Over the weekend, I was at a seminar that I organized on the historical narrative of the Great Depression. Below the fold, I will summarize some things that came out of it. For me, the most interesting insights concern how historical narratives evolve over time to serve later purposes. One argument that was made, which I found persuasive, is that the history of the Great Depression that most of us grew up with was written to enhance the glow surrounding Roosevelt and to transfer that glow to subsequent Democrats, notably John Kennedy. Thus, what one might call the "Arthur Schlesinger version" became the standard narrative.
If nothing else, please read point (5) below on how folk macroeconomics and academic macroeconomics differ, and how this relates to the Great Depression.
1. Economists who have studied the Great Depression and the New Deal have a different view than the conventional history absorbed by others. The perspective of experts includes:
a. The stock market crash was probably not a dominant factor. We have had other large market declines (1987, 2000) that had relatively minor macroeconomic repercussions. Also, note that the decline in the economy began prior to the crash.
b. The Great Depression was not a single event. Rather, it was a sequence of events. First was a cyclical downturn from 1929-1930 that was sharp but not abnormally so. Next came the period of 1931-1932 when a recovery ordinarily would have occurred, but instead there was further decline. Then, starting in the summer of 1933 after the U.S. devalued the dollar relative to gold, there was a recovery, but it proceeded slowly relative to the depth of the hole that we were in. In 1937, the recovery was aborted by a new recession.
c. From a modern perspective of aggregate supply and demand, the New Deal did nothing to promote recovery. Instead, the devaluation of the dollar soon after Roosevelt took office, was his most clearly expansionary policy, yet it receives no attention apart from economic specialists. Employment programs, such as the CCC, would have helped raise aggregate demand, but these programs were small in scale and their benefits were more than offset by adverse New Deal policies, such as the National Industrial Recovery Act, which was the major policy initiative of the early years of the Roosevelt Presidency. The NIRA inflicted a negative supply shock on the economy by creating industry cartels.
2. A history written in period X about period Y may say more about period X than about period Y. In the 1950's, there was a desire to hold the country together for the Cold War struggle. Thus, what was most appealing was a story in which Americans had come through a common period of trial, including the Depression and the second World war. History written at that time emphasized this "We are all in this together" aspect of the 1930's, and it gave Roosevelt credit for fostering a sense of unity and purpose.
In addition, liberal historians wanted to write a history that would promote further movements in a liberal direction. They wanted the public to see the New Deal as a partially-completed agenda, one which was successful as far as it went while needing to go further.
More recently, as academic historians have focused on cultural segments of society, such as women, African-Americans, and gays, they have tried to weave the New Deal into this history of gradual liberation. Those of us over 40 had difficulty keeping our jaws from falling onto the table at the thought of interpreting the New Deal as being about, say, gay rights.
3. Franklin Roosevelt was much more successful than Barack Obama as a politician. Roosevelt had the advantage that the then-new medium of radio fostered one-to-many mass communication. The 1930's might have been the golden age of propaganda as a tool of government, and Roosevelt was naturally skilled at using it. Roosevelt, the patrician, successfully positioned himself as someone whose policies reflected respect for ordinary Americans, avoiding the appearance of arrogance and contempt that has plagued the current Administration.
4. Those who can tell stories with heroes and villains have an advantage over those who do not. Roosevelt is made out to be overly heroic, and Hoover is made out to be overly villainous. The standard history treats Hoover as a cold-hearted, simple-minded liquidationist, with Roosevelt a sophisticated Keynesian. However, Roosevelt was not Keynesian at all, having campaigned against government deficits and essentially sticking to balanced-budget orthodoxy. Apart from the policies on the gold standard, there was actually a great deal of continuity between the Hoover Administration and the first few years of the Roosevelt Administration in their approaches of trying to treat the Depression through industrial co-operation intended to reduce the harshness of competition.
5. Economists have great difficulty in communicating our views to the general public. For example, monetary policy is often portrayed in the media in "helicopter-drop" terms. That is, journalists and other non-economist intellectuals treat an expansionary monetary policy as if it consisted of the Fed giving people more money to spend. In fact, with open-market operations, the Fed undertakes short-term bond repurchase agreements with banks. These are financial transactions, not fiscal expansions.
In my view, the gulf between academic macroeconomic theory and "folk macroeconomics" can be illustrated by the role of money wages. In academic macro, a reduction in the money wage rate is expansionary for the same reason that an expansion in the money supply is expansionary. That is, it raises the "real" money supply, increasing demand and output. In "folk macroeconomics," you would expect a reduction in the money wage rate to be contractionary, because it means that workers can consume less. I should note that there are plenty of academic macroeconomists who are not above writing op-ed columns that take the folk macro point of view, even though their academic macro runs counter to it.
The Depression-era government policies on wages, both of Hoover and Roosevelt, reflected the folk macro view that higher was better. The results were disastrous, as modern academic macro would predict.