The ‘credit crunch’: another Great Depression?

In the first part of his essay on the 1930s and today, Sean Collins puts the case for going beyond Keynesianism and monetarism and the obsession with finance to look at the deeper structural problems of capitalism.

Sean Collins
US correspondent

Topics Books

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Last month Christina Romer, chair of the Obama administration’s Council of Economic Advisers, began a speech by saying: ‘In the last few months, I have found myself uttering the words “worst since the Great Depression” far too often’ (1). Romer is clearly not the only one: in almost any discussion of the current economic crisis, it does not take long before someone mentions the 1930s. Such references to the Great Depression are not just useful compare-and-contrast points for policymakers. The 1930s have re-entered the popular imagination: the period has become part of our mental furniture as we try to make sense of what is going on today.

Cover illustration by
Jan Bowman

At worst, the fascination with the Great Depression is a crystallisation of our deepest fears about a collapse of the economy and society. Apparently, many now indulge in ‘pessimism porn’ on the internet, spending hours reading about doomsday scenarios put forward by pundits like Gerald Celente, who predicts ‘Breadlines, protests, tax revolts… civil unrest. Crime like we’ve never seen before.’ Celente has bought a German shepherd to protect himself (2).

At best, the discussion about the 1930s is an opportunity for more serious reflection on how best to address meeting people’s material needs. However, if we are to draw lessons from the past, we need to be careful. Too often there is an attempt to find exact parallels, or to project today’s preoccupations on to the past. The lessons are hardly likely to be ‘it’s a repeat of the Great Depression, we’re doomed’, or ‘it’s totally different from the 1930s, everything is fine, stop worrying’.

A survey of literature on the Great Depression – both old and new – finds that there are plenty of myths and misunderstandings that still exist about this period that need to be cleared up as we try to tackle today’s problems. In this essay, we look at the origins of the economic crisis of the 1930s, the common explanations given for it, and how this experience might inform our approach to understanding the current downturn. In next month’s spiked review of books, a second essay will examine to what extent the New Deal and other state responses solved the Great Depression, and the prospects for government intervention to address today’s crisis.

1) From the Great Crash to the Great Depression

The Great Depression was a worldwide phenomenon, and it is important that any account does not exclusively look at the US experience. But the eye of the storm was clearly in America, whose economy was among the first to decline, and saw the steepest drop.

On 24 October 1929, in what became known as ‘Black Thursday’, the New York Stock Exchange went into free-fall. In his classic The Great Crash 1929, John Kenneth Galbraith tells of the panic unleashed: ‘Outside the Exchange in Broad Street a weird roar could be heard. A crowd gathered… More people came and waited, though apparently no one knew for what. A workman appeared atop one of the high buildings to accomplish some repairs, and the multitude assumed he was a would-be suicide and waited impatiently for him to jump… Crowds also formed around the branch offices of brokerage firms throughout the city and, indeed, throughout the country… An observer thought that people’s expressions showed “not so much suffering as a sort of horrified incredulity”.’ (3)

Galbraith also noted that Winston Churchill was in the visitors’ gallery of the New York exchange that day, ‘showing his remarkable ability to be on hand with history’. Indeed, some Americans blamed Churchill, the former UK chancellor of the exchequer, and other British officials for demanding that the US ease credit conditions in the 1920s, which arguably led to a booming stock market.

Share prices would continue to drop over the next days, the worst day being ‘Black Tuesday’, 29 October. In fact, prices would not start to stabilise until mid-November, by which time about a third of the market’s value had disappeared and many investors went bankrupt. Galbraith writes: ‘In the week or so following Black Thursday, the London penny press told delightedly of the scenes in downtown New York. Speculators were hurling themselves from windows; pedestrians picked their way delicately between the bodies of fallen financiers.’ But such lurid stories of mass suicide (which were not limited to the London media) were simply imaginary, according to Galbraith; the number of suicides in October and November was actually lower than before.

