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The Economics of the Great Depression

Author(s):Wheeler, Mark
Reviewer(s):Wicker, Elmus

Mark Wheeler, editor, The Economics of the Great Depression. Kalamazoo,

MI: W.E. Upjohn Institute for Employment Research, l998. 220 pp. $25

(cloth), ISBN 0-88099-192-5; $15 (paper), ISBN 0-88099-191-7.

Reviewed for EH.NET by Elmus Wicker, Department of Economics, Indiana


The Great Depression of the nineteen thirties remains perhaps the most

enduring economic enigma of the twentieth century despite the voluminous

literature it has generated.

There have been two general approaches to the study of the Great Depression: as

a specific country phenomenon and as a global even t.

Friedman and Schwartz (1965) preferred the former and concentrated on the U.S.

Charles Kindleberger (1973) and, more recently, Barry Eichengreen

(1992) have preferred the latter.

The occasion for this book was a series of six lectures given during the

academic year 1996-97 at Western Michigan University. The editor boasts that

these essays take a fresh approach to the study of the Great Depression, but it

is not always easy to detect wherein that “freshness”


Four of the six papers continue

the specific country approach: Robert Margo reexamines the U.S. labor market in

the thirties; James Fackler constructs and tests a macroeconomic model of the

U.S. for the l921-37 period, and Michael Bernstein attempts to revive a version

of the economic maturity hypothesis popular in the post World War II period.

David Wheelock links events in the Great Depression to the inflation bias of

the Fed and the ultimate collapse of the Bretton Woods international monetary


Carol Heim’s essay is the

only paper specifically global in scope. It examines the incidence of the Great

Depression in the U.S., the U.K. and in some less developed economies including

Latin America, India, China, and Japan.

If the Great Depression was a global event, it rarely

has received systemic and extensive treatment across continents. We know more

about what happened in the U.S. and Europe than we do about what happened in

Japan, China,

India and Africa. Carol Heim has performed yeoman service by drawing our

attention the

differential impact of the Great Depression across continents, among nations

and among industries within individual countries.

Heim begins by contrasting the depression’s impact on the U.S. and the U.K.

Great Britain, unlike the U.S., suffered from an industrial malaise during

1920s. The Great Depression simply exacerbated the situation. Still some

industries continued to grow while others declined, but labor failed to move

away from the depressed areas. In the U.S. the South managed to improve its

relative, if not its absolute, position partly as a consequence of labor

migration and the effects of the New Deal.

Heim breaks new ground when she describes the impact of the Great Depression on

the less developed countries. Japan continued to grow, while China does not

seem to have been affected. Heim attributes the moderate effects of the Great

Depression on the less developed countries to the

“delinking” of domestic currency from the international economy. Resources were

shifted from the export to domestic industries thereby stimulating economic

development. This is an interesting hypothesis which needs to be worked out

more fully than what was possible in a short lecture. The Great Depression as a

stimulus to economic growth in the less developed countries is a “fresh” and

provocative idea.

The other five papers treat the Great Depression as a specific country event.

James Fackler constructs an econometric model of the U.S. economy for the

period 1921-37. It is a variant of the standard aggregate demand

/aggregate supply with IS and LM underpinnings. His purpose is to attempt to

differentiate between alternative propagation mechanisms. He identifies three:

a decline in the money stock (Friedman and Schwartz),

autonomous changes in consumption (Temin) and

the debt-deflation or credit view (Fisher and Bernanke). Fackler recognizes

the they may not be mutually exclusive. It is doubtful how much we have learned

from this exercise.

Alternative propagation mechanisms can not be ruled out. The “best,” he

surmises, appears to be a shock to the IS curve whose source, however, can not



Robert Margo’s paper is more modest in its aspirations but, nevertheless,

makes two “fresh” contributions to the behavior of the labor market during the

Great Depress ion. He presents new evidence about the labor participation rate

of wives of husbands on WPA projects and the effects of the Great Depression on

income distribution. Using microeconomic data Margo refutes the “added worker

effect” hypothesis–that other family members have an incentive to seek

employment when the head of household becomes unemployed. What he finds is that

the WPA inhibited the wives of husbands on WPA from seeking a job. Even if

wages were relatively low on WPA projects, they were still better than what

married women could earn.

Margo’s conclusion that WPA work was essentially full time and excluded job

search is consistent with the Lucas-Rapping (1972) model of the Great

Depression where the labor market is presumably in continuous short

-term equilibrium.

Margo also questions the conventional wisdom that the Great Depression helped

to produce a more egalitarian distribution of income. This did not happen

because earnings differentials widened between skilled and unskilled

workers–the decline in hours worked was greater among the unskilled. By 1939,

however, the differential had returned to what it had been in the late 1920s.

Instead, a substantial decline in the inequality of wages occurred between 1940

and 1950.

The papers of Wheelock and Cecchetti are less concerned with the causes of the

Great Depression than with its legacies. Wheelock maintains that institutional

change spawned by the Great Depression imparted an inflationary bias to

monetary policy and completely undermined any

lasting commitment to the gold standard which led inevitably to the rejection

of the Bretton Woods agreement in 1971. He concludes correctly that the Fed’s

commitment to the full gold standard was weakened by gold sterilization in the

twenties, the priority of domestic stabilization objectives, a reluctance to

raise rates in 1931, and the final abandonment of gold temporarily in 1933. It

was not the Great Depression that weakened the U.S.

commitment to the gold standard but the realization when “push comes to shove”

exchange rate rigidity must be subservient to domestic stabilization


Cecchetti derives three lessons of the Great Depression for current policy:

the central bank’s function as lender of last resort is of primary importance,

deflation is extremely costly, and the gold standard is very dangerous! One

lesson that we should have learned, but which Cecchetti omits, is that the

initial structure of the Federal Reserve (as embodied in the original Federal

Reserve Act) was faulty. All banks were not required to become members thereby

excluding those banks that later were in most need of Federal Reserve support.

A faulty Federal Reserve Act and not inept management was the primary cause of

the Fed not having done more.

Bernstein eschews the relatively short-run view of the Great Depression. He

prefers an explanation couched in terms of secular changes in technology and

shrinkage of investment outlets that bears a strong resemblance to the older

theories of Kalecki, Schumpeter, and Hansen.

The key is to be found in the concept of industrial maturity which he derives

from the work of the Austrian economist Joseph Steindl (1976). In the Steindl

version there were long-run tendencies toward capital accumulation in

capitalist development which

led to diminished competition and investment. Bernstein acknowledges that

Steindl’s explanation does not have the unequivocal support of the historical


There is no simple interpretation of the Great Depression to which these six

essays point.

Nor do they make any pretense at summarizing the state of the art. They

represent a combination of singular efforts to come to terms with specific

problems. Some are more successful than others.


Barry Eichengreen. Golden Fetters: The Gold Standard and the Great

Depression, 1919-1939. New York: Oxford University Press, 1992.

Milton Friedman and Anna Jacobson Schwartz, The Great Contraction,

1929-1933, Princeton: Princeton University Press, 1965.

Charles P. Kindleberger. The World Depression, 1929-1939. Berkeley:

University of California Press. 1973.

Robert E. Lucas and Leonard Rapping. “Unemployment in the Great Depression:

Is There a Full Explanation?” Journal of Political Economy, 80, 1972,


Joseph Steindl, Maturity and Stagnation in American Capitalism, New


Monthly Review Press, 1976.

Elmus Wicker is Professor of Economics, Emeritus at Indiana University. He is

the author of Banking Panics of the Great Depression, Cambridge

University Press. 1996, and Banking Panics of the Gilded Age, Cambridge

University Press, forthcoming.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII