ideas that became popular in the 1970s and 1980s calling for a more direct government role in stimulating the growth of new industries.

In the end, however, no single explanation of the Great Depression has ever seemed adequate to most scholars. The event, the economist Robert Lucas once argued, is simply "inexplicable" by any rational calculation.

http://www.amatecon.com/gd/gdcandc.html - America's Great Depression

http://www.jmu.edu/madison/center/main_pages/teacher/curriculum/chap11.htm - The James Madison Center, The Great Depression

http://www.digitalhistory.uh.edu/database/article_display.cfm?HHID=464 - Digital History: Why it Happened

http://www.pbs.org/fmc/interviews/brinkley.htm - An Interview with Alan Brinkley

1			Peruse the articles above on the causes of the Great Depression. Upon which interpretations do each rely to make their case? What arguments have fallen by the wayside? Are you convinced?

http://www.mackinac.org/article.asp?ID=4013 - Mackinac Center, Great Myths of the Great Depression

http://minneapolisfed.org/research/qr/qr2311.pdf - The Great Depression from a Neoclassical Perspective

http://www.mises.org/fullstory.asp?control=1211 – Ludwig von Mises Institute, "Does a Falling Money Stock Prevent Economic Depression?" by Frank Shostack

http://www.huppi.com/kangaroo/Fed.htm - "What Role did the Fed Play in Causing the Great Depression?"

2			Peruse the articles above on the Great Depression and briefly summarize their respective theses. What role does the government play in each case? Why do you think these authors come to such wildly different conclusions? What does this tell us about the historiography of the Great Depression and New Deal?

http://www.eh.net/lists/archives/eh.res/feb-1997/0010.php - EH Net, Forum: The Great Depression

3			Professor Robert Whaples of Wake Forest University recently conducted a survey of economic historians on the causes of the Great Depression. Read the article above and summarize his conclusions. Again, why do you think the disagreement on this issue has continued for so long?