The Great Depression

Using the 2 articles below, and the historical context article, answer the following question:
Does the current economical turmoil equate to a modern "depression"? Why do people compare the current situation to the depression of the 1930s? Do you think it is an accurate comparison? If yes, how? If no, why?

ARTICLE 1:
Posted 11.05.2008
Lessons of the Great Depression
Future painful day of reckoning?
By Rebecca Cole

"Washington was rife with both fear and optimism as Roosevelt was sworn in on March 4, 1933 - fear that the economy might not recover and optimism that the new and assertive president just might make a difference." -- Myths of the Great Depression, Lawrence Reed

Nearly every article written recently about the economic meltdown usually contains the phrase, "the worst financial crisis since the Great Depression" to describe the current state of affairs.

Last month, Lawrence Reed, president of the Foundation for Economic Education, a free-market think-tank, drew parallels between today’s crisis and what he terms the "myths" of the Great Depression.

"If we ignore history, we will be condemned to repeat it," Reed told a crowd of about 75 undergraduates and guests at Colorado Christian University in Lakewood. "I’d like to say the Federal Reserve has learned from the Great Depression, but maybe not all the lessons."

Reed said the years of expansion in the 1920’s were caused primarily by the Fed’s "disastrous mismanagement" of monetary policy. Driving interest rates to historic lows ensured bloated liquidity and created an artificial short-term boom. As commodity prices skyrocketed and the dollar plunged, it all came crashing down on October 24, 1929.

Sound familiar?

In today’s global financial crash, initial finger-pointing was aimed at greedy Wall Street investment banks that peddled chopped-up mortgage securities and credit default swaps around the world. But now former Fed chairman Alan Greenspan is in the hot seat for keeping interest rates too low for too long and fueling the housing boom at the root of the financial mess.

The real danger, Reed said, is if the new administration makes the kind of monetary mistakes he says a "silver-tongued" President Franklin Roosevelt made with his New Deal policies — doubling the tax rate for those in the top bracket, raising tariffs, implementing price controls and choking the monetary supply — that turned a recession into a severe and prolonged depression.

"Speeches are no substitute for good policy, as the 1930s demonstrated," Reed said. "FDR could give a fireside chat like no other. But if the policies are bad, they will not restore confidence."

Blasting the Bush administration’s bailout mentality, Reed said it amounts to nothing more than a short-term stimulus.

"Debts aren’t disappearing; they’re only getting transferred," he said. "We’re not removing malfeasance in this behavior; we’re subsidizing it. In the short run, it may make you feel good, but in the long run there’s a piper to be paid."

Calling for a "quick and healthy adjustment," Reed said any effort to forestall an inevitable correction is only going to "put the day of reckoning off" and make it more painful in the future. "There’s a cleansing that takes place when markets are allowed to go to where values really are. When we prevent that cleansing, we just prop up the system for a more painful future correction."

Reed said the Bush administration is "a disaster on the spending front, one of the worst in our history," and that he’s not happy with either of the possible replacements. With the election over and Sen. Barack Obama declared the winner, he will inherit a record $455 billion deficit — doubled from its level at $162 billion just one year ago — and an overall national debt north of $10 trillion.

"There needs to be less government meddling and more personal responsibility," Reed said.

Tucker Hart Adams, president of the Adams Group, who has monitored and analyzed the Colorado economy for 30 years, agrees with Reed’s analysis to some extent in terms of personal responsibility. "Nobody wants to say it’s our fault, as a country, as individuals, for trying to live beyond our means as we have done for several decades, and it has just gotten worse and worse."

But Hart Adams disagreed with Reed on the $700 billion rescue plan and said there is a clear place for government regulation, especially in terms of transparency. "Markets work when you have perfect information. We didn’t have that, and nobody cared, nobody asked."

To step back and let the market chart its own course, she said, would cause horrible suffering — and with the interconnected global economy, not just here in the U.S — that could be prevented.

"We need jobs, we need people paying taxes, we need goods and services produced," Hart Adams said. "And if we have to smooth the transition period in order to not have bread lines and 25 percent unemployment I think that’s a valid role for government.

"We’re going to have to pay one way or the other, unless we’re going to just say, ‘Let ’em starve,’" she said.
Rebecca Cole is the online editor at Rocky Mountain Institute, a non-profit "think-and-do" tank that drives the efficient use of energy and resources. Learn more about RMI's latest initiative, Reinventing Fire, to move the U.S. off fossil fuels by 2050.

ARTICLE 2:
USA 2008: The Great Depression
Food stamps are the symbol of poverty in the US. In the era of the credit crunch, a record 28 million Americans are now relying on them to survive – a sure sign the world's richest country faces economic crisis
By David Usborne in New York
Tuesday, 1 April 2008

We knew things were bad on Wall Street, but on Main Street it may be worse. Startling official statistics show that as a new economic recession stalks the United States, a record number of Americans will shortly be depending on food stamps just to feed themselves and their families.
Dismal projections by the Congressional Budget Office in Washington suggest that in the fiscal year starting in October, 28 million people in the US will be using government food stamps to buy essential groceries, the highest level since the food assistance programme was introduced in the 1960s.
The increase – from 26.5 million in 2007 – is due partly to recent efforts to increase public awareness of the programme and also a switch from paper coupons to electronic debit cards. But above all it is the pressures being exerted on ordinary Americans by an economy that is suddenly beset by troubles. Housing foreclosures, accelerating jobs losses and fast-rising prices all add to the squeeze.
Emblematic of the downturn until now has been the parades of houses seized in foreclosure all across the country, and myriad families separated from their homes. But now the crisis is starting to hit the country in its gut. Getting food on the table is a challenge many Americans are finding harder to meet. As a barometer of the country's economic health, food stamp usage may not be perfect, but can certainly tell a story.
Michigan has been in its own mini-recession for years as its collapsing industrial base, particularly in the car industry, has cast more and more out of work. Now, one in eight residents of the state is on food stamps, double the level in 2000. "We have seen a dramatic increase in recent years, but we have also seen it climbing more in recent months," Maureen Sorbet, a spokeswoman for Michigan's programme, said. "It's been increasing steadily. Without the programme, some families and kids would be going without."
But the trend is not restricted to the rust-belt regions. Forty states are reporting increases in applications for the stamps, actually electronic cards that are filled automatically once a month by the government and are swiped by shoppers at the till, in the 12 months from December 2006. At least six states, including Florida, Arizona and Maryland, have had a 10 per cent increase in the past year.
In Rhode Island, the segment of the population on food stamps has risen by 18 per cent in two years. The food programme started 40 years ago when hunger was still a daily fact of life for many Americans. The recent switch from paper coupons to the plastic card system has helped remove some of the stigma associated with the food stamp programme. The card can be swiped as easily as a bank debit card. To qualify for the cards, Americans do not have to be exactly on the breadline. The programme is available to people whose earnings are just above the official poverty line. For Hubert Liepnieks, the card is a lifeline he could never afford to lose. Just out of prison, he sleeps in overnight shelters in Manhattan and uses the card at a Morgan Williams supermarket on East 23rd Street. Yesterday, he and his fiancée, Christine Schultz, who is in a wheelchair, shared one banana and a cup of coffee bought with the 82 cents left on it.
"They should be refilling it in the next three or four days," Liepnieks says. At times, he admits, he and friends bargain with owners of the smaller grocery shops to trade the value of their cards for cash, although it is illegal. "It can be done. I get $7 back on $10."
Richard Enright, the manager at this Morgan Williams, says the numbers of customers on food stamps has been steady but he expects that to rise soon. "In this location, it's still mostly old people and people who have retired from city jobs on stamps," he says. Food stamp money was designed to supplement what people could buy rather than covering all the costs of a family's groceries. But the problem now, Mr Enright says, is that soaring prices are squeezing the value of the benefits.
"Last St Patrick's Day, we were selling Irish soda bread for $1.99. This year it was $2.99. Prices are just spiralling up, because of the cost of gas trucking the food into the city and because of commodity prices. People complain, but I tell them it's not my fault everything is more expensive."
The US Department of Agriculture says the cost of feeding a low-income family of four has risen 6 per cent in 12 months. "The amount of food stamps per household hasn't gone up with the food costs," says Dayna Ballantyne, who runs a food bank in Des Moines, Iowa. "Our clients are finding they aren't able to purchase food like they used to."
And the next monthly job numbers, to be released this Friday, are likely to show 50,000 more jobs were lost nationwide in March, and the unemployment rate is up to perhaps 5 per cent.

HISTORICAL BACKGROUND:
The Great Depression as Historical Problem

Michael A. Bernstein
It is now well over a half-century since the Great Depression of the 1930s, the most severe and protracted economic crisis in American history. To this day, there exists no general agreement about its causes, although there tends to be some consensus regarding its consequences. Those who at the time argued that the depression was symptomatic of a profound weakness in the mechanisms of capitalism were only briefly heard. After World War II, their views appeared hysterical and exaggerated, as the industrialized nations sustained dramatic rates of growth and as the economics profession became increasingly preoccupied with the development of Keynesian theory. As a result, the economic slump of the interwar period came to be viewed as a policy problem rather than the outgrowth of fundamental tendencies of capitalism. The presumption was that the Great Depression could never be repeated owing to the increasing sophistication of economic analysis and policy formulation. Indeed, the belief became commonplace that the business cycle was "tamed" and "obsolete."
The erratic performance of the American economy during the 1970s and 1980s and more recent challenges associated with globalization have made this notion itself obsolete. Entirely new varieties of economic thinking have emerged, asserting that the government cannot alter levels of real output except under exceptional circumstances. Indeed, confidence in the "Keynesian Revolution" has been shaken, and a new "classicism" has come to prominence in economic thought.
In this climate of economic opinion, it is important to remember that the postwar optimism for Keynesian economics emerged at a time of dramatic reconstruction in the world economy and concomitant prosperity in the United States. Such hope had been absent in the decade of the Great Depression, and even during the war years there had been apprehension that a return to depression would come close on the heels of victory. But the high growth rates of the fifties and sixties obscured the prewar debates and dissolved for the moment any fears of a return to hard times.
Yet far from being resolved, the concerns and misgivings of the depression and war years simply faded from view. It has by now long been fashionable to claim that "Keynes is dead," and few economists choose to engage with the ideas of an older generation who struggled to understand devastating events at a time when orthodox theories and remedies no longer sufficed. Indeed, the vast majority of contemporary economists have grown decidedly hostile to arguments concerning the Great Depression that do not focus on the short run or on policy failure. In this respect, they have avoided the structural, institutional, and long-run perspectives more characteristic of the work of their forebears who sought to situate the Great Depression within a historical framework that spanned several decades or more. By so doing, they have lost an appreciation not simply of some possible causes of the Great Depression itself, but also of the subsequent development and performance of the American economy since mid-century. It is for this reason that I seek, through a reassessment of these older analytical approaches, to persuade you of the insight afforded by an understanding of "The Great Depression as Historical Problem."
Trends in the Literature
The older literature concerning the Great Depression in the United States may be broadly classified into three categories. One set argued that the severity and length of the downturn was the direct result of the collapse of financial markets that began in 1929. Such work emphasized the causes of the 1929 crash and those factors that amplified its impact. Another school of thought concluded that the economic calamity of the 1930s was the direct result of poorly formulated and politically distorted actions undertaken by the government. A third set of research took a broader perspective and attempted to analyze the depression in a long-run context. It suggested that whatever the origins of the slump, the reasons for its unparalleled length and severity predated and transcended the events of 1929.
The Stock Market Crash as Cause
All short-run analyses of the Great Depression shared a common attribute. They focused on the immediate causes and impacts of the New York Stock Market collapse of 1929, and they asserted that the resulting devaluation of wealth and disruption of the banking system explained the intensity of the crisis. The "business confidence" thesis was perhaps the best example of this school of thought. It held that regardless of the mechanisms that caused the collapse, the dramatic slide of the stock market created intensely pessimistic expectations in the business community. The shock to confidence was so severe and unexpected that a dramatic panic took hold, stifling investment and thereby a full recovery.
A more comprehensive formulation of the short-run argument directly confronted the question of why financial markets collapsed. Looking to the political and institutional distortions created by the Treaty of Versailles, some writers (such as Irving Fisher and Lionel Robbins) argued that the depression was the inevitable consequence of the chaotic and unstable credit structure of the twenties. The principal irritant consisted of a dangerous circle of obligations and risks, epitomized by the Dawes Plan of 1924, in which the United States lent funds to Great Britain, France, and Germany, at the same time the Allies depended on German reparations to liquidate their American debts. By 1928 American banks were already quite wary of the situation, but their predictable response, cutting back on loans to European governments, merely made the situation worse.
Moreover, the demise of the gold standard in international trade and demands that Germany make reparations payments in gold created a net gold flow into the United States that led to a veritable explosion of credit. Extremely unstable credit arrangements thereby emerged in the twenties, and once the crash came, the collapse of the banking system was quick to follow. Thus excessive credit and speculation, coupled with a weak banking network, caused the Great Depression.
Another version of the short-run approach concerned the immediate effects of the crash on consumer wealth and spending. The severity of the downturn, it was argued, resulted in a drastic devaluation of consumer wealth and a loss of confidence in credit. The resulting decreases in purchasing power left the economy saddled with excess capacity and inadequate demand.
None of these short-run arguments were completely convincing. Because the business confidence thesis was subjective, it was 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 speculation argument on the grounds that it abstracted too boldly from real rather than monetary events in the interwar economy. Indeed, business cycle indicators turned down before the stock market crashed. Indices of industrial production started to fall by the summer of 1929, and a softness in construction activity was apparent in 1928. Such critics as John Kenneth Galbraith held that "cause and effect run from the economy to the stock market, never the reverse. Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small . . . the shock to confidence and the loss of spending by those who were caught in the market might soon have worn off."
As for the wealth and spending hypothesis, the evidence did not provide compelling proof. The dramatic decline in consumption expenditures after 1929 may have been due to the stock market debacle; it may have arisen once expectations had been dampened by the events after 1929; or it may have been an outgrowth of a declining trend in construction activity and in farm incomes during the twenties. But even recent investigations have been incapable of unambiguously explaining a large portion of the decline in spending. We can speak of a drop, but we cannot say for sure why it happened.
Policy Errors as Cause
Another approach to understanding the Great Depression evaluated the extent to which the slump was the result of systematic policy errors. According to this school of thought, inadequate theory, misleading information, and political pressures distorted the policy-making process. Such investigators as Melvin Brockie, Kenneth Roose, and Sumner Slichter maintained that from 1932 onward the American economy showed great potential for recovery, only to be set back profoundly by the 1936 recession. They asserted that the New Deal's Industrial Codes raised labor costs and material input prices, thus negating whatever monetary stimulus existed. The rhetoric and ideology of the Roosevelt Administration may have further contributed to the downturn by jeopardizing the confidence of the business community. Not surprisingly, several investigators labeled the downturn of 1936-1937 the "Roosevelt Recession."
It was not solely criticisms of actual government policy in which these writers indulged to explain the depression's unusual severity. In some cases they also criticized the government for not doing enough. They maintained that the private sector moved too quickly in the mid 1930s in raising prices. As a result, by 1937 consumers increasingly resisted higher prices as they sought to liquidate the large debt incurred earlier in the decade and to maintain their savings in uncertain times. The average propensity to consume subsequently fell, and a recession took hold. Pro-competitive policies presumably were the solution, but government action (such as the creation of the Temporary National Economic Committee to Investigate the Concentration of Economic Power) was too little, too late, and was often inspired more by political than economic concerns.
The notion that the Great Depression was essentially an outgrowth of policy failures was problematic at best. To be sure, one could with the benefit of hindsight engage in some forceful criticism of economic policy during the 1930s. But it seems a futile exercise. After all, in many respects the Roosevelt Administration (especially the Board of Governors of the Federal Reserve System) did what many of its predecessors had done in the face of a cyclical downturn. One must ask, therefore, how government officials suddenly became so inept in the interwar period. Moreover, the question remains: why were traditional policies that had seemingly worked in the past and that represented a theoretical consensus among generations of economists suddenly so perverse in the 1930s? What had changed in the structure and operation of the national economy in the interwar period that made orthodox economic theory and policy inadequate?
Long-Run Factors as Cause
The literature that focused on long-run factors in the American depression was distinctive in holding that the stock market crash of 1929 was less important than certain developments in the economy that had deleterious impacts throughout the interwar period. Some authors (for example, Seymour Harris and Paul Sweezy) argued that during the 1920s the distribution of national income became increasingly skewed, lowering the economy's overall propensity to consume. Others, such as Charles Kindleberger, W. Arthur Lewis, and Vladimir Timoshenko, focused on a shift in the terms of trade between primary products and manufactured goods, due to the uneven development of the agricultural and industrial nations. This change in the terms of trade, they argued, created a credit crisis in world markets during the bad crop yields of 1929 and 1930. At the same time that agricultural economies were losing revenue because of poor harvests and declining world demand, the developed economies were contracting credit for the developing nations and imposing massive trade restrictions such as America's Hawley-Smoot Tariff of 1930. As the agricultural nations went into a slump, the industrialized countries (most notably the United States) lost a major market for their output. Hence, the downturn of 1929 became more and more severe.
