The Great Depression: A Good Summary
Lots of folks are asking if we're having another depression. I very much think not. But it's worth reviewing just what happened in the 1930s. An excellent summary is the article in the Concise Encyclopedia of Economics. That link takes you to the article, but here are some good passages for you skimmers:
Depression in the development of economic thinking and economic policy,
economists do not completely agree on what caused it. Recent research
by Peter Temin, Barry Eichengreen, David Glasner, Ben Bernanke, and
others has led to an emerging consensus on why the contraction began in
1928 and 1929. There is less agreement on why the contraction phase was
longer and more severe in some countries and why the depression lasted
so long in some countries, particularly the United States.
…
In previous
depressions, wage rates typically fell 9-10 percent during a one- to
two-year contraction; these falling wages made it possible for more
workers than otherwise to keep their jobs. However, in the Great
Depression, manufacturing firms kept wage rates nearly constant into
1931, something commentators considered quite unusual. With falling
prices and constant wage rates, real hourly wages rose sharply in 1930
and 1931. Though some spreading of work did occur, firms primarily laid
off workers. As a result, unemployment began to soar amid plummeting
production, particularly in the durable manufacturing sector, where
production fell 36 percent between the end of 1929 and the end of 1930
and then fell another 36 percent between the end of 1930 and the end of
1931.
Why
had wages not fallen as they had in previous contractions? One reason
was that President Herbert Hoover prevented them from falling. He had
been appalled by the wage rate cuts in the 1920-1921 depression and had
preached a “high wage” policy throughout the 1920s. By the late 1920s,
many business and labor leaders and academic economists believed that
policies to keep wage rates high would maintain workers’ level of
purchasing, providing the “steadier” markets necessary to thwart
economic contractions. When President Hoover organized conferences in
December 1929 to urge business, industrial, and labor leaders to hold
the line on wage rates and dividends, he found a willing audience.
…
fewer deposits, and as banks built up their excess reserves, the money
supply fell 30.9 percent from its 1929 level. Though the Federal
Reserve System did increase bank reserves, the increases were far too
small to stop the fall in the money supply.
…
had led to overproduction, causing the depression. The centerpieces of
the New Deal were the Agricultural Adjustment Act (AAA) and the
National Recovery Administration (NRA), both of which were aimed at
reducing production and raising wages and prices. Reduced production,
of course, is what happens in depressions, and it never made sense to
try to get the country out of depression by reduc ing production further. In its zeal, the administration apparently did not consider the elementary impossibility of raising all real wage rates and all real prices.
The entire article is quite readable. Here's what I think:
Contraction of the money supply was the greatest problem in the Great Depression.
The various measures to prop up wages and prices contributed to the problem. When economists create mathematical models of business cycles, they have to add some element that prevents wages and prices from falling. Some are just ad hoc assumptions, other elements are theoretical based on monopolistic pricing. However, we should remember that falling wages and prices are a natural adjustment mechanism.
The Smoot-Hawley tariff, along with other countries' movements toward protectionism, worsened the depression.
The many gyrations of policy lowered business investment.
Banking laws, which limited opportunities for geographic diversification, caused bank failures and much of the financial crisis.
My reading of America's post-World War II recessions indicates that multiple causation is common. The economy is resilient enough to withstand a variety of shocks and policy errors. Sometimes, though, the shocks and errors keep piling up.
Another Great Depression? Not while the Fed is aggressively easing.
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I always get so depressed when I read Krugman or Delong. Thanks for not saying capitalism is ending!