This would not be the only myth to emerge from the Great Crash; indeed, one of the biggest is that the crash itself was the primary or sole cause of the Depression. But it is true that the stock market collapse triggered a severe downturn in economic activity. Over the year that followed, all sectors were affected: factories shut, farms went under, and banks failed. By 1930 output had declined by 10 per cent and unemployment rose from three per cent to nine per cent.

The crash and downturn shocked most Americans, mainly because the 1920s was an era of prosperity in the US. After recovering from a wrenching recession in 1921, productivity and profits increased, industries built on innovations – especially automobiles, but also domestic appliances like radios and refrigerators – took off, and living standards rose. Another new industry to emerge was Hollywood, and the movies and other forms of popular culture celebrated growing wealth. Such conditions led many observers to believe that high stock prices simply reflected a healthy economy. On 15 October 1929 – just before the crash – the economist Irving Fisher predicted: ‘I expect to see the stock market a good deal higher than it is today within a few months.’ (4) (When the crash did arrive, Fisher would blame irrational mob psychology.)

That Americans generally were caught by surprise is understandable, but also somewhat myopic and parochial, given that many parts of the world faced economic difficulties during the 1920s. As Eric Rauchway notes in his useful ‘very short introduction’ to the Great Depression published last year, the problems of the 1920s could be traced back to the First World War, which ‘made it harder for people, goods and money to move around the globe’ and ‘changed America, rendering the once-peripheral New World nation’s peculiarities central to the planet’s concerns’ (5). Europe was slow to recover, hindered by war debts (in particular Britain and France) and war reparations (in particular Germany), which the US refused to cancel. In the late 1920s, the flow of American capital to Europe was reversed, as investors were attracted by the stock market boom and rising interest rates in the US, further damaging the region’s prospects.

Even in the US, where the economy made real gains in the 1920s, there were unhealthy signs. While consumer goods were taking off, capital goods were less dynamic; and consumer goods were increasingly being bought on credit. Economic performance was inconsistent, with minor recessions in 1924 and 1927. The policy of the Federal Reserve (the US central bank) was expansionary, just as the stock market boom was getting underway, and banks were channelling funds into the stock market. And investors were buying stocks on ‘margin’; that is, borrowing up to 90 per cent of the stock price, a sure sign of frothiness.

The crash happened less than a year into Republican President Herbert Hoover’s term in office. Hoover is remembered as a free-market proponent who stood by while the economy slid into the abyss. His initial response on Black Thursday was to pronounce that the ‘fundamental business of the country’ was on a ‘sound and prosperous basis’. Andrew Mellon, Hoover’s treasury secretary, took an infamously hard line, calling to leave the economy to restructure itself: ‘Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate.’ (6) For periods of time after 1929 there were upticks in activity, and Hoover would pronounce that the recovery was starting (although he was not alone in seeing false dawns; for example, in January 1930, the Harvard Economic Society would state ‘there are indications that the severest phase of the recession is over’) (7).

Hoover’s reaction was no doubt informed by a laissez-faire perspective, but that was the consensus outlook among both major parties at the time. But it is not true that Hoover was totally hands-off; as Rauchway writes, ‘Hoover did not “do nothing”’, as Democrats then (and now) charged, ‘but he did not do enough either’ (8). Hoover cut top income tax rates; encouraged business to maintain wages and avoid job losses; and worked with state and local governments to increase spending on roads and other public works. But his initiatives did little to stop the downward spiral, as a wave of bank panics and bankruptcies raged from 1930 onwards. His Reconstruction Finance Corporation, set up in 1932 to provide credit to banks, could not stop the rot. Under his regime – and contrary to subsequent lore – government spending increased (although slightly compared to the New Deal), and the federal budget went into deficit (mainly due to declining revenues). But by 1932, his last year in office, Hoover was more concerned with balancing the budget, and he raised taxes, which only added to the decline in spending and growth.

