- The Defining Moment: The Great Depression and the American Economy in the Twentieth Century
This collection of essays is a fascinating and bold exercise in conjectural history. How would United States political and economic history have differed if the Great Depression had not occurred? During the 1930s, policymakers initiated numerous legislative reforms, ranging from macroeconomics to labor policy. The relevant issue is whether these reforms were of lasting impact or simply temporary detours in the immutable march of history. Somewhat surprisingly, the authors of these essays appear to have no preset answers or agenda. They have proper respect for the audacity of their task and seem as anxious as anyone to see where a careful and often creative reading of the tea leaves leads.
The essayists do not flinch from drawing conclusions, given the highly speculative nature of their assignment. Was the Great Depression a defining moment in monetary policy? Yes, it set the stage for the inflation of the 1960s and 1970s (Charles Calomiris and David Wheelock, Chapter 2). Was the Great Depression a defining moment in fiscal policy? Yes, it set the stage for the budget deficits of the 1960s and 1970s (Bradford De Long, Chapter 3). Was it a defining moment in the growth of unionism? No, the Depression-era spurt in the growth rate of unionism proved temporary (Richard Freeman, Chapter 8). Did the Great Depression alter the evolution of the international monetary system? Yes and no—the present system of floating exchange rates and free capital mobility would have been the same, but Bretton Woods would not have occurred (Michael Bordo and Barry Eichengreen, Chapter 12).
The essays are grouped into four categories: (1) activist macroeconomic policy, (2) expanding government, (3) insuring households and workers, and (4) international perspectives. About half of the contributions [End Page 353] are “large” topic essays—monetary policy, fiscal policy, federalism, size of government, and the global economy. The rest are tailored to specific pieces of legislation—deposit insurance, agriculture, unemployment compensation, unions, and social security.
A theme that occurs throughout the essays is the role of ideology in shaping policy. The editors in their introductory chapter pose the key question and also supply the answer: “Did the Great Depression alter the public’s view concerning the functions of government, particularly those at the national level? It would certainly appear that it did” (5). The general result was an expansion in the scope of the government and a shift in the locus of power up the fiscal ladder.
At times, the essays seem to stretch the ideological theme too far. To be sure, the opening essays by Calomiris and Wheelock on monetary policy and by De Long on fiscal policy seem secure in arguing that a shift in ideology made the general public and economists more tolerant of an activist policy. The upshot was that this shift provided policymakers with the leeway to make mistakes. In the case of monetary policy, the mistake was acting upon a flawed operating procedure to produce the inflation of the 1960s and 1970s. In the case of fiscal policy, the new ideology paved the way for the recent pattern of budget deficits, “with damaging effects on the economy” (69).
But having stressed the importance of ideology, the authors almost throw in the towel. Calomiris and Wheelock explain that “our historical approach eschews purely theoretical analyses of Fed policy shifts based either on welfare economics or political economy. . . . we believe that the role of theory for understanding policy changes is limited . . . institutional constraints and mistaken beliefs of policymakers place a wedge between intents and outcomes” (25). Similarly, De Long concludes that “no logic can be seen in the pattern of U.S. fiscal policy across decades” (68). Having lost confidence in theory, the only resort would seem to be explanations based on happenstance.
Thankfully, these two essays, as well as the others in the collection, resist the temptation; they do not give up. For each piece...