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