The Big Picture Of The Great Depression


Roosevelt had never been happy with deficits, and he was not much of an economist, but he was far from being alone in thinking that the time had come to apply the brakes to the economy. Economists who were far more knowledgeable than he saw the situation exactly as he did. Prices were still below 1929 levels in most countries, but they were rising rapidly. Using 1929 levels as an index, during 1937 prices jumped from 83 to 96 in Great Britain, from 80 to 93 in Italy, from 87 to 98 in Sweden, and from 80 to 86 in the United States.

These increases caused the grinding deflation of the years since 1929 to be forgotten. Fear of inflation resurfaced. The economist John Maynard Keynes had discounted the risks of inflation throughout the Depression. Inflation was a positive social good, he argued, a painless way to “disinherit” established wealth. But by January 1937 Keynes had become convinced that the British economy was beginning to overheat. He was so concerned that he published a series of articles in the Times of London on “How to Avoid a Slump.” It might soon be necessary to “retard certain types of investment,” Keynes warned. There was even a “risk of what might fairly be called inflation,” he added. The next month the British government’s Committee on Economic Information issued a report suggesting a tax increase and the postponement of “road improvements, railway electrification, slum clearance,” and other public works projects “which are not of an urgent character.”


During this same period the Federal Reserve Board chairman Marriner Eccles, long a believer in the need to stimulate the economy, warned Roosevelt that “there is grave danger that the recovery movement will get out of hand, excessive rises in prices…will occur, excessive growth of profits and a boom in the stock market will arise, and the cost of living will mount rapidly. If such conditions are permitted to develop, another drastic slump will be inevitable.”

It did not take much of this kind of talk to convince President Roosevelt. When Roosevelt’s actions triggered the downturn, he reversed himself again, asking Congress for budget-busting increases in federal spending. The pattern elsewhere was similar. In the United States the money was spent on unemployment relief and more public works; in the major European countries the stimulus chiefly resulted from greatly increased expenditures on armaments. In 1939 World War II broke out, and the Great Depression came to a final end.

When viewed in isolation, the policies of the United States government during the periods when economic conditions were worsening seem to have been at best ineffective, at worst counterproductive. Those put into effect while conditions were getting better appear to have been at least partly responsible for the improvement. This helps to explain why the Hoover administration has looked so bad and the New Dealers, if not always good, at least less bad.

When seen in broader perspective, however, credit and blame are not so easily assigned. The heroes then appear less heroic, the villains less dastardly, the geniuses less brilliant. The Great Depression possessed some of the qualities of a hurricane; the best those in charge of the ship of state could manage was to ride it out without foundering.

Economists and politicians certainly know more about how the world economy functions than their predecessors did half a century ago. But the world economy today is far more complex and subject to many more uncontrollable forces than was then the case. A great depression like the Great Depression is highly unlikely. But a different great depression? Galbraith ended The Great Crash with this cynical pronouncement: “Now, as throughout history, financial capacity and political perspicacity are inversely correlated.” That may be an overstatement. But then again, maybe not.