What do you think?
Rate this book
American Ways Series
Rethinking the Great Depression
The worldwide Great Depression of the 1930s was the most traumatic event of the twentieth century. It ushered in substantial expansions in the role of governments around the world, focused attention on social insurance, and for a time bolstered socialist economic ideas as a form of cure. Skepticism about the effectiveness of government withered as the free market failed, and it seems safe to say that Keynesian economics would not have flourished if the depression had not occurred. While this severe contraction has been extensively examined, we are just now—thanks to increasingly sophisticated analytical techniques—beginning to comprehend its causes and the reasons for the extremely slow recovery that occurred in the United States. Much of this analysis, though, remains in specialized studies that are visited mainly by economists and economic historians. In Rethinking the Great Depression, Gene Smiley draws upon this recent scholarship to present a clear and nontechnical analysis for the general reader. He explains the roots of the depression in the 1920s, the efforts of the New Deal to combat the economic crisis, and the legacy of these efforts in World War II and the postwar years. He offers new insights and some surprising conclusions: that the causes of the Great Depression lay in the dislocations caused by World War I and the attempt to reconstitute an international gold standard in the 1920s; that the New Deal, regardless of its good intentions, adopted misguided fiscal and monetary policies that prolonged the depression in the United States beyond what it should have been; that World War II, rather than stimulating an end to the depression, actually postponed a full recovery until 1946.
192 pages, Paperback
First published January 1, 2002
13 people are currently reading
104 people want to read
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 10 of 10 reviews
February 22, 2015
I learned some of the things in this book in my college economics classes (particularly Money and Banking), but Smiley's explanation went into greater detail and drew a more complete picture for me. The author talks about the gold standard and scores of other things I won't touch on much in my summary, but I'm going to try to highlight what stood out for me. Although the book was not horribly dry, I wouldn't call it easy reading either. I'm not sure anyone who does not have a fairly strong interest in economics would want to plow through it, though he does speak largely in layman's terms.
In short, without FDR's contradictory reform efforts, the Depression would have been much shorter. "Rethinking the Great Depression" paints a picture of major legislative expansion and increasing federal control, law after law, program after program, each bringing forth unintended negative consequences that have to be "fixed" by further legislation, which itself has unintended consequences. The whole time I read, I was reminded of Hayek's famous saying," The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
The downturn was deepened during the transition to FDR's term in part because of uncertainty over what actions his administration would take regarding devaluation of the dollar (he refused to comment on his plans). Then the New Deal program had inconsistent goals. Businesses were expected to keep prices low while keeping wages high and spreading the work through a shorter work week. The National Recovery Administration (NRA) ended up encouraging the formation of cartels and a reduction in production, which stalled the recovery for two years.
The NRA was ruled unconstitutional in 1935 unanimously by the Supreme Court, as were some other programs. (FDR, as we all learn in high school, tried to stack the court but failed.) The economy started to recover in the summer of 1935 and indicators looked good by January of 1937 – rising stock prices, declining unemployment. However, the Federal Reserve increased reserve requirements to stave off what they thought would be impending inflation; the money supply fell and interest rates rose, deterring investment. In addition, wages rose rapidly because of unionization, and labor costs also increased because of FDR's new social security tax. To compensate for higher labor and wage costs, businesses further reduced investments, which contributed to contraction. The social security tax also decreased purchasing power, but, because no one was collecting benefits yet, that decrease was not offset by payouts. The tax on undistributed profits was also considered a contributor to the contraction.
All this resulted in "the depression within the depression." There was a sharp rise in unemployment. The stock market crash in October of 1937 was almost as bad as the one in 1929. In fact, from May of '37 to May of '38, the S&P fell 52%. FDR had completely lost the support of business by now, but he also began to lose the support of the media and even the Democrats in the House and Senate. His latest reorganization bill was defeated, with over half of the nays coming from Democrats. Republicans gained seats in the House and Senate.
