The depression of the 1930s was a worldwide event. In most economically advanced countries the fall in output and employment was the deepest and the most protracted in recorded history. In many of these countries the economic disaster also had profound political consequences, most prominently the rise to power of the Nazi Party in Germany, but also the ascendency of right-wing nationalists and fascists who soon enough made up the core of the Vichy regime in wartime France and likewise encouraged Britain’s flirtation with organized fascism. America—along with Germany one of the two countries hit hardest by the economic collapse—was no exception in this regard, although here political developments took a different course.
Nearly eight decades later, debate continues over the relative importance of the forces that combined to make what would otherwise have been an ordinary business downturn so deep and long-lasting. In the US most economists today assign the highest importance to systematic mistakes by policymakers at the Federal Reserve System—whose managers were still learning their way following the institution’s creation in 1913—together with the collapse of the banking system both here and abroad. If the Federal Reserve had eased monetary policy earlier and made funds more readily available to banks, the outcome would presumably have been different. Other foolish policies contributed as well—like raising tariffs to record levels, and raising tax rates to try to balance the government’s budget despite the economic decline. So too did the absence of deposit insurance, which allowed many families’ savings to be wiped out. Most economists see the stock market crash itself as more a symptom of the larger crisis than a cause.
Debate is even more intense on the broader questions of what the depression proved about the US economy and society, and what implications therefore follow for public policy. The chief economic lesson drawn at the time was to reject the long-standing presumption that competitive private markets would naturally and promptly right the economy after any departure from stable expansion. Instead, it became clear that downturns, if left unchecked, might persist over long periods and inflict widespread losses of output, profits, and jobs. (How long would it have taken to achieve a full recovery if World War II had not occurred?) In a world in which more and more people worked for wages, often in large companies, rather than running their own businesses or conducting independent trades, a significant part of the citizenry was plainly unable to protect themselves against losses and hardships resulting from problems in the economy at large for which they bore no individual responsibility. Hence the presumption that a man’s material success in life would reflect his moral worth—the core belief underpinning what Max Weber had identified as the “Protestant ethic”—likewise came into question.
With many citizens neither personally responsible for their economic hardships nor able to defend themselves individually, the depression naturally raised the further question of what governments could do to undertake …