The Great Duration, 1929-41

Article excerpt

Economists, following the usage of Milton Friedman and Anna Schwartz in their classic Monetary History of the United States, call the economic collapse between 1929 and 1933 the Great Contraction. In my own writings, I have added two similar terms to refer to other aspects of the Great Depression-the Great Duration and the Great Escape. The former denotes the depression's exceptional length, from 1929 to 1941 (when the economic adversity did not actually end, but merely changed its form).

The Great Duration is as puzzling as the Great Contraction and in some ways even more so. No previous depression had persisted nearly so long. The secondworst one, in the mid- 1890s, lasted less than half as long. Except for France, where political conflicts stymied recovery, no other major industrial country took as long as the United States to escape from the Great Depression; all the others had recovered fully before World War II began. What accounts for the Great Duration?

In brief, the depression's extraordinary length is attributable to the same general cause that explains the Great Contraction's extraordinary severity: a series of ill-chosen government policies. These policies disrupted and distorted the operation of the competitive economy, created paralyzing fear in the minds of its most important investors and businessmen, and gummed the gears of the economy's normal recuperative processes. After some headway had been made toward recovery between 1933 and 1937, new government policies-collecting new taxes, encouraging aggressive labor unionization and, especially, abruptly doubling bank reserve requirements-knocked the economy into a serious "depression within a depression," setting full recovery back by at least another two years.

Nearly all the counterproductive policies adopted from 1933 to 1938 reflected the triumph of Progressive ideology and political self-serving. Regardless of the policy-makers' beliefs or assurances, their policies were not actually in the public interest. Unfortunately, as economic historian Peter Temin observes, the New Dealers "turned away from the market toward a managed economy and democratic socialism." In practice, their commitment to active government intervention in the market was equivalent to the conviction that a bull elephant must play an active role in the China shop.

When Franklin D. Roosevelt took office in March 1933, the economy was in the ditch. Roosevelt's first official act was to issue an executive order to close all the commercial banks in the country, thereby bringing economic activity almost to a complete standstill. By that time, after nearly four years of relentlessly deteriorating economic performance, almost everyone was clamoring for some kind of economic salvation from the federal government.

In this charged atmosphere, politicians found themselves in paradise because they could easily rationalize on grounds of "national emergency" the creation of a host of policies to please or calm down countless organized special-interest groups and then reap the return, whether it took the form of votes in the next election or cash in a plain brown wrapper. "The crisis," historian John Garraty wrote, "justified the casting aside of precedent, the nationalistic mobilization of society, and the removal of traditional restraints on the power of the state, as in war, and it required personal leadership more forceful than that necessary in normal times." In short, as Roosevelt and the Democrats in Congress perceived the situation, it required FDR's New Deal.

Which is what it promptly got-good and hard. No summary can do justice to the astonishing breadth of the legislative outpouring during Roosevelt's first term, especially during the congressional sessions of 1933 and 1935. Jim Powell wrote an entire book recently to catalog the numerous studies that show, in the words of the book's subtitle, "how Roosevelt and his New Deal prolonged the Great Depression. …