The US downturn led Europe to decline further from its sluggish 1920s. In particular, the Smoot-Hawley tariff imposed by the US in 1930 would encourage beggar-thy-neighbour policies and the demise of trade relations, which ultimately hurt Europe more than the US. In 1931 a financial crisis hit Europe, as Kreditanstalt, the largest bank in Austria, failed and the Bank of England was forced to move off the gold standard. This set off a new wave of liquidation worldwide, and deepened the depressions.

The impact of the Great Depression was devastating. For the three years following the crash, US gross national product (GNP) fell every year, reducing by a third (in constant terms) over the period. Private investment totally collapsed, falling by nearly 90 per cent (9), and about a fifth of banks went under (10). Nearly a quarter became unemployed, and ‘in what Americans assumed to be the richest country in the world, the living standards of many unemployed workers and poor soil farmers fell to “third world” levels’ (11). Moreover, the depression was clearly international in scope: industrial production, from the peak (1929-30) to the trough (1932-33), fell by 42 per cent in Germany, 26 per cent in France and 17 per cent in the UK (12). Most major economies would start to grow again around 1933, but it would take the rest of the decade, if not the Second World War itself, before the pre-depression levels would be reached again (see chart here).

2) What Caused the Great Depression?

Any possible lessons from the experience of the 1929 crash and subsequent depression depend on understanding what brought about those events. And as it happens, the cause of the Great Depression has remained a matter of academic debate since the 1930s; with the onset of today’s crisis, this debate has broken into the public domain.

Keynesianism was the ascendant economic theory of the post-Second World War era (leading Richard Nixon in 1971 to proclaim ‘We are all Keynesians now’). John Maynard Keynes’ The General Theory of Employment, Interest and Money seemed to provide an intellectual underpinning for Franklin Delano Roosevelt’s New Deal (even though The General Theory was not published until 1936, and thus did not inform FDR’s policies, which were initiated in 1933), as well as postwar government management of the economy. Keynes asserted that economies occasionally suffered from a lack of spending power, or so-called ‘effective demand’, and that the tendency to correct such shortfalls may operate slowly or not at all. Furthermore, he believed government policies can plug the gaps and increase demand, and in the process reduce unemployment and encourage the private sector to invest.

Keynes’ followers believe that the Great Depression was a prime case of such a demand shortfall. In particular, many Keynesians cite the drop in consumer spending in the 1930s, especially on housing and autos, as the main reason for a broader decline in economic output and employment. But, as Paul Krugman – the 2008 Nobel laureate economist and a leading Keynesian – notes in his introduction to The General Theory re-issued in 2007, Keynes never really explains what causes the original lack of demand. Keynes presents ‘a picture of an economy stuck in depression, not a story about how it got there’. Keynes asked, ‘Given that overall demand is depressed – never mind why – how can we create more employment?’, and he analysed ‘how the economy stays depressed, rather than trying to explain how it became depressed in the first place’ (13).

In the 1960s, the Keynesian thesis about the Great Depression was challenged by Milton Friedman, who created a doctrine known as ‘monetarism’. In a 1963 book co-authored with Anna Jacobson Schwartz, Friedman blamed a decline in the money supply; specifically, in a period when looser monetary conditions were needed, the Federal Reserve adopted ‘a passive, defensive, hesitant policy’ (14). In fact, the Federal Reserve did increase the amount of money over which it had direct control, but the overall supply decreased due to the wave of bank failures, which led people to hoard cash and for banks to increase their cash reserves. Friedman argued that the Fed could have done more to stop the banks from failing, rather than allow destructive liquidations to proceed (15).

Some problems with the monetarist explanation are readily apparent. The actual decline in the money supply in the early 1930s was not that severe or unprecedented and yet such earlier instances did not lead to depression. Likewise, expansionary money policies have not historically been sufficient to increase investment in periods of depression.

Another viewpoint that also emphasises money is provided by the ‘Austrian school’. This laissez-faire group was named for its Austrian founders such as Ludwig von Mises, and prominent adherents have included Joseph Schumpeter and Friedrich Hayek. Austrians believe that the free market periodically rights itself via recessions, and both monetarists and Keynesians only make things worse by trying to avoid the pain of structural adjustment.

