Why Do We Still Study the Great Depression?

David Wheelock: I was asked to talk about the Great Depression, which I guess you've been going through various topics in economic history throughout the day today, and it’s kind of the progression we've come up to the 1930s now.

Interestingly, yesterday at the National Bureau of Economic Research in Cambridge, Massachusetts, there was a conference, a one-day symposium on the history of the Federal Reserve and Chairman Bernanke gave a speech, which I just had the opportunity to read before coming up here. And he covers some of the same ground that I'll be going over today.

In addition, Bernanke gave a series of lectures at Georgetown — was it Georgetown or George Washington University — earlier in the year and starting last fall on the history of the Fed, and the Great Depression, and so forth, and I commend those lectures to you. They’re on the Fed’s website, the Board of Governors website, and they're very interesting and worthwhile to watch. So, now I've sucked up to the Chairman [audience laughter] let me say at the outset that the rest of what I say today reflect my own views and not his necessarily or anyone else in the Federal Reserve System. So again, welcome.

By the way this is not me, the picture here, this guy up here [audience laughter]. This, it does have historical significance though. During the New Deal period of the of the Great Depression under President Roosevelt. There were a number of federal programs initiated to provide work employment for various people throughout the economy, and one was a federal artist project under the Works Progress Administration. This particular farmer was painted by an artist under the auspices of the Federal Artists Project. So hence, that’s the connection with the Great Depression of this guy here.

So why do we still talk about the Great Depression? Why do we still study it? Why do we still teach it to our students? Well, first of all, is because it was so big. It was undoubtedly the worst macroeconomic crisis in the United States since the Civil War, maybe of all time. There was a significant depression in the late 1830s, early 1840s that some say, it was on the order of magnitude of the Great Depression with 1930s. It's hard to tell.

It's a bit of an apples and oranges comparison because the economy was much smaller and much different in the antebellum period than it was since. And, of course, the statistics we have on that period are not nearly as good as those from the 1930s. But, certainly since the Civil War, the Great Depression was the biggie by a long margin.

During the recent financial crisis and recession, there were a lot of commentary about parallels with the Great Depression, how we're in the next Great Depression, and one of the myths we kept trying to dispel was yeah, this is bad, but as I'll talk in a minute, this is nowhere near as bad as the Great Depression that our grandparents and our parents had.

Another reason we still study the Great Depression of course, it was a defining event, particularly for the role of government in the economy. The federal government played a very minor role — well, I don't want to say that. It had a distinct role throughout the history of the United States in a variety of ways. Of course, the federal government owned much of the land and sold or gave away much of that land, was very involved in the development of the railroads and infrastructure — canals and so forth. But, in terms of what we think of government intervention in the economy today in terms of big federal spending programs, taxing and so forth, the federal government was tiny before the Great Depression in comparison to what it became during the Depression and has continued to grow ever since. So the federal government plays a much bigger role in the U.S. economy in many ways than it did before the Depression.

Another reason we still study the Depression is because it still remains controversial. What caused the Great Depression? I will give you one story today, but it is by no means the only story. In fact, some stories, some perfectly credible economists have very different views about the Great Depression than what I will present today, which is a rather orthodox view, but not the only view. I will end up blaming the Federal Reserve, which it seems appropriate given we’re in the Federal Reserve at the moment, to talk about the Fed’s role in the economy, but it’s not the only view about what caused the Great Depression or what ended the Great Depression.

Another reason we look at, talk about the Great Depression, we teach the Great Depression is because it’s very useful as a teaching tool, particularly when we’re talking about economic concepts, teaching about economic concepts and getting those across to students is easier when you can relate them to dramatic events. And similarly, we talk about political economy — very important, talking about the role of government and how it’s changed over time. Again, the Great Depression is a very good laboratory for that.

So what makes the Great Depression — what makes a depression great? I would say that it’s a recession if you're out of work, but it's a depression if I’m out of work. That's an old saw that goes back a long way. There really is no hard and fast rule making a distinction between a recession and a depression, it’s just a matter of degree.