The Great Depression

Lionel Robbins, Stephen Longrigg

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138536029
• eBook ISBN: 9781351481922
• Topic: Histoire
• Subtopic: Histoire de l'Amérique du Nord

This book examines the nature and the causes of the 1929 depression, tracing its background and the broad conditions from which the depression emerged. As an infl uence on economic activity, Robbins sees World War I, and the political changes that followed it, as a series of shifts in the fundamental conditions of demand and supply, to which economic activity had to adapt. Th e needs of the war had called a huge apparatus of mechanical equipment into being, which the resumption of peace rendered in large part superfl uous. The war also disrupted world markets, and its settlement created conditions that aggravated this disruption. Th us, the struggle that was to end nationalist friction in fact gave nationalism new scope.

The depression of 1929 and beyond dwarfed all preceding economic disruptions, both in magnitude and in intensity. In 1929 the index of security prices in the United States was in the neighborhood of 200-210; in 1932 it had fallen to 30-40. Commodity prices in general fell by 30 to 40 percent, and in some commodity markets the drop was even more catastrophic. Production in the chief manufacturing countries of the world from 30 to 50 percent, and the value of world trade in 1932 was a third of what it was three years before. Worldwide, something like 30 million people were unemployed.

There have been many economic downturns in modern economic history, but never anything to compare with the years of the Great Depression. Few books have conveyed that period with greater clarity and precision than this masterpiece by Lionel Robbins. Murray Weidenbaum's masterful new introduction adds to its contemporary value.

CHAPTER I
1914-1933

1. THE object of this Essay is to examine the nature and the causes of the present depression of trade. Its first task, therefore, is to trace the background of the depression and the broad conditions amid which it was generated.

To do this it is necessary to draw the picture on a canvas wider than that which would at first sight seem appropriate to an enterprise of this nature. The onset of the present crisis may perhaps be dated from the autumn of 1929. But its causes and the conditions under which they have operated take their rise long before this date. The body-economic, equally with the body-politic, has been in a state of violent tension ever since the war. We live, not in the fourth, but in the nineteenth, year of the world crisis. If our discussion of the events since 1929 is not to be wholly unrelated to their most significant causes, it must take some account, however brief, of events before that date. 1914 is the beginning of our epoch.

2. For the hundred years which preceded the outbreak of the Great War, the economic system had not at any time shown itself to be in serious danger of grave breakdown. It was a period of unprecedented change. The external conditions of economic activity were in process of continual alteration. In the old world the advent of steam and machinery was changing the nature and the structure of manufacturing industry. In the new, the coming of new modes of transport was opening up vast areas, hitherto undeveloped, both as sources of food supply and raw materials, and as markets for the products of the manufacturing processes. The population of the world, whose normal state there is reason to suppose to have been more or less stationary, was growing rapidly. The aggregation of people into large cities, dependent for the most elementary necessities of life upon supplies produced at the other ends of the earth, proceeded at a rate unknown in any earlier epoch. Yet the economic mechanism was adjusted to this complex of change without anything like the present dislocations, and, year in, year out, turned out what, for a substantial proportion of the increasing population, has been regarded as the basis of an increasing standard of real income. According to the calculations of Sir Josiah Stamp, the level of real incomes in Great Britain in the years before the war was four times as great as in the Napoleonic period.

To say all this is not in the least to contend that the pre-war period was immune from economic difficulties, or that what has come since is to be regarded as spontaneous catastrophe, having no intimate connection with anything that went before. No student of those times is likely to be unaware of the ups and downs of trade, the recurrent waves of business depression and unemployment, which ruffle the lines of secular development. Nor will he be blind to the increase towards the end of the period in political tendencies which, viewed in the light of more recent developments, can be seen to have been fraught with danger to the stability of the whole system. The Great War itself was the product, not of accident, but of some of these tendencies. Nevertheless, compared with what has come since, the difficulties of those times must be admitted as being of a minor order. During the years for which we have records, the number of unemployed trade-unionists in Great Britain only once rose above 10 per cent. The crises were not such as to disrupt the unity of monetary conditions in the important financial centres. The interventionist and restrictive tendencies of economic policy, although no doubt calculated to retard the increase of productivity, were never such as seriously to threaten to reverse it. There is no need to present the world before the war as a Utopia to point the contrast with what has come after.

3. Into this world there came the catastrophe of war. There is no need at this point to dwell on the intellectual and cultural changes which this catastrophe involved, although for those who are not dominated by a purely materialist conception of history it is arguable that, even in this context, these were the most important changes of all. More germane, however, to the purpose of this survey, are certain more tangible influences.

