Main Article: [Intro] [section I] [section II] [section III] [section IV] [appendices] [references] [notes]

For a version of the below with a new analysis of the future, click here.

(an edited version of this appears in the new Encyclopedia of Political Economy, Phil O'Hara, ed.)


The Origins of the Great Depression of the 1930s


by James Devine

November 20, 1996


The collapse of both the 1920s-era prosperity of the United States and the shakier growth of Germany heralded the world-wide Great Depression of the 1930s, as primary-product producers went bankrupt, trade wars flared, and the banking system disintegrated. Because this series of events shook popular faith in capitalism's ability to "deliver the goods," economic historians have dedicated much research time to its understanding. In this research most emphasis has been on either the U.S. economy's collapse (as with Romer, 1993) or the instability of the world economy (Temin, 1989).

The dominant neoclassical view emphasizes the importance of exogenous shocks to what is assumed to be an essentially stable system in causing the 1929-33 collapse. Though some like Peter Temin (1976) and Christina Romer (1990) stress the largely unexplained fall of consumption or the exogenous stock-market crash of 1929 as a shock, policy errors receive the most attention: Milton Friedman and Anna Schwartz (1965), for example, blame a "Great Contraction" of the U.S. money supply. Others (including Romer) emphasize that country's government's efforts to balance its budget in a recession, further cutting aggregate demand. Even the "international Keynesians" who stress the structural instability of the world economy in the late 1920s have this emphasis on misguided policy: while Charles Kindleberger (1986) argues that the U.S. should have lived up to its responsibility as leader of world capitalism to stabilize the system, Temin (1989) blames the deflationary bias inherent in the dominant policy regime of the time (including the gold standard).

Leftist economists stress the inherent instability of the U.S. and world economies of the late 1920s. Hardly any emphasize a fall in the rate of profit or a high employment profit squeeze, since there is little evidence for those hypotheses. Instead, underconsumption tendencies are stressed. Paul Baran and Paul Sweezy (1966) see underconsumption-induced depression as the normal state of monopoly capitalism; it was only World War I and the 1920s automobilization of the U.S. economy that delayed its onset. On the other hand, the France-centered "Regulation School" (of Michel Aglietta (1979), and others) see a structural disjunction between the rising importance of mass production and the limits of mass consumption. The depression was inevitable in the absence of "a monopoly mode of regulation," often called "Fordism."

James Devine [1983, 1994] attempts to synthesize the empirically- and logically-valid parts of all of these different perspectives while reconciling underconsumption tendencies with Marx's view that capitalism tends to expand aggressively independent of constraints set consumer demand. Devine agrees with Marx's vision of capitalist accumulation, seeing competition and class antagonism as driving the system forward to expand too far, to over-accumulate, a process allowed by the credit system. The form that this over-accumulation takes depends on the institutional context: while "labor scarcity" in the late-1960s U.S. implied profit squeezes, the late-1920s "labor abundance" encouraged what Devine terms "over-investment relative to consumption." Rising productivity and stagnant wages imply stagnant workers' consumption but rising profit rates, as seen in the corporate sectors in the late 1920s. High profit rates are hard to sustain given low workers' demand because both investment and capitalist luxury spending (the other domestic private sources of demand) tend to be more volatile than workers' consumption. In addition, fixed investment creates new capacity that implies the need for rising investment and capitalist luxury consumption. In this view, the U.S. economy became increasingly prone to collapse as the 1920s progressed. This meant that prosperity was more vulnerable to "shocks" such as the stock market crash (which itself can be explained in terms of the late-1920s political economy).

After the collapse occurred, when unused capacity, excessive debt, and pessimistic expectations blocked further accumulation, capitalist competition induced falling wages and falling consumption, resulting in an "underconsumption trap" that encourages lasting stagnation.

Of course, the U.S. is not the whole world economy. Devine [1994] argues that the attention to the U.S. economy is justified by the relative stagnation of most of the rest of the industrial world and almost all of primary production (including in the U.S.) after World War I. Much of the prosperity that did occur in the 1920s in places like Germany was dependent on U.S. growth, so that the U.S. was the capstone of the world arch. The slow growth of the world also made it difficult for the U.S. to preserve rising profit rates by boosting net exports.

World stagnation itself he explains by the stage that capitalism, which involved intense contention among nation-states. The inter-imperialist rivalry that spurred World War I also stimulated the creeping protectionism of the 1920s which turned into trade wars in the 1930s, partly as a result of the U.S. shift to increased protection in 1930.

Devine sees the rampant "policy failures" of the inter-War period as being not merely a matter of ignorance of economics but results of the world political economy. Given the incomplete rise of the U.S. to super-power status and the large size of that country's primary-producing sector in the 1920s, that country could not shoulder its "Kindlebergian responsibilities" until after World War II. The deflationary policy consensus that Temin describes can be explained as part of the post-World War I capitalist offensive that aimed to end rampant inflation, reverse workers' gains, and restore depressed profit rates. Given the ascendancy of this movement, it is no surprise that policy-makers were not interested in reversing the 1929-33 collapse until it was too late, as Epstein and Ferguson [1984] show.

partial bibliography:

 Aglietta, Michel. 1979. A Theory of Capitalist Regulation: The US Experience. London, UK: New Left. David Fernbach, transl.

 Baran, Paul and Paul Sweezy. 1966 Monopoly Capital. New York: Monthly Review Press.

 Devine, James. 1983. "Over-Investment, Underconsumption, and the Origins of the Great Depression," Review of Radical Political Economics, 15(2), Summer: pp. 1-27.

 _______. 1994. The Causes of the 1929-33 Great Collapse: A Marxian Interpretation, Research in Political Economy (Paul Zarembka, ed.) vol. 14: 119-94.

 Epstein, Gerald, and Thomas Ferguson. 1984. Monetary Policy, Loan Liquidation, and Industrial Conflict: The Federal Reserve and the Open Market Operations of 1932. Journal of Economic History 44(2) December: 957-83.

 Friedman, Milton, and Anna Jacobson Schwartz, 1965. The Great Contraction, 1929-33. Princeton, NJ: Princeton U.P.

 Kindleberger, Charles P. 1986. The World in Depression, 1929-1939 rev. & exp. ed. Berkeley: University of California Press.

 The Journal of Economic Perspectives. Special Issue on the Great Depression, Spring 1993.

 Romer, Christina. The Great Crash and the Onset of the Great Depression. Quarterly Journal of Economics. 105(3), August: 597-624.

 Temin, Peter. 1976. Did Monetary Forces Cause the Great Depression? New York: W.W. Norton.

 -----. 1989. Lessons from the Great Depression Cambridge, MA: MIT Press.

 Main Article: [Intro] [section I] [section II] [section III] [section IV] [appendices] [references] [notes]

 For a version of the below with a new analysis of the future, click here.