Where should we place the blame? ?Economists believe the Great Depression was caused by the weaknesses in the 1920s economy, but the person whose name will be

The Unfinished Nation: A Concise History of the American People, 6/e

Alan Brinkley, Columbia University

Debating the Past

Chapter Twenty-Five: The Great Depression

Where Historians Disagree – Causes of the Great Depression

What were the causes of the Great Depression? Economists and historians have debated

this question since the economic collapse began and still have not reached anything close to

agreement on it. In the process, however, they have illustrated several very different

theories about how a modern economy works.

During the Depression itself, different groups offered interpretations of the crisis that fit

comfortably with their own self-interests. Some corporate leaders claimed that the

Depression was the result of a lack of “business confidence,” that businessmen were

reluctant to invest because they feared government regulation and high taxes. The Hoover

administrations blamed international economic forces and sought, therefore, to stabilize

world currencies and debt structures. New Dealers, determined to find a domestic solution

to the crisis, argued that the Depression was a crisis of “underconsumption,” that low wages

and high prices had made it too difficult to buy the products of the industrial economy; and

that a lack of demand had led to the economic collapse.

Scholars in the years since the Great Depression have also created interpretations that fit

their view of how the economy works. One of the first important postwar interpretations

came from the economists Milton Friedman and Anna Schwartz, in their Monetary History of

the United States (1963). In a chapter entitled “The Great Contractions,” they argued for

what has become known as the “monetary” interpretation. The Depression, they claimed,

was a result of a drastic contraction of the currency (a result of mistaken decisions by the

Federal Reserve Board, which raised interest rates when it should have lowered them).

These deflationary measures turned an ordinary recession into the Great Depression. The

monetary argument fits comfortably with the ideas that Milton Friedman, in particular, has

advocated for many years: that sound monetary policy is the best way to solve economic problems–as opposed to fiscal policies, such as taxation and spending.

A second, very different argument is known as the “spending” interpretation, an

interpretation supported by many liberal, Keynesian economists. It is identified with, among

others, the economist Peter Temin, and his book Did Monetary Forces Cause the Great

Depression? (1976). Temin’s answer to his own question is “no.” The cause of the crisis was

not monetary contraction (although the contraction made it worse), but a drop in

investment and consumer spending, which preceded the decline in the money supply and

helped to cause it. Here again, there are obvious political implications. If a decline in

spending was the cause of the Depression, then the proper response was an effort to

stimulate demand–raising government spending, increasing purchasing power,

redistributing wealth. The New Deal never ended the Depression because it did not spend

enough. World War II did end it because it pumped so much public money into the economy.

Another important explanation comes from the historian Michael Bernstein. In The Great

Depression (1987) he avoids trying to explain why the economic downturn occurred and

asks, instead, why it lasted so long. The reason the recession of 1929 became the

Depression of the 1930s, he argues, was the timing of the collapse. The recession began as

an ordinary cyclical downturn. Had it begun a few years earlier, the basic strength of the

automobile and construction industries in the 1920s would have led to a reasonably speedy

recovery. Had it begun a few years later, a group of newer, emerging industries would have

helped produce a recovery in a reasonably short time. But the recession began in 1929, too

late for the automobile and construction industries to help and too soon for emerging new

industries–aviation, petrochemicals and plastics, aluminum, and others–to help, since they

were still in their infancies.

The political implications of this argument are less obvious than those of some other

interpretations. But one possible conclusion is that if economic growth depends on the

successful development of new industries to replace declining ones, then the most sensible

economic policy for government is to target investment and other policies toward the

growth of new economic sectors. One of the reasons World War II was so important to the

long-term recovery of the U.S. economy, Bernstein’s argument suggests, was not just that

it pumped money into the economy, but that much of that money contributed to developing

new industries. This is, in other words, an explanation of the Depression that seems to

support some of the economic ideas that became popular in the 1980s and 1990s calling for a more direct government role in stimulating the growth of new industries.

In the end, however, no single explanation of the Great Depression has ever seemed

adequate to most scholars. The event, the economist Robert Lucas once argued, is simply

“inexplicable” by any rational calculation. There is no one, wholly persuasive answer to the question of