Industrial organization economists (Adolf Berle and Gardiner Means most prominent among them) sought an explanation of the depression in the trend toward imperfect competition in the American economy of the early twentieth century. After the crash of 1929, prices became increasingly inflexible, due to the concentrated structure of American industry and the impact of labor unions. On the one side, these "sticky prices" further limited the already constrained purchasing power of consumers. On the other, noncompetitive pricing predominated in the capital goods sector, meaning producers were less willing to buy new plants and equipment. Price inflexibility thus inhibited the recovery of both final product demand and investment demand.
There were several weaknesses in these theories. Those authors who focused on an increasingly unequal distribution of income did not marshal unambiguous evidence to make their case, nor did they specify precisely how such factors came to life in the interwar economy. While Berle and Means claimed to have demonstrated a relative price inflexibility in concentrated economic sectors during the 1930s, their critics were unconvinced. Given that the aggregate price level fell by one-third in the early thirties, they argued, how inflexible could the general price system have been? The "sticky prices" thesis also relied on an assumption of perfect competition in all markets other than those where the imperfections existed. If this assumption were relaxed, the thesis did not hold.
The terms of trade argument similarly had a major flaw. The major weaknesses in the American economy of the interwar period were domestic, and the collapse of demand on the part of agricultural nations was not highly relevant. During the 1920s, exports as a share of the nation's gross national product had annually averaged only a bit over 5 percent. A fall in export demand, then, could not have played a major role in worsening or prolonging the Great Depression.
Theories of Economic Stagnation
Continued research on the Great Depression necessarily relied upon the work of Joseph Schumpeter on cyclical processes in modern economies. Schumpeter held that the interwar period was an era in which three major cycles of economic activity in the United States (and Europe) coincidentally reached their nadir. These cycles were 1) the Kondratieff, a wave of fifty or more years associated with the introduction and dispersion of major inventions; 2) the Juglar, a wave of approximately ten years' duration that appeared to be linked with population movements; and 3) the Kitchin, a wave of about forty months' length that had the appearance of a typical inventory cycle.
Schumpeter's efforts were paralleled by those of Simon Kuznets and, more recently, Moses Abramovitz and Richard Easterlin. Kuznets was successful in documenting the existence of waves of some fifteen to twenty years in length. These periodic swings, according to Abramovitz, demonstrated that in the United States and other industrialized countries, "development during the nineteenth and early twentieth centuries took the form of a series of surges in the growth of output and in capital and labor resources followed by periods of retarded growth." Significantly, "each period of retardation in the rate of growth of output . . . culminated in a protracted depression or in a period of stagnation in which business cycle recoveries were disappointing, failing to lift the economy to a condition of full employment or doing so only transiently." The specific behavioral mechanisms that could account for the Kuznets phenomenon (and its precise manifestation in the United States in the 1930s) were necessarily the focus of continued debate. It is in this context that we can understand the large literature on "secular stagnation."
In general, stagnation theorists agreed that stagnation, or economic maturity, as it was sometimes called, involved a "decrease of the rate of growth of heavy industries and of building activity . . . [and] the slowing down of the rate of growth of the total quantity of production, of employment, and usually of population. It [also involved] the rising relative importance of consumer goods." However, they differed in emphasis, falling into two broadly defined groups: those who focused on the decline of new technologies and those who were more concerned with the shrinkage of investment outlets as the rate of population growth fell. Followers of this second school held that as population growth fell off, and as major markets in housing, clothing, food, and services consequently contracted, outlets for new investment were quickly limited.
Both variants of stagnation theory had limitations. For one, arguments concerning economic maturity and population growth conflated population with effective demand. As one critic put it: "[i]t is sometimes maintained that the increase in population encourages investment because the entrepreneurs anticipate a broadening market. What is important, however, in this context is not the increase in population but in purchasing power. The increase in the number of paupers does not broaden the market."
