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Understanding Economic Recovery in the 1930s: Endogenous Propagation in the Great Depression

Author(s):Steindl, Frank G.
Reviewer(s):Wheelock, David C.

Published by EH.NET (July 2004)

Frank G. Steindl, Understanding Economic Recovery in the 1930s: Endogenous Propagation in the Great Depression. Ann Arbor, MI: University of Michigan Press, 2003. xi + 228 pp. $52.50 (hardcover), ISBN: 0-472-11348-8.

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

Economists and economic historians continue to study the Great Depression. Most of this effort has been directed toward understanding the economic contraction of 1929-33. By contrast, the recovery phase of the Great Depression has received comparatively little attention. In this book, Frank Steindl reviews previous explanations for the recovery, presents new empirical evidence on the possible role of bank credit growth in the recovery, and offers a novel explanation for the simultaneous occurrence of rapid output growth and price deflation during 1938-40. The book describes at length the explanations of economists writing in the 1930s, as well as the views of economists and economic historians looking back at the decade. It concludes that rapid growth of the money stock, brought about by massive inflows of gold, can explain much of the recovery, but that “endogenous propagation,” i.e., a tendency for real output growth to return to trend, also played an important role.

The book begins with a comprehensive review of major macroeconomic time series for the 1930s including, for some series, a comparison of original and revised data. Because most modern explanations of the Great Depression since Friedman and Schwartz (1963) assign an important role to monetary forces, Steindl constructs estimates of the money stock for the 1930s using data that were readily available to contemporary analysts. These series track closely the estimates subsequently produced by Friedman and Schwartz. The next three chapters then focus on the monetary explanation of the recovery, with two chapters devoted to examining the extent to which economists writing in the 1930s assigned any importance to money as a cause of the recovery.

Steindl’s review of the empirical evidence leads him to conclude that growth of the money stock, driven by gold inflows, was an important cause of the economic recovery. He finds it puzzling, therefore, that almost without exception contemporary economists dismissed the role of monetary forces in the recovery. Even among those who had previously espoused the quantity theory, almost no economist linked the economic recovery to growth of the money stock. Steindl reviews the work of such prominent monetary economists as James Angell and Lauchlin Currie. He finds most puzzling the case of Irving Fisher, the “quintessential” quantity theorist, to whom Steindl devotes an entire chapter. Fisher’s early writings viewed the money stock as largely under central bank control. He attributed the monetary contraction of 1929-33 to the public’s attempt to reduce debt, however, and saw the buildup of excess reserves in banks beginning in 1932 as evidence that the Fed’s ability to control the money stock is limited. He concluded that the Fed could increase currency and reserves but not ensure that money would circulate, let alone that firms and individuals would borrow or that banks would lend. Fisher thus proposed that hoarded currency be taxed and that a 100 percent reserve requirement be imposed on banks.

Much of the book is devoted to reviewing and evaluating evidence about the impact of monetary forces, fiscal policy, and bank lending on economic activity during the recovery. A separate chapter examines the depression of 1937-38, which occurred before the economy had fully recovered from the contraction of 1929-33. As with the recovery that began in mid-1933, Steindl concludes that monetary forces were paramount in the contraction of 1937-38 and subsequent recovery. He finds that neither fiscal policy nor an exogenous component of bank lending contributed to the recovery. Whereas his analysis of monetary and fiscal policy is largely a review of previous work, Steindl presents new empirical tests of the credit channel.

In his review of the role of monetary forces in the recovery, Steindl identifies an apparent puzzle in the behavior of output, money, and the price level during the recovery from the depression of 1937-38. From May 1938 to August 1940, both the money stock and real output grew rapidly while the price level fell. Steindl argues that the occurrence of deflation alongside vigorous growth of output and money cannot be explained by the behavior of aggregate demand, nor by any identifiable series of shocks to aggregate supply. He finds it puzzling that no prior studies examined this period.

Steindl attributes the rapid growth of output during 1938-40 to “endogenous propagation,” i.e., the natural forces that cause a market economy to return to trend growth. He attributes deflation to an increase in money demand caused by expectations of further deflation and perhaps depressed economic activity. Although Steindl identifies no series of positive supply shocks, he argues that productivity growth is a “key ingredient” in the endogenous propagation mechanism and notes that productivity grew rapidly during 1938-40. Field (2003) finds considerable evidence of rapid multifactor productivity growth in the 1930s, which he attributes to increased research and development activity and numerous important technological breakthroughs. His research suggests that there was a series of positive supply-side shocks that could explain rapid output growth and/or a falling price level.

Steindl’s analysis of deflation during 1938-40 is somewhat unsatisfying because the decline in prices was not widespread. Steindl focuses exclusively on the wholesale price index (WPI), which declined 7 percent from May 1938 to August 1940 (except for a brief uptick at the start of World War II in Europe). Much of this decline, however, is attributable to farm output prices. Excluding farm product and food prices, the WPI fell less than 2 percent between May 1938 and August 1939, and was higher in August 1940 than it had been in May 1938. Furthermore, the consumer price index (CPI) and the GNP deflator, estimated by Balke and Gordon (1988), declined much less than the WPI. Both fell approximately 2 percent from May 1938 to August 1939, and then remained almost constant through 1940. Hence, the profession’s lack of interest in 1938-40 does not seem as puzzling to me as it does to Steindl.

In sum, I found Steindl’s review of the monetary, fiscal, and credit channel explanations of the economic recovery interesting and useful. I also enjoyed reading about the views of monetary economists writing in the 1930s, which builds on Steindl’s earlier book (Steindl, 1995). I am not convinced, however, that the behavior of output and prices during 1938-40 deserves the special attention it receives in this book.


Balke, Nathan S. and Gordon, Robert J. “Appendix B, Historical Data,” in Robert J. Gordon, editor, The American Business Cycle: Continuity and Change. Chicago: University of Chicago Press, 1986, pp. 781-850.

Field, Alexander J. “The Most Technologically Progressive Decade of the Century,” American Economic Review 93 (4), September 2003, pp. 1399-1413.

Friedman, Milton and Schwartz, Anna J. A Monetary History of the United States, 1867-1960. Princeton, NJ: Princeton University Press, 1963.

Steindl, Frank G. Monetary Interpretations of the Great Depression. Ann Arbor, MI: University of Michigan Press, 1995.

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 several articles on banking and monetary history.

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