Revisiting the Great Depression: The Role of the Welfare State, Gold Standard in the Calamitous 1930s
The Great Depression cast a dark shadow over the 20th century. It arguably led to World War II, because without the Depression, Adolf Hitler might never have come to power. It discredited unfettered capitalism—which was blamed for the collapse—and inspired the expansion of government as the essential overseer of markets. This economic catastrophe has long fascinated historians and economists, but for decades serious reflection on the Depression didn’t extend much beyond the scholarly world. It couldn’t happen again. We knew too much. There were too many economic and regulatory controls. But the Great Recession has made us wonder. Can we learn from the Depression? Are there parallels between then and now? Most ominously, could we suffer another depression? The conventional wisdom still says no. Unfortunately, the conventional wisdom might be wrong.
There is no precise definition of a depression; it’s a term of art. Generally speaking, it’s a broad economic collapse that produces high unemployment from which there is no easy and obvious escape. The crucial difference between recession and depression is that recoveries from run-of-the-mill recessions occur fairly rapidly in response to automatic market correctives and standard government policies. Businesses work off surplus inventories or repay excessive debt. Governments reduce interest rates and allow budgets to swing into deficit. A depression occurs when these mechanisms don’t work, or don’t work quickly. The pivotal question becomes: Why?
One answer is that powerful historical, social, and political changes overwhelm the normal market and policy responses. Modern depressions are not ordinary business cycles susceptible to routine remedies, because their origins lie in institutions and ideas that have been overtaken by events. But letting go of or modifying these powerful attachments is a painfully slow process, precisely because the belief in them is so strong and the alternatives are often unclear. Hence, adjustment occurs slowly, if at all. Change is resisted or delayed, or wanders down dead ends. Economies languish or decline. The Great Depression was one of those moments. We may now be in another.