Much like the population theory, the variant of stagnation theory that focused on the decline of technological change embodied many inconsistencies and questionable assertions. Proponents of this school claimed that the lower rate of technological innovation (said to be a primary cause of the economy's inability to recover from the depression) derived from the state of technological knowledge at the time, yet they offered little justification of this position. A further objection to the technology argument was apparent to some of the stagnation theorists themselves. Their work contained an implicit assumption that new innovations were always of the capital-using type, but if innovations were capital-saving, their argument foundered. Heavy investment (in railroads, motor cars, and housing, for example) during earlier stages of economic growth may have given way in later periods to newer forms of investment in managerial technique and information processing. These latter innovations may not have absorbed very large amounts of investment expenditure at all. While they may have improved the organization and efficiency of production, their impact on spending would not have been adequate to the task of systematic recovery.
The Work of Josef Steindl
It was the Austrian economist Josef Steindl who provided the most sophisticated version of the economy maturity idea. Not surprisingly, he did so in part by explicitly situating the Great Depression in the United States within a long-term development framework. His work linked economic stagnation directly with the behavior of capitalist enterprise, thereby avoiding the mechanistic qualities of many of the stagnation arguments as well as their frequent appeals to external factors. Steindl's version of the maturity thesis was that long-run tendencies toward capital concentration, inherent in capitalist development over time, led to a lethargic attitude toward competition and investment. Specifically, the emergence of concentrated markets prevented the utilization of excess capacity that is required for an economic revival.
Price inflexibility in concentrated industries is intensified during depressions, and this has an important impact on the response of firms to economic fluctuations. Firms' revenues tend to be so jeopardized in a slump that price reduction seems unfeasible. There may even be incentives to raise prices in order to compensate for the reduction in sales. For a given industry, therefore, the impact of a decline in the growth rate will depend on the extent to which the industry is concentrated. In a sector where the squeezing out of competitors is relatively easy, large declines in demand will result in the reduction of profit margins for each firm as prices are cut. By contrast, in a concentrated market, profit margins will tend to be inelastic in the face of lowered demand.
At the macroeconomic level the implications of inelastic profit margins are most profound. In these circumstances, price reductions do not compensate for declines in the rate of growth, and thus companies tend to reduce their rate of capacity utilization. Reductions in capacity utilization imply not only declines in national income but also increases in unemployment. In the presence of underutilized capacity, firms will be increasingly disinclined to undertake any net investment. A cumulative process is thereby established wherein a decline in the rate of growth, by generating reductions in the rate of capacity utilization, will lead to a further decline in the rate of expansion as net investment is reduced. Individual firms, by believing that decreases in their own investment will alleviate their own burden of excess capacity, merely intensify the problem economy-wide. The greater the proportion of the nation's industry that is highly concentrated, the greater the tendency for a cyclical downturn to develop into a progressive (and seemingly endless) decline.
A further consequence of the existence of highly concentrated sectors in the national economy is the impact it has on demand. The higher profit margins secured by large firms are indicative of an increasingly skewed distribution of output that, when combined with the reluctance of firms to invest (or otherwise spend) their revenues, generates a rising aggregate marginal propensity to save. Declining effective demand is combined with rising excess capacity when a slump occurs. The potential for recovery, barring the intervention of exogenous shocks, government spending, or the penetration of foreign markets, is therefore greatly lessened.
What is central to Steindl's thesis is the concept of long-term alterations in industrial structure that make the economy as a whole less capable both of recovering from cyclical instability and of generating continued growth. He assumed the emergence of oligopolistic market structure to be inherent in the process of capitalist development, because of capitalism's tendencies toward the development of large-scale manufacturing techniques and financial concentration. Economic maturity and the threat of stagnation result because the growing incidence of "[o]ligopoly brings about a maldistribution of funds by shifting profits to those industries which are reluctant to use them." In order to escape stagnation, capital must be redistributed either to more competitive sectors or new industries.
Indeed, during the Great Depression, some members of Roosevelt's "Brain Trust," such as Rexford Tugwell, argued forcefully for the imposition of an "undistributed profits tax" to prevent the accumulation of corporate surpluses. The incentive of the tax, it was claimed, would lead firms to issue more of their surpluses in the form of productive investment or dividends. As a result, the mobilization of capital resources would be more efficient and more likely to generate recovery. Embedded in the Revenue Act of 1936, the undistributed profits tax proved to be one of the most unpopular and controversial pieces of legislation to emerge from the New Deal, and it was repealed in 1938.