Over Roosevelt's objections, the House and Senate eliminated the tax on undistributed profits and replaced it with a flat, 18% corporate tax. FDR's administration finally began to focus on recovery instead of reform, and 1938 marked the end of the reform efforts. The economy began to recover. World War II boosted employment through foreign demand for war materials, and it also led FDR to bring top businessmen into his administration as consultants in preparation for war efforts. This, in turn, diminished the "regime uncertainty" that had prevented businesses from investing in the long-term.
Smiley points to "regime uncertainty" as one of the primary contributors to the length of the Great Depression; this uncertainty "ravished the confidence of business men" – businesses did not invest, and the economy therefore did not recover. They did not invest because they did not know what the administration was going to do next, what economic freedoms they might have to surrender, or how secure their property rights were.
John Maynard Keynes argued that a decline in investment contributes to depression and that the federal government should therefore boost aggregate demand to increase Gross National Product (GNP) either by increasing spending (without increasing taxes) or decreasing taxes (while holding spending steady). While Roosevelt was not impressed with Keynes when they met, the war did lead to an increase in federal spending (up 885.3% from 1940-1943) over and above tax revenues (up only 182%). Unemployment fell and real GNP appeared to increase. Keynes's theory seemed to be validated, and it dominated economic analysis for the next 20 years.
The idea that the economy improved during and because of World War II ("war prosperity") came into question in the 1960s, when economists began to talk about monetary policy and the role of the money supply. The Fed did not act to expand the money supply in the 1930s because of the restrictions of the gold standard and fears of inflation. However, from the end of 1939 to the end of 1943, the Fed moved to increase the money supply over 79%; without this move, federal spending could not have been sustained.
The "war prosperity" gospel drew two attacks – first, it was observed that unemployment decreased from 1940-1943 only because military employment rose, in large part through draft. Military pay was low, and many of those men died. It wasn't precisely an ideal solution to the unemployment problem.
Second, the argument that the nation produced more during the war was also drawn into question. Rather, it was argued, consumption was simply transferred from "butter" to "guns" through rationing and price controls that forced civilians to save more of their money rather than spend it on civilian goods. Thus, production of non-durable civilian goods declined while production of war goods increased.
Tax rates were also sharply increased at this time, which took money from civilian consumption to be used for war consumption via the government. While real GNP appeared to increase during the war based on government statistics, it is now believed that price indices were understated at that time because of the price controls. When this is corrected for, GNP was actually lower during the war years. Despite wartime investment, existing capital continued to depreciate.
People were not better off during the war. Only after the war, when price controls were lifted, rationing ended, and labor unions restricted by a more conservative Congress, did production of civilian goods begin to increase. Prosperity returned not *during* the war, but *after* the war, when the command economy was dismantled and the market economy "came back to life." When the war ended, there was a new optimism that led to more spending and investment as well. Stock prices rose.
What failed in the 1930s, Smiley argues, was not the market economy, but "governments, in their eagerness to direct activity to achieve political ends—ends that were often contradictory."
One hopes we've learned a few lessons about what not to do from the Great Depression. However, it remains to be seen whether or not policy makers and the Federal Reserve will make depression-lengthening mistakes in the future. While Smiley's above summarized "rethinking" of the Great Depression may well be true, the "war prosperity" gospel and the policies of FDR's administration have forever changed the way the U.S. federal government operates. As a famous Time (?) headline stated, "We're all Keynesians now."
In short, without FDR's contradictory reform efforts, the Depression would have been much shorter. "Rethinking the Great Depression" paints a picture of major legislative expansion and increasing federal control, law after law, program after program, each bringing forth unintended negative consequences that have to be "fixed" by further legislation, which itself has unintended consequences. The whole time I read, I was reminded of Hayek's famous saying," The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
The downturn was deepened during the transition to FDR's term in part because of uncertainty over what actions his administration would take regarding devaluation of the dollar (he refused to comment on his plans). Then the New Deal program had inconsistent goals. Businesses were expected to keep prices low while keeping wages high and spreading the work through a shorter work week. The National Recovery Administration (NRA) ended up encouraging the formation of cartels and a reduction in production, which stalled the recovery for two years.
