Stiglitz Rewrites the Great Depression

January 2nd, 2012 at 8:21 am David Frum | 7 Comments |

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Joe Stiglitz’s offers in the current Vanity Fair an arresting theory of both the Great Depression and the current economic malaise.

Contra the (now) orthodox view propounded by Milton Friedman and Anna Schwartz, Stiglitz argues that the Depression was not fundamentally a monetary event. Instead, Stiglitz counters, we should think of the Depression as driven by a deeper crisis in the real economy: Between 1890 and 1930, technological advance had rendered most farm labor obsolete. Yet these redundant farmers remained on the farm, supported first by the high farm prices of 1913-1919, then by the easy credit of 1921-1929. After 1929, the credit disappeared–and millions of farmers and farmworkers were ruined and stranded. Unable to earn a livelihood, they could no longer purchase the products of the urban manufacturing economy, pulling the whole economy into depression after them.

In this telling, the collapse of the money supply identified by Friedman and Schwartz as the cause of the (American) Great Depression is reduced a symptom. When the farms failed, their bankers failed. Because monetary contraction did not cause the crisis, monetary stimulus could not redress the crisis. Contemporary economists despairingly compared monetary stimulus to “pushing on a string”: the central bank could create bank reserves, but it could not induce bankers to lend or business to borrow at a time when neither saw profitable opportunities.

Again in Stiglitz’s telling, the US was pulled out of Depression by the catastrophe of World War II. To wage war, the US government invested massively to develop industrial infrastructure, especially in the West and South. War spending provided the demand for new products; war investment built the plants and ports that absorbed formerly redundant labor. Instead of rescuing the financial system, the government reinvented the real economy. The now-stringently regulated financial system recovered willy-nilly.

You can probably see where Stiglitz is going with this analogy. How should we assess the claim?


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7 Comments so far ↓

  • Primrose

    But his logic doesn’t follow. Just because a changing economy caused a collapse, does not mean that putting money into the economy wouldn’t fix it. If one consideres the new deal, what did FDR do, but make jobs for those displaced workers, i.e. stimulus.

    On the theory itself, I am not so sure, how do we get the dustbowl because of too many farmers? Those people may not have been buying manufacturing goods but they shouldn’t have been on the edge of starvation as farmers.

    And in that time period there was massive depopulation of agricultural workers to the cities, the great Black migration North happens during this period. Was the South in better shape? Decidedly not.

    And how does it take into account the rampant investment in the stock market, and excessive buying on margin? Not about technological change there.

  • SteveThompson

    There is at least one parallel to recent events. The notion of easy credit compounding prior to the beginning of the Great Depression is a most interesting analogy for the easy credit issues that were, in part, responsible for the Great Recession. As shown here, even the Federal Reserve is admitting that it was relaxed credit standards that were at least partly responsible for the explosion in the number of multiple mortgage holders in the years leading up to the real estate market boom and bust:

  • jg bennet

    The Great Depression story was written by propagandist/public relations guru Edward Bernays so I’m sure Stiglitz is on to facts that have been hidden.

    The article says “Government spending unintentionally solved the economy’s underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing.”

    No mention of the Smoot Hauley Tarrif Act causing the depression.

    Funny how the GOP & Dem free traders say tariffs will ruin the economy and there is not one mention of that being the case in his article.

    When we have manufacturing we soar, a service economy is an economy that produces little which means imports rise, the dollar drain continues and the debt rises.

    Manufacturing is the way to strength & service is the way to servitude, hence the word service in the term service economy.

    I think it is great that trade tariffs were not mentioned, perhaps the free trade/outsourcing propaganda from the day is finally fading.

    here is a little diddy from the neo confederates of the day…

    September 1929 By Robert La Follette (La Follette was a progressive Republican Senator & propaganda/public relations mouthpiece of Bernays and the progressives)

    “The Smoot-Hawley Tariff bill, conceived in greed, drafted in secret and packed with “jokers,” was submitted to the Senate on September 4.

    “If this bill is passed by Congress and signed by President Hoover, every farmer, every wage-earner, every house-wife, every legitimate business and merchant in the land will feel its blighting effects in increased taxes upon the necessaries of life and upon every phase of production, in the factory and on the farm.”

  • jg bennet

    Stiglitz wants to get back to Lincoln Republicanism and his American School of economics.

  • Graychin

    “Again in Stiglitz’s telling, the US was pulled out of Depression by the catastrophe of World War II. To wage war, the US government invested massively to develop industrial infrastructure, especially in the West and South.”

    The greatest stimulus program in American history? Runaway deficit spending during a depression? How totally irresponsible! How could we EVER have paid off the huge national debt that we ran up during the War, which we compounded with aid post-war to rebuild our enemies’ shattered economies?

    (I look forward to the continuation. It sounds like Stiglitz might have a good point about easy 1920s farm credit. In 1930 there was no mechanism – or will – to bail out failing banks, and of course no FDIC to protect savings.)

  • sweatyb

    Not sure why he found it necessary to throw the Fed under the bus. The Great Recession was bad, but it was nothing like the Great Depression. And that’s because the banks did not collapse. And that’s because of TARP and the gaping wide Fed windows implemented by Bernanke.

    Ignoring the role of monetary policy in stabilizing a crisis and forestalling the collapse of the financial industry is like lamenting the life-support system that keeps the patient alive long enough for the doctor to operate on him.

    I think the parallels in this piece are tenuous at best. The move from a manufacturing-based economy to an information-based economy started in the 70s and I would argue has already reached its conclusion. By 2008, manufacturing was mostly stabilized and the growth of our economy was coming elsewhere. It’s not like there are unemployed factory workers flooding into Silicon Valley.

    That doesn’t mean that there’s no place for Federal support for a robust and healthy manufacturing sector that provides good-paying jobs and quality exports. Domestic manufacturing is still a valuable part of our economy, it’s just not the driver anymore.

    Though his comparisons are weak, I agree that the current slump is a perfect time to look to the future (We can borrow money at the rate of inflation!). But I just don’t see how it would be possible to build a WWII-style domestic spending agenda around just education and research. Sure, you can spend $Billions put people through college and funding research grants, but the stimulus we need for a robust recovery is measured in the $Trillions.

    We know that the things this country needs for the next century are Power, Water and Transportation. We can spend $Trillions over the next decade improving our infrastructure, high-speed rail, nuclear & large-scale solar power plants, improve the electric grid, protect our water resources and improve how that water is distributed and used.

    But it’s highly likely that instead of doing that, the partisan nature of Republican politics will continue to obstruct any progress. We’ll gradually climb our way out of the doldrums and get back to something resembling economic health without addressing the weaknesses revealed by the last financial crisis. Until the next financial crisis.

  • zaybu

    There’s not much new in Stiglitz’ article. It has been known for many decades that monetary policies are insufficient, and what pulled the US out of the Great Depression is the massive government spending during WW2. In the 1930′s, the deficit averaged around $5 B. In the years 1943-44-45, it soared in the $50B range, that is, ten times. The debt ratio peeked at 120% GDP by 1946. If anything, the Obama administration has been tamed on bugetary spending, as was foretold by Krugman and Roubini. With political gridlock, the US economy is doomed for another generation… unless in the next election, the electorate is wise enough to set the next administration free from this gridlock. But I’m not pinning my hopes on that.