Lessons for the Present from the Great Depression

Abstract

The economic contraction that started in 1929 was the worst in history. Historians have compared it with the downturns of the 1840's and the 1890's, but the comparisons serve only to show the severity of the later movement. In the nineteenthcentury depressions, there were banking panics, deflation and bankruptcy in various proportions. But there is no parallel to the massive underutilization of economic resources in the 1930's. Given the magnitude and importance of this event, it is surprising how little we know about its causes. The reactions of people to the Depression, the policies undertaken during the Depression, and the effects of the Depression have all been the objects of extensive study. But the economic collapse itself has suffered a form of intellectual neglect. Too long ago to be part of the study of the current economy, too recent to be included in most courses in economic history, too complex to be explained simply, economists havewith a few prominent exceptions-left the study of the Depression to others. The inevitable result has been a neglect of the economic aspects of the Depression. While economists have advanced a variety of hypotheses to explain why depressions can take place, little attention has been given to the explicit application of these competing theories to the biggest depression in history. One reason, often and correctly given for the magnitude of the Great Depression, is the absence of a concerted expansionary macroeconomic policy between 1929 and 1933. The monetary and fiscal policies that we now think could have been effective in moderating or eliminating the contraction were not used to any perceptible extent.' But the question of what macroeconomic policy would have worked is only one question that can be asked about the Great Depression. It is of considerable interest also to know what happened to make such a corrective policy desirable.2 What happened in the years around 1929 that (in the absence of offsetting govern-

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