The NRA was ruled unconstitutional in 1935 unanimously by the Supreme Court, as were some other programs. (FDR, as we all learn in high school, tried to stack the court but failed.) The economy started to recover in the summer of 1935 and indicators looked good by January of 1937 – rising stock prices, declining unemployment. However, the Federal Reserve increased reserve requirements to stave off what they thought would be impending inflation; the money supply fell and interest rates rose, deterring investment. In addition, wages rose rapidly because of unionization, and labor costs also increased because of FDR's new social security tax. To compensate for higher labor and wage costs, businesses further reduced investments, which contributed to contraction. The social security tax also decreased purchasing power, but, because no one was collecting benefits yet, that decrease was not offset by payouts. The tax on undistributed profits was also considered a contributor to the contraction.
All this resulted in "the depression within the depression." There was a sharp rise in unemployment. The stock market crash in October of 1937 was almost as bad as the one in 1929. In fact, from May of '37 to May of '38, the S&P fell 52%. FDR had completely lost the support of business by now, but he also began to lose the support of the media and even the Democrats in the House and Senate. His latest reorganization bill was defeated, with over half of the nays coming from Democrats. Republicans gained seats in the House and Senate.
Over Roosevelt's objections, the House and Senate eliminated the tax on undistributed profits and replaced it with a flat, 18% corporate tax. FDR's administration finally began to focus on recovery instead of reform, and 1938 marked the end of the reform efforts. The economy began to recover. World War II boosted employment through foreign demand for war materials, and it also led FDR to bring top businessmen into his administration as consultants in preparation for war efforts. This, in turn, diminished the "regime uncertainty" that had prevented businesses from investing in the long-term.
Smiley points to "regime uncertainty" as one of the primary contributors to the length of the Great Depression; this uncertainty "ravished the confidence of business men" – businesses did not invest, and the economy therefore did not recover. They did not invest because they did not know what the administration was going to do next, what economic freedoms they might have to surrender, or how secure their property rights were.
John Maynard Keynes argued that a decline in investment contributes to depression and that the federal government should therefore boost aggregate demand to increase Gross National Product (GNP) either by increasing spending (without increasing taxes) or decreasing taxes (while holding spending steady). While Roosevelt was not impressed with Keynes when they met, the war did lead to an increase in federal spending (up 885.3% from 1940-1943) over and above tax revenues (up only 182%). Unemployment fell and real GNP appeared to increase. Keynes's theory seemed to be validated, and it dominated economic analysis for the next 20 years.
The idea that the economy improved during and because of World War II ("war prosperity") came into question in the 1960s, when economists began to talk about monetary policy and the role of the money supply. The Fed did not act to expand the money supply in the 1930s because of the restrictions of the gold standard and fears of inflation. However, from the end of 1939 to the end of 1943, the Fed moved to increase the money supply over 79%; without this move, federal spending could not have been sustained.
The "war prosperity" gospel drew two attacks – first, it was observed that unemployment decreased from 1940-1943 only because military employment rose, in large part through draft. Military pay was low, and many of those men died. It wasn't precisely an ideal solution to the unemployment problem.
Second, the argument that the nation produced more during the war was also drawn into question. Rather, it was argued, consumption was simply transferred from "butter" to "guns" through rationing and price controls that forced civilians to save more of their money rather than spend it on civilian goods. Thus, production of non-durable civilian goods declined while production of war goods increased.
Tax rates were also sharply increased at this time, which took money from civilian consumption to be used for war consumption via the government. While real GNP appeared to increase during the war based on government statistics, it is now believed that price indices were understated at that time because of the price controls. When this is corrected for, GNP was actually lower during the war years. Despite wartime investment, existing capital continued to depreciate.
People were not better off during the war. Only after the war, when price controls were lifted, rationing ended, and labor unions restricted by a more conservative Congress, did production of civilian goods begin to increase. Prosperity returned not *during* the war, but *after* the war, when the command economy was dismantled and the market economy "came back to life." When the war ended, there was a new optimism that led to more spending and investment as well. Stock prices rose.