Interestingly enough, there exists no clear relationship between stagnation and concentration in American industry during the Great Depression. By applying a static conception of market structure, investigators have tended to focus on the number of firms in an industry as the primary determinant of a sector's competitiveness. Yet, as I discovered in my own research, some highly concentrated industries were relatively vibrant during the decade, while others appeared virtually moribund. Clearly, the evidence concerning market structure was a frail reed upon which Steindl based his theory. Whether a given industry is dynamic or not involves several issues unrelated to the number of firms or the extent of capital concentration issues having to do with the industry's position in the economy's input-output matrix, the durability of its output, and the relative maturity of the industry with respect to the shifting composition of the economy as a whole.
The weaknesses in Steindl's analysis do not, of course, obscure the importance of his contribution to an understanding of the Great Depression in particular, and of mature capitalist economies in general. That importance derives from the fact that Steindl attempted to situate the decade of the thirties within a larger historical framework. In this context, he could view the Great Depression as the outcome of an interaction between cyclical forces dating from 1929 and tendencies of long-run development spanning a half-century or more. In short, he was thus able to understand the Great Depression as a historical problem.
The U.S. Economy Since the Great Depression
Steindl had, of course, focused his work on the interwar economic crisis of the 1930s. His central theses regarding maturity and stagnation in advanced capitalist economies seemed particularly compelling when viewed in terms of the long-run historical experience of the Great Depression. Yet both the postwar record, at least in the case of the United States, and some of the theoretical lacunae in his earlier claims, led Steindl to modify some of the arguments of his 1952 book. With the 1976 republication of his Maturity and Stagnation in American Capitalism, Steindl allowed that technical innovation, product development, public spending, and research and development initiatives might provide the means to escape from investment inertia. Even so, he was extremely concerned that most accumulation strategies in mature capitalist nations would focus on military-industrial activity and war itself. Using both public and private investment funds for other purposes, while obviously desirable, would be "exceedingly hard" given "the workings of political institutions."
The wisdom (not to mention the prescience) of Steindl's 1976 observations becomes apparent as soon as one surveys the more recent evolution of American capitalism. American accumulation in the latter half of the twentieth century, on the one side, confirmed many of Steindl's suppositions regarding expansion in advanced industrial states. On the other, it demonstrated both the unique and abiding flexibility of capitalism in the face of contradictory tendencies toward underutilization, and the importance of political and social forces often thought by economists to be superfluous. In all these respects, contemporary history reveals the conceptual power and importance of what Steindl had to say when he first examined the crisis of the1930s. But it also reminds us of the unyielding impacts of contingency and human agency in economic performance over time.
World War II achieved in the United States, of course, what the New Deal could not--economic recovery. With the start of war in Europe, the unemployment rate began to fall so that by the time of the Japanese naval offensive at Pearl Harbor, only 7 percent of the labor force remained idle. American entry into the war brought almost instantaneous resolution of the persistent economic difficulties of the interwar years. Between 1939 and1944 the national product, measured in current dollars, increased by almost 125 percent, ultimately rising to $212 billion by 1945.
Yet as World War II came to a close many economists and businesspeople worried about the possibility of a drop in the level of prosperity and employment. But these apprehensions proved to be unwarranted. In the first year after the war, gross national product fell less than the postwar reduction in government spending; unemployment did not even reach 4 percent; consumer spending did not fall at all, and eventually rose dramatically. Although recessions occurred between 1945 and the mid 1970s, most of them lasted only about a year or less, and none of them remotely approached the severity of the Great Depression. During these three decades American output steadily increased with only minor setbacks. According to the Federal Reserve Board's index, manufacturing production doubled between 1945 and 1965, and tripled between 1945 and 1976.
