This Week in the Great Depression -- What Went Wrong?: Echoes

By late 1931, economic troubles had been growing for more than two years. Those expecting a quick recovery were disappointed and sought explanations. What's wrong with the world economy? How did we get into this swamp?

Among many theories advanced at the time, three stand out: one focused on long-term economic imbalances, one on financial contingencies and one on cultural or psychological explanations.

The 1920s were prosperous, but not for American farmers, who made up nearly half the population. As the war intensified demand for meat, wheat and cotton, they sharply expanded croplands and added acreage at high cost. This led to overcapacity and volatile prices. As farmers chased what they expected to be high-value crops, they flooded commodity markets and drove down prices instead.

One commentator suggested in the New York Times that the fall in wheat prices "to previously unimaginable depths" had been "the primary cause for the industrial depression," and blamed "the abnormality of low agricultural prices, the discouragement and poverty of the farm population, and their all but total loss of purchasing power." When wheat prices went up, prospects would brighten.

In the UK, the Economist argued that "there is no single cause of the crisis." Instead "a whole host of circumstances" had interacted to cause the economic decline. Given that London was "the world's bank" and a safe repository, it received huge postwar foreign deposits, particularly from France. War debts and reparations generated a "serious maldistribution of the world's monetary gold," further disturbed when France began large gold repatriations in 1929.

The ensuing international trade contraction led to increased layoffs, reduced exports and shrunken revenues for Britain's budget, which fell into deficit. To meet unemployment-insurance payments, the government had to borrow heavily from abroad. Soon the Central European financial crises were underway. Banks began panic withdrawals of "London gold," which "first brought down the Labour government and then led to the suspension of the gold standard." From this angle, there would be no easy fixes.

Swedish economist Gustav Cassel, the founder of purchasing power parity theory, had a different explanation for "deflation mania and liquidation fever." His analysis focused on American Puritanism, which dreaded "the diabolism of speculation. Each warning against continued deflation has stranded on the fear that a more liberal monetary policy might infuse new vigor in the spirit of speculation."

Businesses and banks may fail, but Puritans "highly approve proper punishment of speculation and a thorough cleaning out of questionable business projects."

Lest this seem bizarre, consider that Harvard economist and Bloomberg View columnist Edward L. Glaeser, writing approvingly about older Americans continuing to work rather than retiring amid today's grim economic times, recently noted in the New York Times that "The United States has always had a Calvinist backbone."

Culture may explain our responses to depressions better than it explains their causes. But it's not a negligible force.

(Philip Scranton is a Board of Governors Professor of the History of Industry and Technology at the University of Rutgers at Camden and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author of this story:
    Philip Scranton at

    To contact the editor responsible for this story:
    Timothy Lavin at

    Before it's here, it's on the Bloomberg Terminal.