The Great Depression and the New Deal

There are important lessons to be learned from the Great Depression but I have the impression that the left emerged with the view that the New Deal was required to save the US from rampant capitalism. There is an alternative account. For an MP3 version of the story.

The New Deal can be compared with the Australian Premier’s Plan which was a compromise between different interests, as all practical policies are bound to be, it was not pure but it had enough of the right stuff to make a difference.

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NPOV
NPOV
13 years ago

I’ve always had something of a hard time understanding how the New Deal could have done much to end the Depression – though it’s hard to dispute that Hoover’s “sit-back-and-do-almost-nothing” position was not particularly effective either.
If there’s ever a time for minimal government constraints on economic activity, it’s when times are bad*. It’s once high levels of prosperity are achieved that there’s a more convincing case for governments ensuring that the stability of the economy is maintained, and that everyone gets a share of the proceeds (this was more-or-less Galbraith’s position, AIUI).
Elements of the New Deal may well have prevented the Depression happening in the first place, but too many other elements, especially given the timing of their introduction, almost certainly played a part in drawing it out longer than was needed. But you don’t need free-market think tanks to tell you that – surveys of economists of all persuasions have indicated that as many as half of them have largely agreed that the New Deal was at least partly responsible for lengthening the Depression. And I don’t think anyone could seriously today defend such parts as destroying food in the middle of a famine to ensure farmers realised good profits.

* One exception I would make is labour market regulation, as when times are bad, employers are in far more of a position to take advantage of desperate workers. But even then the consequences of poorly-thought out policy can be the difference between a worker being able to at least feed himself, and being left to starve.

a student
a student
13 years ago

I have a bit of a problem with what you mean by the ‘left’. If you narrow your focus to people who haven’t looked at the great depression in much detail, then your impression may be correct. They think that government activism is a good thing, they see that the New Deal coincided with a recovery from the Great Depression, and there you go, suspicions confirmed. However, among experts of most colors, the view is much more nuanced.
First, few mainstream economists believe that the Great Depression was caused by rampant capitalism. I’d say most think it was caused by the Fed’s poor policy that meant a normal downturn became a complete disaster. Also, most would argue that the New Deal was not perfect. There are very few who would back the NRA (although there is an article in the latest issue of the AER suggesting that the NRA could be expansionary when nominal interest rates hit the zero lower bound), but there were other parts of the New Deal that were positive. Which part of the New Deal are you referring to? The increase in government spending? I’d say that has pretty broad based support. From my perspective, not that many people would argue that it was bad.
I don’t think the paper you linked to is particularly good. It looks like he assumed the answer before considering the question, and he seems to have some pretty important facts wrong. From the data I have seen, unemployment wasn’t 17 percent twelve years after the crash, but much much lower, (10 per cent according to “Was depression era unemployment really less in Canada than the U.S.?” in Economics Letters).

NPOV
NPOV
13 years ago

One of the mainstream economists that believed the Great Depression was caused, essentially, by rampant capitalism (or something like it) is Marriner S. Eccles, Chairman of the Fed from 1934 to 1948, who wrote:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery.

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

I’ve yet to read a good rebuttal of this line of argument, and it certainly intuitively rings true to me, but I suppose nobody can really prove it was the primary factor behind the crash.

JC
JC
13 years ago

N

Why would a few hands or lots of hands holding the money matter in terms of what caused the crash. I’ve seen that argument before and never made sense to me.

NPOV
NPOV
13 years ago

JC – I actually don’t think I can explain it any more clearly than Eccles, but here’s goes anyway: if too much wealth is concentrated in the hands of a few producers (‘capitalists’), this has been at the expense of better incomes for average workers, who make up the consumers that purchase what’s produced.

I’d suggest the problem still exists today to an extent, but it’s been covered up by easy access to credit.

JC
JC
13 years ago

if too much wealth is concentrated in the hands of a few producers (capitalists), this has been at the expense of better incomes for average workers, who make up the consumers that purchase whats produced.

I know that’s how it goes.