Such robust economic performance is hardly surprising in wartime especially when conflict is global and, with few exceptions, kept outside of national boundaries. What is most striking about the American economic experience linked with World War II was the enduring growth and prosperity of the postwar years. Consumption and investment behavior played a major part in this great prosperity of the late forties and fifties. As soon as Germany and Japan surrendered, private and foreign investment in the United States rose quickly. On the domestic side, reconversion was itself an investment stimulus. Modernization and deferred replacement projects required substantial deployments of funds. Profound scarcities of consumer goods, the production of which had been long postponed by wartime mobilization, necessitated major retooling and expansion efforts. Even fear of high inflation brought on by the dismantling of wartime price and wage controls prompted many firms to move forward the date of ambitious and long-term investment projects. On the foreign side, both individuals and governments were eager to find a refuge for capital that had been in virtual hiding during the war. Along with a jump in domestic investment, therefore, a large capital inflow began in late 1945 and early 1946.
Domestic consumption was the second major component of postwar growth. Bridled demand and high household savings due to wartime shortages, rationing, and controls, coupled with the generous wages of the war economy, contributed to a dramatic growth in consumer spending at war's end. The jump in disposable income was bolstered by the rapid reduction in wartime surtaxes and excises. And the baby boom of the wartime generation expressed itself economically in high levels of demand for significant items like appliances, automobiles, and housing. G.I. Bill benefits additionally served to increase the demand for housing and such things as educational services, with associated impact on construction and other industrial sectors.
Foreign demand for American exports grew rapidly in the immediate postwar years. In part the needs of devastated areas could only be met by the one industrial base that had been nearly untouched by war-related destruction. Explicit policy commitments to the rebuilding of allied and occupied territories, such as the Marshall Plan in Europe, also served to increase the foreign market for the output of American industry.
American postwar prosperity and the benefits of world economic leadership continued throughout most of the 1950s. But the prosperity of the decade, while robust and impressive, nevertheless weakened by 1957. This set the stage for the arrival of a new brand of economics in Washington, explicitly (and self-consciously) imbued with the doctrines of Keynesianism.
From the "New Frontier" policies of John F. Kennedy, to the "Great Society" agenda of his successor Lyndon Johnson, through the declaration of a "New Federalism" by Richard Nixon, there ensued an era of sustained central government intervention in the nation's economic life. The goal of many (but not all) of the "new" economists of the early 1960s--achieving simultaneously acceptable levels of unemployment and inflation--has more recently shattered. But throughout the sixties and much of the seventies (and for some even during the eighties) the perceived obligation of government to secure overall economic instability was not seriously questioned and remained one of the more important changes of twentieth-century American economic history.
Historical specificity notwithstanding, American economic performance in the latter half of the twentieth century seems to have conformed in many respects with the general analytical propositions derived from interwar economics. The ability to forestall and/or overcome tendencies toward economic stagnation has depended upon a varied set of circumstances, both global and domestic. But a continuation of such a charmed existence is apparently no longer possible. Josef Steindl himself noted, in 1976, that "the cheerful extroverted era of [postwar] growth has apparently come to an end." And, in words that today seem as relevant as they did over twenty years ago, he noted that the reasons for this were "the reduction of tension between the superpowers . . . the increase in tension within the capitalist countries . . . and . . . the emergence of environment, raw material, and energy problems . . . ."
In the midst of a return to the unstable growth of earlier decades, an altogether reactionary (re)orientation of fiscal and monetary policy has occurred. A resurgence of general equilibrium approaches to cyclical phenomena has prompted the formupoignancy of this state of contemporary affairs are made strikingly clear when we reflect upon the Great Depression as a significant and coherent historical problem. q
Note on this Issue: As this article amply demonstrates, consideration of the economic history of the Great Depression necessarily focuses on both quantitative and aggregate data that tend to obscure the human dimensions of the event. Indeed, the challenge for those of us who teach about this profound economic crisis is to find substantive ways in which to link the economics of the interwar years with the personal and social experience of its contemporaries. It is for this reason that the inspired work of the contributors to this special issue of the OAH Magazine of History should prove so useful to all of us in our work with students. In the pages that follow, readers will find visual and textual examination of the many ways in which Americans endured, understood, and ultimately overcame the burdens of the Great Depression. These articles and lesson plans will assist us all in our determination to convey to students the singular nature of the economic crisis of the interwar era and the remarkable accomplishments of the generation that lived through it.
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Michael A. Bernstein is a professor of history and associated faculty member in economics at the University of California, San Diego. His most recent book is A Perilous Progress: Economists and Public Purpose in Twentieth-Century America (2001).