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The Great Depression As Historical Problem Author(S): Michael A The Great Depression as Historical Problem Author(s): Michael A. Bernstein Source: OAH Magazine of History, Vol. 16, No. 1, The Great Depression (Fall, 2001), pp. 3-10 Published by: Organization of American Historians Stable URL: http://www.jstor.org/stable/25163480 . Accessed: 08/05/2011 19:24 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=oah. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Organization of American Historians is collaborating with JSTOR to digitize, preserve and extend access to OAH Magazine of History. http://www.jstor.org From the Editor/Historiography The Great Depression as Historical Problem Michael A. Bernstein now over a It is well half-century since the Great Depression of rates of the fifties and sixties obscured the prewar debates and most severe moment a return the 1930s, the and protracted economic crisis in dissolved for the any fears of to hard times. American history. To this day, there exists no general agree Yet far from being resolved, the concerns and misgivings of the ment to some consensus war about its causes, although there tends be depression and years simply faded from view. It has by now at regarding its consequences. Those who the time argued that the long been fashionable to claim that "Keynes is dead," and few was a to an depression symptomatic of profound weakness in the mecha economists choose engage with the ideas of older generation were to events a nisms of capitalism only briefly heard. After World War II, who struggled understand devastating at time when their views appeared hysterical and exaggerated, as the industri orthodox theories and remedies no longer sufficed. Indeed, the alized nations sustained dramatic rates of growth and as the vast majority of contemporary economists have grown decidedly economics profession became increasingly preoccupied with the hostile to arguments concerning the Great Depression that do not a on run development of Keynesian theory. As result, the economic focus the short or on policy failure. In this respect, they came as slump of the interwar period to be viewed a policy problem have avoided the structural, institutional, and long-run perspec rather than the outgrowth of fundamental tendencies of capital tives more characteristic of the work of their forebears who sought was never a ism. The presumption that the Great Depression could to situate the Great Depression within historical framework that to or more. so an be repeated owing the increasing sophistication of economic spanned several decades By doing, they have lost not some causes analysis and policy formulation. Indeed, the belief became com appreciation simply of possible of the Great monplace that the business cycle was "tamed" and "obsolete." Depression itself, but also of the subsequent development and The erratic performance of the American economy during the performance of the American economy since mid-century. It is for more reason a 1970s and 1980s and recent challenges associated with this that I seek, through reassessment of these older analytical to globalization have made this notion itself obsolete. Entirely new approaches, persuade you of the insight afforded by an understand varieties of economic thinking have emerged, asserting that the ing of "The Great Depression as Historical Problem." government cannot alter levels of real output except under exceptional circumstances. Indeed, confidence in the "Keynesian Trends in the Literature Revolution" has been shaken, and a new "classicism" has come to The older literature concerning the Great Depression in the prominence in economic thought. United States may be broadly classified into three categories. One In this climate of economic opinion, it is important to remem set argued that the severity and length of the downturn was the ber that the postwar optimism for Keynesian economics emerged direct result of the collapse of financial markets that began in at a time of dramatic reconstruction in the world economy and 1929. Such work emphasized the causes of the 1929 crash and concomitant prosperity in the United States. Such hope had been those factors that amplified its impact. Another school of thought absent in the decade of the Great Depression, and even during the concluded that the economic calamity of the 1930s was the direct war a to years there had been apprehension that return depression result of poorly formulated and politically distorted actions under would come close on the heels of victory. But the high growth taken by the government. A third set of research took a broader OAH Magazine of History Fall 2001 3 Bernstein/From the Editor created by the Treaty of Versailles, some writers (such as Irving Fisher and Lionel Robbins) argued that the depression was the The for those inevitable consequence of the chaotic and unstable credit struc challenge ture of the twenties. The principal irritant consisted of a dangerous circle of obligations and risks, epitomized by the Dawes Plan of of us who teach about 1924, in which the United States lent funds to Great Britain, France, and Germany, at the same time the Allies depended on this economic German reparations to liquidate their American debts. By 1928 profound American banks were already quite wary of the situation, but their on to predictable response, cutting back loans European govern worse. crisis is to find ments, merely made the situation Moreover, the demise of the gold standard in international substantive in trade and demands that Germany make reparations payments in ways gold created a net gold flow into the United States that led to a veritable explosion of credit. Extremely unstable credit arrange which to link the once ments thereby emerged in the twenties, and the crash came, the collapse of the banking system was quick to follow. Thus economics of the excessive credit and speculation, coupled with a weak banking network, caused the Great Depression. Another version of the short-run approach concerned the interwar with the on consumer years immediate effects of the crash wealth and spending. The severity of the downturn, it was argued, resulted in a drastic personal and social devaluation of consumer wealth and a loss of confidence in credit. The resulting decreases in purchasing power left the economy of saddled with excess capacity and inadequate demand. were experience None of these short-run arguments completely convinc ing. Because the business confidence thesis was subjective, it was contemporaries. virtually impossible to evaluate in the light of historical evidence. There was also the objection that notions like these mistook effect for cause; the economic circumstances of the thirties may have generated pessimism and panic, rather than being caused by such feelings. Later economists frequently rejected the excessive credit and to in a on too perspective and attempted analyze the depression long-run speculation argument the grounds that it abstracted boldly context. It suggested that whatever the origins of the slump, the from real rather than monetary events in the interwar economy. reasons for its unparalleled length and severity predated and Indeed, business cycle indicators turned down before the stock transcended the events of 1929. market crashed. Indices of industrial production started to fall by the summer of 1929, and a softness in construction activity was The Stock Market Crash as Cause apparent in 1928. Such critics as John Kenneth Galbraith held All short-run analyses of the Great Depression shared a com that "cause and effect run from the economy to the stock on causes mon attribute. They focused the immediate and impacts market, never the reverse. Had the economy been fundamen of the New York Stock Market collapse of 1929, and they asserted tally sound in 1929 the effect of the great stock market crash that the resulting devaluation of wealth and disruption of the might have been small... the shock to confidence and the loss banking system explained the intensity of the crisis. The "business of spending by those who were caught in the market might soon confidence" thesis was perhaps the best example of this school of have worn off." thought. It held that regardless of the mechanisms that caused the As for the wealth and spending hypothesis, the evidence did collapse, the dramatic slide of the stock market created intensely not provide compelling proof. The dramatic decline in consump to to pessimistic expectations in the business community. The shock tion expenditures after 1929 may have been due the stock was so severe a once confidence and unexpected that dramatic panic market debacle; it may have arisen expectations had been took hold, stifling investment and thereby a full recovery. dampened by the events after 1929; or it may have been an A more comprehensive formulation of the short-run argument outgrowth of a declining trend in construction activity and in even directly confronted the question of why financial markets col farm incomes during the twenties.
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