But let’s move back a little. I presume the wealth concentration is also held in liquid assets like money in the bank… in other words they are saving. However to save is to spend in the sense that the banks won’t take the money if they can’t lend it out to anyone. So who’s spending? It can’t be the rich dudes and they’re the savers according to this fable.

a student
a student
13 years ago

NPOV:
That may or may not have lead to the initial slowdown, and may have something to do with the crash, although I’m skeptical. However, what turned the slowdown into the depression was the Fed allowing the collapse of the banking system. Bernanke shows this in his work.
I’m don’t think that many mainstream economists today would agree with Eccles.

NPOV
NPOV
13 years ago

Interesting point JC, but even back in 1929 the economy was global enough that the banks surely had plenty of potential people to lend out money to outside the U.S. And even within the U.S., as long as the banks *believed* that the party was going to continue, they would still happily lend out to those who were trying to break into the ranks of successful entrepreneurs and business owners.

Look I really don’t know how likely an explanation it is – it seems something that should actually be testable with hard data, assuming such data is available. But there’s little denying that relatively few economists seem to actively support the idea.

John Greenfield
John Greenfield
13 years ago

If KKKism is falling apart all around us, why aren’t the Commies/Socialists putting up their hands for a piece? I reckon if the Luvvie Plodders, Webdiary, and the various wymyn’s groups took to the streets and started talkin’ about a revolution, Tanya Plibersek and Albo would hitch up their Armani skirts, grab their nearest Gucci handbag, and head for the hills. Or maybe Palmie.

John Greenfield
John Greenfield
13 years ago

Perhaps Luvvie Quiggin will join Margo Kingston and Lefty Kim on stage for a rousing rendition of “Our Talking points united, we’ll never be defeated” or some such.

JC
JC
13 years ago

Interesting point JC, but even back in 1929 the economy was global enough that the banks surely had plenty of potential people to lend out money to outside the U.S.

No, the US was importing capital at the time as it was running a current account deficit.

I guess also the thousands of banks around that time were all taking in deposits from the few hundred rich families. Doesn’t figure, right?

FDB
FDB
13 years ago

Sounds like the GreenfieldBot’s about ready for a new version.

I can’t wait!

NPOV
NPOV
13 years ago

Who says they were only taking deposits from a “few hundred rich families”.
Even the low-paid workers make deposits into banks.
And why “a few hundred”? I would’ve assumed at least “a few thousand”. Indeed, there could’ve been a million Americans that could be reasonably classified as “rich” in 1929, but if the remaining 119 million earned barely enough to afford little more than the basics, then a model that works on mass production and consumption seems likely to break down.

Patrick
13 years ago

Even the low-paid workers make deposits into banks.

I have no reason to believe this quote insofar as the 20s goes. At least some of my great- and grandparents and their contemporaries certainly wouldn’t have deposited money in a bank.

And if I think even back so far to the mid-eighties and international communication then, well, I can easily believe that the barriers to foreign lending in the 1920s-1930s were pretty high and not easily surmounted except in transactions between the most sophisticated parties (ie major bank in country A to major bank in country B who might then lend to company C).

JC
JC
13 years ago

N

You can’t have a depression without asset prices dropping against loans. In other words you can’t go broke without owing money. If the 1,000,000 rich US families were the net savers then who exactly had the debt for that silly fable to be correct? this is why the ” concentration of wealth” schtik doesn’t figure.

JC
JC
13 years ago

Patrick:

I can easily believe that the barriers to foreign lending in the 1920s-1930s were pretty high and not easily surmounted except in transactions between the most sophisticated parties (ie major bank in country A to major bank in country B who might then lend to company C).

Actually there was quite a bit of capital movement between Europe and the US. What stopped it were the regulations imposed by FDR and the Bretton Woods agreement. I recall reading in the Economist several years that suggested capital movements (direct capital outflow/inflow) for the UK and the richer countries of Europe were higher 19th century then they were now (about 1998) which I thought was extraordinary.

JP Morgan himself was the chief FX dealer for the bank. (Serious). LOL.

NPOV
NPOV
13 years ago

JC, again, reasonable point. However I didn’t suppose that 1,000,000 rich US families were all net savers, just that they had enough use for the services of banks to keep them profitable for a while. Obviously there was a substantial class of people that were in a significant amounts of debt – but as I understand it it wasn’t your average worker/consumer, and it probably wasn’t your super-successful (“top 100”) capitalist either.