What failed in the 1930s, Smiley argues, was not the market economy, but "governments, in their eagerness to direct activity to achieve political ends—ends that were often contradictory."
One hopes we've learned a few lessons about what not to do from the Great Depression. However, it remains to be seen whether or not policy makers and the Federal Reserve will make depression-lengthening mistakes in the future. While Smiley's above summarized "rethinking" of the Great Depression may well be true, the "war prosperity" gospel and the policies of FDR's administration have forever changed the way the U.S. federal government operates. As a famous Time (?) headline stated, "We're all Keynesians now."
March 8, 2008
Don't believe what they teach you in high school about FDR's New Deal. Contrary to the popular belief that activist government rescued the US economy from the ravages of unbridled markets, this book makes the case that policy failure was a major contributor to the depth of the downturn and that government intervention snuffed out the recovery by preventing the self-correcting mechanisms of the market to work.
February 17, 2010
This book is amazingly clear at explaining the multiple complex causes of the Great Depression. For example, monetary policy, specifically the decision to support the English pound, was a major cause of the Depression. Normally any mention of monetary policy is as good as a sedative in putting me to sleep, but Smiley makes the arcane plain.
Today all economists agree that increasing interest rates slows econonic growth, but in the 1929 interest rates were raised 3 times in the runup to Black Friday.
Ever wonder why farms were repossessed in such numbers? Why so many banks failed? It's all here. You will be conversant in the Depression in ways that will impress your friends and help you to better understand our modern day economy.
Today all economists agree that increasing interest rates slows econonic growth, but in the 1929 interest rates were raised 3 times in the runup to Black Friday.
Ever wonder why farms were repossessed in such numbers? Why so many banks failed? It's all here. You will be conversant in the Depression in ways that will impress your friends and help you to better understand our modern day economy.
January 12, 2020
Balanced approach
It gives a clear understanding what happened. Gives positive and negative things about government and the private sector. Very thoughtful.
It gives a clear understanding what happened. Gives positive and negative things about government and the private sector. Very thoughtful.
April 24, 2025
Bastante convincente en sus puntos. Bastante más técnico de lo que soy capaz de asimilar pero sirve para una discusión de bar.
March 5, 2015
This is a tough book to get through as a person with limited knowledge of economics, even though Smiley's intended audience is people without a background in economics. I think Smiley is able to prove his argument that the Depression showed that government interference in the economy worsened and lengthened the economic crisis, even though many people would not agree, since his argument is against the traditional assumption that the Depression showed the need for the government taking more action to control the economy. Although his writing style and organization is mostly clear and focused, it is hard to fully comprehend the slews of statistics that Smiley shoves in at the end of each section to prove his point.
January 21, 2016
Interesting Quote:
"As the number of unemployed workers fell by 7.05 million between 1940 and 1943, the number in the military service rose by 8.59 million...The huge buildup of military personnel--not the expansion of economic activity--sharply reduced the unemployment rate. And it is hard to argue that the unemployed men conscripted into military service were better off...The decline in unemployment during the war years is hardly a sign of prosperity in that period."
-Gene Smiley, Rethinking the Great Depression
"As the number of unemployed workers fell by 7.05 million between 1940 and 1943, the number in the military service rose by 8.59 million...The huge buildup of military personnel--not the expansion of economic activity--sharply reduced the unemployment rate. And it is hard to argue that the unemployed men conscripted into military service were better off...The decline in unemployment during the war years is hardly a sign of prosperity in that period."
-Gene Smiley, Rethinking the Great Depression
May 12, 2010
not summer reading
August 10, 2011
This is a quick read on the Great Depression. It's more of a high level overview of the event surrounding crisis, though the book is useful as a reminder of the events.
Want to read
November 25, 2008세계 대공황 - 80년 전에도 이렇게 시작됐다
Displaying 1 - 10 of 10 reviews