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It is important to remember the difference between the Great Depression
and the New Deal. There are some central questions about the
interrelationship between economic and political events in the 1930s
that are fundamentally unresolved. Did the Great Depression cause the
New Deal? Did the New Deal prolong the Great Depression? Could the
Depression have been avoided if a different set of economic policies
been followed?
I don't know the answers to these questions. But they are critical, as
the issue of endogeneity lies at the heart of many of the debates over
what happened.
For example, the "elusive consensus" that the Depression was caused by
monetary forces has been built on a better understanding of the
international character of the depression. I remember how striking that
was at the conference organized by Barry Eichengreen and Tim Hatton.
When you lined up the experience of lots of different countries in the
1930s some common patterns emerged.
But I have been less than persuaded that, in fact, international
factors, particularly monetary factors, were the cause of the
Depression. It has to do with simultaneity. Monetary policy in the
United States was a response to a mix of internal and external forces.
What is causing what? Are the policies or the economic realities
driving the changes?
For smaller countries heavily dependent on agricultural exports, the
break down of the international markets was probably the primary cause
of their "great depressions." But then we are left with explaining why
the depression occurred in Europe and the US that led to the breakdown
of the international system.
In other words, I think we have a better understanding of what went on
in the 1920s and 1930s than we did before, but I still don't think we
understand the "causes" of the depression.
It seems to me to be crystal clear that the New Deal was a critical
turning point in the economic and political history of the United
States, but that may not have been the case in other countries. World
War I may have been a more cathartic experience in Europe for example.
I'm sure that you are aware that there is a NBER volume coming out on
precisely this question.
Here, again, the issue of endogeniety is of central importance. The New
Deal resulted in two permanent changes. One was the ascendance of the
Democrats as the majority party, the other was the shift in fiscal
structure to a more dominant national government within a more
integrated federal system. While the great contraction had something to
do with the election of FDR in 1932, it is far from clear that it was
the depression that resulted in FDR's victory in 1936. The depression
wasn't over and the end wasn't in sight. The 1936 election confirmed
the Democrats as the majority party and was tangible approval of the New
Deal policies. How much the depression shaped the New Deal policies
(e.g. were the policies the reactions to short run problems or long run
problems?) and how much the New Deal policies shaped the depression
(e.g. did New Deal regulation erode business confidence and prevent a
resurgence of investment?) are questions that are still wide open.
John Wallis
University of Maryland
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