An early version of the Austrian case is Murray Rothbard’s America’s Great Depression, published in 1963. (16) An updated, 2009 contribution from this perspective can be found in Robert Murphy’s The Politically Incorrect Guide to the Great Depression and the New Deal. Murphy argues that ‘it was big government – in alliance with some members of big business – that fuelled the 1920s stock market boom and made the 1929 crash inevitable’. Like monetarists, the Austrians blame the Federal Reserve, but for the opposite reason – for being too expansionary: ‘Throughout the 1920s, but particularly in 1927, the Fed pumped artificial credit into the loan market, pushing down interest rates from their free-market level… the crash was made inevitable by the bubble in the stock market fuelled by artificially cheap credit.’ (17) But also like the monetarists, Austrians attribute an awful lot of power to one factor – money – and the workings of a single agency, the Federal Reserve, in explaining such a severe downturn.

Charles Kindleberger provided a noteworthy critique of the main theories in his 1974 book, The World in Depression, 1929-1939. Kindleberger characterised Keynesianism and monetarism as ‘two unicausal theories’. ‘The question is of the chicken-or-egg variety, whether the failure of the money supply to grow led to a decline in spending, or whether an independent autonomous decline in spending led to a decrease in the money supply.’ Instead, Kindleberger posited that the origins of the Great Depression were complex and international in scope, involving both financial and real-economy factors. In particular, he stressed the breakdown of the old hegemonic order: ‘The 1929 depression was so wide, so deep, and so long because the international economic system was rendered unstable by British instability and US unwillingness to assume responsibility for stabilising it.’ While provocative, Kindleberger’s theories ‘failed to persuade large numbers of scholars’, as he himself admitted (18).

As Keynesian-influenced policies were blamed for ‘stagflation’ during the 1970s, monetarist views gained the upper hand, reaching their heyday in the 1980s, when Reagan administration advocated them. During those years Keynesians and monetarists battled, but as the Reagan ‘revolution’ fizzled out, so their debate lost its sharper edges. What emerged was a rough consensus that there were virtues to both. Keynesians accept that monetary expansion is often necessary (though perhaps limited in effect), while most monetarists agree that government action is needed, including at times fiscal stimulus.

Ben Bernanke, who is both the current head of the Federal Reserve and an academic specialist on the Great Depression, favours a monetarist explanation (in particular, one based on the requirements imposed by adherence to the gold standard), but he also recognises a ‘compromise position’ in which ‘both monetary and non-monetary forces were operative at various stages’ (19). An example of an application of such an approach is provided by another Depression scholar-turned-government official, Christina Romer. Writing in her academic past, Romer put forward a variety of factors: ‘The United States slipped into recession in mid-1929 because of tight domestic monetary policy aimed at stemming speculation on the US stock market. The Great Depression started in earnest when the stock market crash in the United States caused consumers and firms to become nervous and therefore to stop buying irreversible durable goods. The American Depression worsened when banking panics swept undiversified and overextended rural banks and the Federal Reserve failed to intervene.’ (20)

Reviewing the various standard explanations of the Great Depression, it is hard not to reach the conclusion that none are satisfactory. If Keynesian or monetarist views do not stand on their own merits, combining them is more confusing than enlightening. Most importantly, all of the standard explanations (Austrian school and Kindleberger included) share a key assumption: that the cause of the Great Depression was external to the fundamental workings of the market.

The customary theories assume that the ‘normal’ state of affairs is a market that operates without problems; the business cycle has ups and downs, but recessions are usually self-adjusting and manageable. According to this logic, a depression must be caused by factors outside the system. At the start of the Great Depression, Keynes wrote ‘We have magneto [alternator] trouble.’ As Krugman elaborates in the updated, 2009 edition of his book, The Return of Depression Economics, by this Keynes meant that ‘most of the engine was in good shape, but a crucial component, the financial system, wasn’t working’ (21). Nearly all accounts argue along the lines of ‘if not for X, the Great Depression would have been a normal recession’, with X being Federal Reserve monetary policy, the stock market crash, the gold standard, the collapse of banking or some other exceptional feature (22).

