THE ECONOMIC CONTRACTION that started in 1929 was the worst in history. Historians have compared it with the downturns of the 1840s and the 1890s, but the comparison serves only to show the severity of the later movement. In the nineteenth-century depressions, there were banking panics, deflation, and bankruptcy, in various proportions. But there is no parallel to the underutilization of economic resources--to the unemployment of labor and other resources--in the 1930s.
The value of goods and services in America fell by almost half in the early 1930s. Correcting for the fall in prices, the fall in the quantity of production fell by approximately one-third. Unemployment rose to include one-quarter of the labor force. And investment stopped almost completely. It was the most extensive breakdown of the economy in history.
The effects of this collapse are still evident. It shattered people's faith in the ability of the economy to run smoothly without interference--the liberal credo of the nineteenth century; the stage was set for a major expansion of the role of government in the economy. A revolution in economic thought accompanied and justified this expansion.1 And in Europe, political changes following the onset of the Depression began the progression toward the Second World War.
Given the magnitude and importance of this event, it is surprising how little we know about its causes. The reactions of people to the Depression, the policies undertaken during the Depression, and the effects of the Depression have all been the object of extensive study. But the economic collapse itself has suffered a form of intellectual neglect.____________________