Abstract
The Great Depression was a global crisis and served as a watershed moment for the modern mixed-market economy. Marked with high unemployment, financial uncertainty, and human suffering on a global scale it gave rise to the field of macroeconomics, offering valuable lessons for policy to remediate future calamities.
The Great Depression and Lessons Learned
The Great Depression resounded around the industrialized world from 1929 to 1933, its negative effects touched businesses great and small, leading to massive unemployment, and eventually resulted in bigger government in the United States. With an event of this magnitude, theories abounded which attempted to answer important questions such as why this happened and what remedies may be applied to prevent such an economic crisis from occurring in the future. Higgs (1985) notes that the twentieth century saw the emergence of the “Great Transformation” in the United States, namely the modern mixed economy recognizable today.[1] This urban-industrial-capitalist model may have been a reaction to crisis which ultimately led to the expansion of governmental authority in economic decision-making[2] and a political economy became firmly established during this inter-war period. The great depression was dramatically introduced through the Stock Market crash on October 29, 1929, known as Black Tuesday. Among the above-mentioned theories available to explain the crash and subsequent crisis, one theory has received wide, historic acceptance, namely John Kenneth Galbraith’s account in his book The Great Crash.
Written in 1954, Galbraith’s book captured the major points of the event and while he came short in causality for the crash, it is still recognized as authoritative by economic historians.[3] Galbraith posits that the stock market was not, in and of itself, the cause of the crash, rather a reflection which provided an image of the fundamental economic situation.[4] Many western nations experienced a financial boom during the decade, referred to nostalgically as the “Roaring Twenties.”[5] Technological advances in industry led the public to expect higher earnings and dividends. The stock market bubble rose from this rapid expansion, and there appeared to be a certain psychological element to stock speculation as public confidence increased in like measure. Participation during this time also expanded for groups who had previously been excluded from trading, such as women.
Galbraith noted that by the autumn of 1929, the nation was already amid depression. In fact, June statistics bear out that indexes of industrial and factory production had experienced a downturn, steel production was declining, and home sales-building had been diminishing for a few years prior to 1929. Bernanke’s approach supports Galbraith’s, referring to the effects depressed aggregate demand and aggregate supply around the world along with the role of monetary “shocks” in the Great Contraction, with negative ramifications for the prevailing gold standard.[6] Another piece of the puzzle, according to Galbraith and echoed in the literature, was the prevalence of brokers’ loans to expand investment in the markets. The danger of this was dismissed by contemporaries before the crash. One such example of overconfidence was banker Charles Mitchell, who made the announcement that the “industrial condition of the United States is absolutely sound”[7] indicating that concern for brokers loans were inconsequential since the upward economy was impossible to stop. Mitchell was incorrect. Between October 24 and October 29, the banks recalled in billions of loans from Wall Street.[8]
Comprehending the Great Depression remains significant in the twenty-first century, so much that former chair of the Federal Reserve, Ben Bernanke, goes as far as to declare that understanding this is “the Holy Grail” of macroeconomics.[9] Why? Because the crisis gave birth to the field of macroeconomics, remaining influential to the beliefs, policy recommendations, and research agendas of economists. Recovery from the crash was slow. White summarized the by noting the intervention by the Federal Reserve Bank of New York as the panic ensued which prevented a collapse of the financial system. While this was the appropriate response, Federal Reserve policies hurt the economy moving forward, causing the country to slip further into recession.[10]
Recovery involved a variety of factors, but Romer observed that monetary developments were vital in the rebound of the U.S. economy, while fiscal policy provided little relief before 1942.[11] The money supply began to experience rapid growth staring in 1933 lowering real interest rates and stimulating investment. This was predicated by an influx of unsterilized gold inflow into the American economy. Some have even credited World War II for speeding along the recovery, supported by a few economists. The period was marked with high unemployment and human suffering on a global scale. Lessons were painfully learned about the topic of the Great Depression and they are communicated to the present day for our edification.
Bibliography
Bernanke, Ben S. “The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1 (1995): 1-28. Accessed April 22, 2021. doi:10.2307/2077848.
Galbraith, John Kenneth, and Andrea D. Williams. 2001. Essential Galbraith. Boston: Houghton Mifflin Harcourt Publishing Company. https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=80873&site=ehost-live&scope=site.
Higgs, Robert. “Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon.” Explorations in Economic History 22, no. 1 (1985): 1-28. https://doi.org/10.1016/0014-4983(85)90019-1.
Romer, Christina D. “What Ended the Great Depression?” The Journal of Economic History 52, no. 4 (1992): 757-84. Accessed April 22, 2021. http://www.jstor.org/stable/2123226.
White, Eugene N. “The Stock Market Boom and Crash of 1929 Revisited.” The Journal of Economic Perspectives 4, no. 2 (1990): 67-83. Accessed April 22, 2021. http://www.jstor.org/stable/1942891.
[1] Robert Higgs, “Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon,” Explorations in Economic History 22, no. 1 (1985): 1.
[2] Ibid., 2.
[3] Eugene N. White, “The Stock Market Boom and Crash of 1929 Revisited,” The Journal of Economic Perspectives 4, no. 2 (1990): 68, http://www.jstor.org/stable/1942891.
[4] John Kenneth Galbraith and Andrea D. Williams. 2001. Essential Galbraith. Boston: Houghton Mifflin Harcourt Publishing Company, 275.
[5] White, 1990, 67.
[6] Ben S. Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1 (1995): 2.
[7] Galbraith and Williams, 2001, 280.
[8] Ibid.
[9] Bernanke, 1995, 1.
[10] White, 1992, 82.
[11] Christina D. Romer, “What Ended the Great Depression?” The Journal of Economic History 52, no. 4 (1992): 781.
Todd Elliott, Writer 