Moreover, most of these X factors emanate from policy errors, which, it is argued, could have been avoided if politicians had made the right choices. The issue is then effectively kicked into touch: it becomes a matter of politics, not economics, and many economists do not feel obliged to try to explain why such choices were made.

There were, however, exceptions to this consensus that the Depression was caused by a virus to an otherwise healthy economic body. Among them were works by Henryk Grossman and Paul Mattick, two Marx-influenced economists writing in the midst of the Depression (and after). Both did not rely on extraordinary ‘external shocks’ to explain the Great Depression, but instead explored more structural changes. Specifically, they examined how that downturn had its roots in an attempt to overcome a lack of sufficient profits generated by the production process itself.

Grossman and Mattick were writing in relative obscurity. Many would not entertain anything to do with Marxism, even in the politically unstable 1930s. But these two were a minority within a minority. When it came to the explaining the Great Depression, most Soviet-supporting Communists and social democrats alike put forward variations of Keynesianism, such as the crude theory of ‘underconsumptionism’, which claimed that workers did not earn enough to buy the goods produced, and thus higher wages would both benefit workers and overcome the crisis. In contrast, Grossman and Mattick did not share anything in common with Keynesianism. To use Keynes’ own metaphor, they believed there was a problem with the engine itself, and any magneto problem was due to a faulty engine.

Writing from Germany in 1928-29 – that is, before the Great Crash – the Poland-native Grossman found the American economy to be already in serious trouble: ‘Industry and commerce have watched their production fall, their sales decline and their profits contract.’ The growth in the financial sphere was the result of the stagnation in the real economy: ‘Reduced sales and lower production release a portion of the capital which flows into the banks in the form of deposits.’ Like many others, he found ‘massive speculation in real estate and shares’, but unlike others, he related these to ‘the shortage of investment opportunities’ Presciently, he even foresaw the possibility of a crash: ‘There are enough signs to suggest that America is fast approaching a state of overaccumulation… Today, America is doing its best to avert the coming crash – already foreshadowed in the panic selling on the Stock Exchange of December 1928.’ (23)

Grossman was no catastrophist who thought capitalism faced imminent doom. He was impressed with capitalism’s dynamism and its methods of restructuring. Profits had a tendency to decline, but the system also gave rise to so-called ‘counter-tendencies’ that sought to restore profitability. From this perspective, the descending spiral of the Great Depression, racked by financial crises and global tensions, was a case study in the working out of the distinctive ‘counter-tendencies’ of that era.

Mattick – who emigrated to the United States from Germany in his late teens – picked up on Grossman’s ideas in the 1930s (24), and in 1978 wrote a comprehensive essay on ‘The Great Depression and the New Deal’ (25). Mattick challenges the standard view that recessions are aberrations, arguing that crises are not only regularly-occurring but also the ‘basic “regulator” of the capitalist economy’. However, all crises are not exactly the same, and need to be studied specifically: ‘Each one varies with respect to its initiation, its length and depth, and the reactions evoked by it. It is the changing capital structure itself that accounts for these variations.’

Like Grossman, Mattick’s take was that the Great Depression stemmed from the real economy: ‘Although initiated by the stock market crash of 1929, the ensuing depression was not the result of mere speculation or of a false monetary policy promoting credit extension for speculative purposes. Both occurrences fell together with a slackening of the rate of investment due to declining profits in relation to the employed capital. It was rather this situation, the relative stagnation of productive capital, which led to the speculative boom.’ He concluded: ‘The economic crisis of 1929 differed from all preceding crises not only in its greater impact on the world economy but also in its political repercussions and their effects on capitalism’s further development.’ (26)

Clearly, the diagnosis of the Great Depression would be likely to inform action to address today’s crisis. Monetarists would seek to expand the money supply, and Keynesians would seek to increase government spending – and, sure enough, we’ve seen both of these measures in the US and elsewhere in recent months. What’s not clear is whether the nature of today’s problems are fully grasped, and therefore whether these initial actions – based on understandings of the 1930s depression – will successfully address them.

3) Another Great Depression?

The spectre of the Great Depression haunts us today, as people worry that the current crisis might develop into a full-blown depression. So, are we in another Great Depression now, or are we sliding into one?

There is no official definition of what constitutes a depression as opposed to simply a recession. Many economists use the rule of thumb of unemployment greater than 10 per cent for several years. Harvard’s Robert Barro defines it as a 10 per cent or more decline in per-person economic output or consumption. In their 2007 book, Timothy Kehoe and Edward Prescott of the Minneapolis Federal Reserve define a ‘great’ depression as real GDP per-working person that is at least 20 per cent below its growth trend, with at least a 15 per cent decline within first decade, and growth remaining below-trend for at least a decade. Based on their criteria, Kehoe and Prescott find that numerous depressions have occurred over the past century, including New Zealand and Switzerland from 1970s to 2000; Latin American countries in the 1980s; and Japan and Finland in the 1990s (27).

By the basic yardsticks of a depression, such as unemployment levels, the US, UK and many other major economies are not in a depression. The US rate of 8.5 per cent in March is below the 10 per cent threshold. And at this stage into the US downturn (17 months), the decline in job losses is far less severe than it was in the 1930s (28).

Yet others contend that the empirical data show that a worldwide depression has started. Economics professors Barry Eichengreen (University of California, Berkeley) and Kevin O’Rourke (Trinity College Dublin) claim that, if the comparison is with global metrics, rather than just American industrial production, exports and stock market valuations are all as bad, if not worse than, in the 1929-30 period (29). According to the World Bank, global industrial production declined at a 20 per cent annual rate in the fourth quarter of 2008 (30). Rich Miller of Bloomberg says the symptoms point to depression: ‘As in the Great Depression, world trade is collapsing, wealth is evaporating and the banking system is broken. Deflation is a growing threat as companies slash production, pay and prices. And leaders worldwide are having difficulty making headway in halting self-perpetuating decline.’ (31)

While it is always necessary to understand economic statistics, wondering whether we are in a depression or not is not all that useful. And searching for parallels with the Great Depression of the 1930s is not enlightening either. It seems there are competing versions of which prior downturn most resembles today’s – some believe the 1873 depression or 1907 panic are closer (32). Simply listing similarities and differences does not reveal anything about the underlying dynamics or likely trajectory. Rather than looking for the past to repeat itself, it is more useful to try to understand today’s crisis in all of its detail.

In this regard, as we all know now, today’s global slowdown was most immediately triggered by the pricking of the housing bubble in the US. As ‘subprime’ mortgages were securitised and sold on to investors in a wide array of financial institutions, and when they were marked down, the ‘contagion’ spread. In a globally-connected world, Florida foreclosures can ultimately result in bank failures in Iceland.

However, the weakness of most accounts of the credit crisis is that they treat the problems of the financial sphere as isolated from the workings of the real economy. In a recently-published collection of essays on the crisis, edited by Michael Lewis, all of the contributors focused on the financial arena (33). Krugman, in the new edition of The Return of Depression Economics, writes that a multitude of factors, suggestive of other periods, is now operating globally: ‘A bursting real estate bubble comparable to what happened in Japan at the end of the 1980s; a wave of bank runs comparable to those of the early 1930s; a liquidity trap in the United States, again reminiscent of Japan; and most recently, a disruption of international capital flows and a wave of currency crises all too reminiscent of what happened to Asia in the late 1990s.’ (34) Yet there is no attempt to relate the emergence of these (very important) financial developments to the real economy. Of course, it is important to not make too hard a distinction between the ‘financial’ and ‘real’ economies – after all, we have just one economy. But it is more fruitful if we can understand how the two spheres interact today.

So how might we begin to explain the current crisis is a more all-rounded way? If we take methodological lessons from the analysis of the Great Depression discussed above, this would mean considering the culmination of trends rather than just the immediate reaction to a triggering financial event. It would also mean not searching for a single causal event, and exploring factors that are internal (as well as external) to the workings of the market.

In that spirit, and to put a stake in the ground, here is a brief outline of how we might characterise the emergence of the recent crisis:

  • As the postwar boom ended, the major economies encountered significant problems of stagnant profitability in productive industries. These problems were not fundamentally addressed by the recessions of the 1970s, 1980s or the early 1990s, and remain to this day. Extreme examples of the holdover of unprofitable businesses are the American car manufacturers GM and Chrysler.
  • As the economy grows, so too will the credit and the financial sphere. However, a trend in the major economies is for this sphere to grow at a faster pace than the real economy. Especially noticeable since the 1987 stock market crash was the trend for stagnancy in production leading to surplus capital, which found outlets in an even more extensive expansion of credit than otherwise and a greater development of (and reliance on) finance as an income-generating area. This development explains the stock market and housing bubbles, as well as the proliferation of financial instruments.
  • A turning point was the end of the Cold War in the late 1980s, which, among other things, lessened international tensions and weakened labour movements. In the global arena, we see greater export of capital and goods from the developed countries, and the expansion of production in emerging markets. A significant development is the opening up of new points of production in China and other parts of Asia.
  • The easing of tensions following the end of the Cold War also gave the market system much more room to manoeuvre, without the need for destructive, cleansing recessions. This allowed capitalism to survive without traditional boom-bust cycles, otherwise known as the ‘Great Moderation’ and ‘SAD’ (stable, anaemic, durable) period. Many have welcomed that recessions became milder and less frequent, but the downside was that growth was muted. Another self-imposed constraint in this period are ‘green’ measures that restrict expansion.
  • The wide expansion of credit, including debt-fuelled consumption, was not sustainable. No one could anticipate when the limit of the credit system would be reached. But now we know: it was precipitated by the US sub-prime crisis, with domino effects across finance and into other sectors.
  • The problems in the productive sphere in the major economies continue today (and arguably more in the US and UK than in Germany and Japan). The ‘deleveraging’ effect from the credit crisis has not fully played out, and is likely to be destructive. In particular, the fallout from this severe asset-based recession will now curb both key drivers of previous 10 to 15 years of economic activity: bank lending/financial activity and consumer spending, leaving a question mark over future sources of growth.

Such an outline obviously requires further analysis and elaboration. With regard to the future, the length and depth of the current crisis depends, in the short term, on effectiveness of the various rescue measures. But ultimately, any sustained recovery depends on the underlying health of the real economy, and the effectiveness of the mechanisms to restructure capital and restore profitability. And all of this is strongly mediated by the political response. That is a topic we will address in next month’s essay, when we consider the New Deal and today’s state interventions.

To be continued in next month’s spiked review of books.

Sean Collins is a writer based in New York.

Books discussed include:

The Great Depression and the New Deal: A Very Short Introduction, by Eric Rauchway, is published by Oxford University Press, 2008.(Buy this book from Amazon(UK).)

The General Theory of Employment, Interest, and Money, by John Maynard Keynes (with a new introduction by Paul Krugman), is published by Palgrave Macmillan, 2007 (original 1936).(Buy this book from Amazon(UK).)

Great Depressions of the Twentieth Century, edited by Timothy J. Kehoe and Edward C Prescott, is published by the Federal Reserve Bank of Minneapolis, 2007.(Buy this book from Amazon(USA).)

The Politically Incorrect Guide to the Great Depression and the New Deal, by Robert P Murphy, is published by Regnery Publishing, 2009.(Buy this book from Amazon(UK).)

The Return of Depression Economics and the Crisis of 2008, by Paul Krugman, is published by WW Norton & Company, 2009.(Buy this book from Amazon(UK).)

(1) Lessons from the Great Depression for Economic Recovery in 2009, Presentation to the Brookings Institution, 9 March 2009

(2) Pessimism porn? Economic forecasts get lurid, by Dan Harris, abc news, 9 April 2009.

(3) The Great Crash 1929, by John Kenneth Galbraith, Mariner Books, 1997 (original 1954)

(4) Cited in The Great Crash 1929, by John Kenneth Galbraith, Mariner Books, 1997 (original 1954)

(5) The Great Depression and the New Deal: A Very Short Introduction, by Eric Rauchway, Oxford University Press, 2008

(6) Cited in The Great Crash 1929, by John Kenneth Galbraith, Mariner Books, 1997 (original 1954)

(7) Cited in The Great Crash 1929, by John Kenneth Galbraith, Mariner Books, 1997 (original 1954)

(8) The Great Depression and the New Deal: A Very Short Introduction, by Eric Rauchway, Oxford University Press, 2008

(9) Economic Instability and Growth: The American Experience, by Robert Aaron Gordon, Harper & Row, 1974

(10) The Great Depression and the New Deal: A Very Short Introduction, by Eric Rauchway, Oxford University Press, 2008

(11) The Climax of Capitalism: The US Economy in the Twentieth Century, by Tom Kemp, Longman, 1990

(12) Economic Instability and Growth: The American Experience, by Robert Aaron Gordon, Harper & Row, 1974

(13) ‘Introduction’, by Paul Krugman, to The General Theory of Employment, Interest, and Money, by John Maynard Keynes, Palgrave Macmillan, 2007 (original 1936)

(14) A Monetary History of the United States, 1867-1960, by Milton Friedman and Anna Jacobson Schwartz, Princeton University Press, 1971 (original 1963)

(15) Discussed in Who Was Milton Friedman?, by Paul Krugman, New York Review of Books, 15 February 2007

(16) America’s Great Depression, by Murray N. Rothbard, Ludwig von Mises Institute, 2000 (original 1963)

(17) The Politically Incorrect Guide to the Great Depression and the New Deal, by Robert P. Murphy, Regnery Publishing, 2009

(18) The World in Depression 1929-1939, by Charles P Kindleberger, University of California Press, 1986 (original 1973)

(19) Essays on the Great Depression, by Ben S Bernanke, Princeton University Press, 2000

(20) ‘The Nation in Depression’, by Christina D. Romer, Journal of Economic Perspectives, Volume 7, Number 2, Spring 1993

(21) The Return of Depression Economics and the Crisis of 2008, by Paul Krugman, WW Norton & Company, 2009

(22) Some arguments are un-compelling off the bat because of issues of timing: for instance, those who, like Bernanke, believe that the depression was caused by factors that only came into play in 1931, have to contend that the 1929-30 period was just a garden-variety recession – despite the clear signs of stagnation in the US before the crash and the steep drop in US output and employment following it (see his Essays on the Great Depression).

(23) The Law of Accumulation and Breakdown of the Capitalist System: Being Also a Theory of Crises, by Henryk Grossman, 1929. See also Why Grossman still matters, by James Heartfield, July 2007

(24) Writings from that period include The Permanent Crisis: Henryk Grossman’s Theory of Capitalist Accumulation, by Paul Mattick, International Council Correspondence, Vol. 1, No. 2, November 1934

(25) ‘The Great Depression and the New Deal’, by Paul Mattick, included in Economics, Politics and the Age of Inflation, Merlin, 1978

(26) “The Great Depression and the New Deal”

(27) Great Depressions of the Twentieth Century, edited by Timothy J Kehoe and Edward C Prescott, Federal Reserve Bank of Minneapolis, 2007

(28) See On the job front, still no Great Depression, but getting a little closer, Justin Fox, Time, 7 April 2009

(29) A Tale of Two Depressions, Vox, 6 April 2009

(30) Cited in The Shadow of Depression, Washington Post, 16 March 2009

(31) Depression dynamic ensues as markets revisit 1930s,, 9 March 2009

(32) The Real Great Depression, by Scott Reynolds Nelson, The Chronicle Review, 17 October 2008

(33) See The boys in the bubble, by Sean Collins, 30 January 2009

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