Revisiting the Great Depression

February 20 , 2006


The Great Depression which began after the stock market crash in the fall of 1929 and lasted in its extreme form until 1934 and its aftermath form until 1939 was an event that marked the last century. Indeed such major collapses seem to be possible only once or perhaps twice a century in keeping with the long term business cycle theories of Kondratieff and Schumpeter. 


The exact nature of the depression and its causes are still much debated. In exploring this debate one can learn a great deal about business cycles, central banking policies, exchange rate management, international flows of capital and trade and stock market speculation.  


A number of influential authors have weighed in on the depression from both a Keynesian and monetarist perspective. These include Charles Kindleberger, Milton Friedman and Ana Schwartz, Gotfried Haberler,Peter Temin, Abe Safarian, Clarence Barber, Donald Moggridge, John Maynard Keynes, Friedrich von Hayek, Robert Lucas and many others. The reason for so much interest is not surprising. 


First of all this was a very major event that presaged and in many ways contributed to the rise of fascism and the Second World War. In economic theory terms if one can explain the causes of the depression one can learn from this and develop policies to prevent another such occurence. Here of course the medical model is influential. One studies epidemics to discover how to prevent them in the future. Charles Kindleberger has written a very comprehensive and fascinating guide to the great depression.The World in Depression 1929 -1939 enlarged edition 1936 University of California Press, Berkely, Los Angeles& London.


Kindleberger starts off by explaining that as a young man in the late 1920s he worked in the stock exchange in New York as a runner for a New York brokerage house.Despite the collapse in share prices he and his family were not severely affected and he was able to continue his studies including European travels and graduate work at Columbia University beginning in the winter of 1933.


He became fascinated with international exchange depreciation and later worked on his dissertation and got a job in 1936 in the International Research Division under Harry White who later played a key role in establishing the World Bank and the IMF along with John Maynard Keynes at Bretton Woods.Kindleberger later went to work at the Federal Reserve Bank of New York and the International Bank of Settlements.


So in many ways Kindleberger was ideally placed to write a history of the Great Depression. His perspective is that of an insider to the events that he describes in such effective detail. Kindleberger eschews econometric techniques and instead relies upon narrative history and a profound understanding of economic theory and the events themselves. He is convinced that the international monetary mechanism played a very important role in the depression. In addition Kindleberger shows how countries like Japan anticipated much of the thrust of Keynesian deficit financing policy as early as 1932. 


Keynes first broached the subject of public works in a letter to the Times on Aug 7, 1929 as well as in earlier writings in 1928. Similar proposals were made by the German progressive economist W.S. Woytinsky in the International Labour Review in January, 1932.(p.171-172)Woytinsky drafted along with two other labour economists a plan for domestic public works for the German Federation of trade unions in December 1931. Arthur Gayer wrote about the strategy of using public works to stabilize the cycle for a study published in New York in 1935 by the National Bureau of Economic Research , Public works in Prosperity and Depression. 


The Swedish economists associated with the Stockholm School developed similar notions in 1932. See the work of Eric Lindhal,Offentligaarbeten i Depressionstider with commentaries by Bertil Ohlin, Gunnar Myrdal, G.Bagge and J. Akerman;( Nationelonomisaka Foreningen, Forhandlingar, 1932 Stockholm, 1933). As far back as 1857 public works such as street cleaning and stone quarrying had been urged by the Mayor of New York as a program to assist the unemployed during the then depression. In 1855 workers were sent to work on the Erie Canal when they applied for assistance.


What this analysis of Kindleberger shows is that along with our knowledge of Kalecki`s work in the early 1930s and the pathbreaking work of R.F. Kahn and several other lesser well know theorists Keynes was not alone in breaking with orthodoxy and developing the intellectual apparatus necessary to justify this new path. But on the whole the fiscal conservatives , the advocates of balanced budgets and deflation were more numerous and overall in charge of policy until well into the 1930s.The automatic deflationist bias of the gold standard and the stubborn insistance of so many countries in trying to cling to it was also to blame. 


In addition from a game theoretic point of view Kindleberger points out the necessity of one major power acting as the responsible underwriter of the international econopmic system. It was the inability of the British to continue in that role from the late 1920s on and the ``reluctance of the United States to take it on until 1936 `` that caused so much damage. (p.11) (more to come)