is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

Rethinking the Great Depression

Author(s):Smiley, Gene
Reviewer(s):Wheelock, David C.

Published by EH.NET (February 2003)

Gene Smiley, Rethinking the Great Depression. Chicago, IL: Ivan R. Dee,

2002. xii + 179 pp $24.95 (hardcover), ISBN: 1-56663-472-5.

Reviewed for EH.NET by David C. Wheelock, Federal Reserve Bank of St. Louis.

Despite being less than 200 pages, Gene Smiley’s Rethinking the Great

Depression is a fairly comprehensive, as well as highly readable, account

of the origins, depth and legacy of the Great Depression. The book is intended

for a non-specialist audience, and would be appropriate reading for

undergraduate courses in American economic history or macroeconomics.

The book’s first two chapters focus on the causes of the Great Depression and

why the Depression was especially severe in the United States. Smiley

attributes the world wide Depression to a breakdown of the international gold

standard. He describes how countries that had undervalued currencies, e.g., the

United States and France, prevented gold inflows from equilibrating national

money supplies and price levels during the 1920s. Tight monetary policy, Smiley

argues, largely explains the unusual severity of the Depression in the United

States. The Federal Reserve adopted a tight monetary policy in 1928 to stem

gold outflows and contain stock market speculation. The Fed remained tight

after the stock market crash in 1929 because of continued gold losses and

because Fed officials mistakenly interpreted low market interest rates and

little discount window borrowing as signaling that monetary policy was in fact


In addition to monetary forces, Smiley argues that rising real wage rates also

contributed to the severity of the Great Depression in the United States.

Previous economic downturns had been relatively short, he contends, because

nominal wage rates had declined when the price level fell to keep real wages

relatively constant. Consequently, output and employment fell less than during

the Great Depression, and recovery came sooner. Smiley attributes the changed

behavior of real wages during the Depression to President Hoover’s lobbying of

large corporations to not cut money wage rates in the hope of preventing large

declines in consumer spending.

The book’s next two chapters focus on the recovery phase of the Depression,

with emphasis on the New Deal. Smiley describes the slow, halting pace of

recovery, which he attributes to misguided government policies. He argues that

the principal policies of the “first” New Deal, including the Agricultural

Adjustment Act (AAA) and the National Industrial Recovery Act (NIRA), were

aimed as much or more at reform than at economic recovery. Roosevelt’s main

economic advisors had little confidence in capitalism or free markets, Smiley

contends, and favored industrial planning and cooperation between business,

labor and government. The spirit of both the AAA and NIRA reflected the view

that deflation was caused by excessive competition and too much production. The

AAA sought to raise farm prices by cutting output, permitting cooperative

marketing, and through government purchases of commodities at target prices.

The NIRA had a similar objective for the price of manufactured output, and led

to the creation of industrial codes that limited competition and production, as

well as instituting labor market reforms. Smiley explains that “the NRA was

attuned to discourage recovery, that is exactly what it did” (p. 100).

Next Smiley discusses the depression of 1937-38. National output grew strongly

in 1935-36, after the “shackles of the NRA” had been removed (p. 106). The

money stock grew rapidly during these years, primarily because of gold inflows

from abroad. The “golden avalanche” allowed banks to build up substantial

excess reserves, which caught the attention of the Federal Reserve Board. Fed

officials worried about the inflationary potential of excess reserves and

increased reserve requirements three times during 1936-37 to reduce them.

Although policymakers viewed excess reserves as being redundant, Smiley argues

that banks held excess reserves as precautionary balances and thus responded to

the Fed’s actions by reducing loans and selling securities, which increased

interest rates. The policy was thus contractionary. Higher taxes on business

associated with a new tax on undistributed corporate profits and the

introduction of Social Security, further contributed to the contraction,

according to Smiley.

The final chapter of the book focuses on the apparent return to full employment

and high output growth during World War II, and the legacy of the Great

Depression for postwar economic policy. Smiley first addresses the

macroeconomic effects of the war. He describes the return to full employment

and rapid output growth, but argues economic conditions (and data) were highly

distorted by the military build up, price controls and rationing. Nevertheless,

the war years were widely seen as providing evidence that fiscal policy could

maintain high employment, and helped bring Keynesian macroeconomics to the fore

among economists and policymakers.

Smiley traces the origins of major postwar government social programs,

regulations, and economic stabilization policies to the Great Depression and

World War II. He also describes how the Bretton Woods System, which

reconstituted the international gold standard after the war, was incompatible

with the Keynesian-influenced monetary and fiscal policies U.S. officials

pursued during the 1960s. In the quest for high employment, these policies

resulted in rising inflation that ultimately forced the breakdown of fixed

exchange rates and dollar convertibility.

Smiley’s interpretations of the origins and effects of the Great Depression are

orthodox. He largely ignores other explanations, such as the possibility that

rising income or wealth inequality, or financial speculation, helped bring

about the Depression. Although many economists would accept Smiley’s

explanations about the causes of the Great Depression, the alternative

explanations are widely believed, especially among non-economists. Hence, the

book might have been enhanced by a discussion of some alternative explanations

and their weaknesses. Similarly, Smiley’s interpretation of New Deal policies

on economic recovery are almost uniformly negative. Although he is careful to

identify how some policies benefited labor and other groups, the book could do

more to distinguish between the effects of New Deal policies on economic growth

and their other effects — for example, on infrastructure, rural

electrification, etc. Moreover, in arguing that New Deal policies retarded

economic recovery, Smiley focuses on disruptions to institutions that defined

property rights. It has been argued, however, that Roosevelt’s policies

stimulated recovery by giving consumers and firms confidence that recovery was

possible. Such effects are hard to quantify, but worth considering. Despite

these quibbles, I recommend this book as a widely accessible and clearly

written summary of the main causes of the Great Depression and its legacy for

economic policy.

David C. Wheelock is Assistant Vice President and Economist, Federal Reserve

Bank of St. Louis. He is author of The Strategy and Consistency of Federal

Reserve Monetary Policy, 1924-1933 (Cambridge, 1991) and numerous articles

on financial and monetary history.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII