Economic Theories of the Great Depression

 

    On September 30th, 1929, the Dow Jones industrial average reached a historic high of 381. Just shy of two months later, October 24th would become known as Black Thursday during which over 13 million shares would be exchanged but most losses would be recovered by the end of the day. The following Tuesday would earn the appellation “Black Tuesday" as the average dropped from 261 to 230. This initiated what came to be known as the Great Depression and there are many theories and models covering both the factors that led to it, contributed to its international nature and led to its unusual persistence.

     Most state that there is a lack of sufficient data to fully account for all relevant factors resulting in a large variety of models. Some, like Ben S. Bernanke in his articles “The Macroeconomics of the Great Depression: A Comparative Approach,” and “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression” take a very technical approach to explain the financial factors he believes propagated the great depression. The method he employs depends on a great number of formulas and tables to support and illustrate his findings. As an economist rather than a historian this should probably be expected. Bernanke speaks in terms of samples and expansion of these to the international level in order to better quantify events. Bernanke is a graduate of Harvard and Massachusetts Institute of Technology who focused in Macroeconomics in the New Kensington tradition who served two terms as the 14th Chair of the Federal Reserve under George W. Bush and is currently with the Brookings Institute.

     His conclusions speak of improved ability to identify the forces which led the World into the Great Depression based on the incorporation of international data sets. He makes statements such as “On the aggregate supply side of the economy, we have learned and will continue to learn a great deal from the interwar period.” He ends his article “The Macroeconomics of the Great Depression: A Comparative Approach,” by stating “Empirical evidence has also been found for incomplete adjustment of nominal wages as a factor leading to monetary nonneutrality. Understanding this latter phenomenon will probably require a broad perspective that takes into account political as well as economic factors.” While one may respect the logical and mathematic approach Bernanke takes to identifying and modeling the issues involved in excruciating detail, he fails to take into account what I believe is the most critical factor. While Bernanke attempts to model thing like an abstract fear element in his formulas, you can not truly model human group response. 

     While you can attempt to influence human behavior but you cannot truly account for it in a mathematic formula and modern economies are entirely reliant on the good faith and confidence of both the population and external trading partners. Outside of barter economies or systems where the medium of exchange is not merely pegged to the value of a precious metal but is actually specie coined of that material, the only reason money has value is because people believe it does. The same can be said for financial derivatives such as stocks and bonds or even the belief in the stability of banks. All of these items of faith were shaken beginning with the end of the 1920s and had not been fully restored when the outbreak of World War Two provided a new focus for America and the World. In fact, the Dow Jones Industrial Average would not surpass its peak reached on September 30th of 1929 until November of 1954, almost exactly fifteen years later.

     This human driven model of the Great Depression may be best represented by Amity Shlaes’ The Forgotten Man: A New History Of The Great Depression. Schlaes discusses many factors including how Hoover's heavy-handed response to the Veterans of the Bonus Marchers seeking relief from some of the effects of the Depression through early payment of the promised service bonuses for World War One handed the 1932 election to FDR. She also covers how, contrary to FDR's famous line, “The only thing we have to fear, is fear itself,” Roosevelt's commitment to experimentation itself created fear.”

      Shlaes’ account takes a historical deep dive into the people, events, and perhaps more significantly the popular fears and feelings that represented the time. She starts each chapter with the date, average unemployment, and Dow Jones Industrial Average and begins her account in January of 1927 with then Commerce Secretary Herbert Hoover and his response to the 1927 Mississippi River flood. Her account ends with the January 1940 figures still showing an unemployment rate of 14.6 percent compare to the 3.3 percent in 1927 and a Dow Jones Industrial Average of 151 which was still far below the closing average on Black Tuesday and it does so from the perspective of those involved and affected. 

     As I have already mentioned, I believe this human perspective can teach us far more than any mathematic formula as it is people who ultimately create stock market crashes and bank runs in response to their perceptions of the stability of institutions. Once faith is lost, it is not easily regained and often will never be regained in the same fashion it was held previously. This is a lesson which bears learning and which some believe is rearing its head again today. One need only look at recent headlines with a significant loss of faith in election systems and the profligate spending by our erstwhile representatives and public reaction to it to see an increasing erosion of faith in our institutions and I am fairly confident that mathematic formulas will prove unable to model the final outcomes where attention to human nature may provide navigational guidance.

Bibliography:

Bernanke, Ben S. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression." The American Economic Review 73, no. 3 (1983): 257-76. Accessed July 31, 2021. http://www.jstor.org/stable/1808111.

Bernanke, Ben S. "The Macroeconomics of the Great Depression: A Comparative Approach." Journal of Money, Credit and Banking 27, no. 1 (1995): 1-28. Accessed July 31, 2021. doi:10.2307/2077848.

Shlaes, Amity. The Forgotten Man: A New History Of The Great Depression. New York, Harper Collins Publishers, 2007.