As an influence on economic activity, the war, and the political changes which followed the war, must be regarded as a vast series of shifts in the fundamental conditions of demand and supply, to which economic activity must be adapted. The needs of war called a huge apparatus of mechanical equipment into being. The resumption of peace rendered it in large part superfluous. The fact of war involved a disruption of the world market. The settlement, which came after, created conditions which aggravated this disruption. The struggle which was to end nationalist friction in fact gave nationalism new scope.

As an influence on subsequent developments, these changes have a double significance. In the first place, they were discontinuous. They therefore involved vast destruction of capital. Secondly, they were restrictive of free economic activity. They therefore involved a reduction in the productivity of the factors of production. For four years, the capital resources of the belligerent countries of the world were devoted to providing offerings to Mars, which either perished in the moment of their production or remained as useless as the pyramids of the Pharaohs, once the occasion for the sacrifice had ceased. The disruption of the world market, consequent on the war and on the peace settlement, meant a restriction of the area within which the division of labour had scope. It meant therefore a limitation of the increase of wealth to which division of labour gives rise.

Concurrently with these structural dislocations, there came a further series of changes no less important in the causation of post-war difficulties. At the same time as the using up of capital and the lowering of productivity were producing conditions demanding readjustment on a scale hitherto unknown in economic history, the economic system was losing its capacity for adaptation. The successful prosecution of war involved, as we have seen, a large and discontinuous alteration of the “set” of the apparatus of production. This alteration was carried through. But the measures which were necessary to bring it about—the centralisation of control of industrial operations—were such as permanently to impair its capacity for further change. The grouping of industrial concerns into great combinations, the authoritarian fixing of wages and prices, the imposition of the habits of collective bargaining, were no doubt measures which would be justified by appeal to the necessities of war. But they carried with them a weakening of the permanent flexibility of the system, whose effects it is difficult to over-estimate. This was a dish of eggs not easy to unscramble.

Here, as with other contrasts between pre-war and post-war conditions, it is important not to exaggerate differences. It is not contended that the pre-war system was entirely flexible, or that the post-war system has shown itself to be incapable of some adaptation. This would be untrue. All that is argued is that the changes introduced by way of groupings which made for cartellisation on the one hand and a greatly increased rigidity of the labour market on the other, were such as to produce an important and far-reaching impairment of what degree of flexibility there was. In the light of well-known facts regarding the rigidity of wages and the prices of cartellised products in the postwar period, this does not seem to be a contention which is open to serious question.

Beyond all this came the break-up of international monetary unity. For forty years before the war, the financial systems of the leading countries of the world had been linked together by the international Gold Standard. For a century, the Gold Standard had been virtually effective. Trade between different national areas took place on the basis of rates of exchange which fluctuated only between very narrow limits. Capital moved from one part of the world to another, if not with the same ease with which it moved within national areas, at least with much the same effects as regards the volume of credit available. The prices of internationally traded commodities moved together in all the important centres. The price and cost structures of the different financial areas maintained a relationship which was seldom seriously out of equilibrium.

The war put an end to all this. Within a few days of the outbreak of hostilities, in each of the belligerent financial centres, measures had been taken which amounted to an actual, if not to a legally acknowledged, abandonment of the Gold Standard. Of the chief financial centres, the United States was the only one to remain on gold. The others not only suspended the rights of effective convertibility; they each, in greater or lesser degree, resorted to the device of inflation as a means of financing the war. The results were as might have been expected. The gold supplies of the world tended more and more to be concentrated in the vaults of the Federal Reserve Banks. Prices rose in the inflating countries in various degrees, according to the measure of the inflation. In the markets for foreign exchange the conditions of supply and demand reflected the internal depreciation. It was the first phase of a period of international disequilibrium from which we have not yet emerged.

4. The conclusion of peace brought no end to this disorder. The inordinate claims of the victors, the crass financial incapacity of the vanquished, the utter budgetary disorder which everywhere in the belligerent countries was the legacy of the policies pursued during the war, led to a further period of monetary chaos. In the United States a brief inflationary boom was followed by collapse, and then a fairly rapid recovery. In Great Britain the boom and the collapse had no such fortunate sequel: a long period of relative stagnation followed. In continental Europe, the confusion was without precedent. It was the era of the great inflations. The rouble, the crown and the mark all suffered what was virtually an annihilation of value. The franc and the lira underwent serious depreciation. The results were what was to be expected—severe curtailment of trade, further structural dislocations, capital consumption and the wiping-out of middle-class resources, a further disruption of the basis of the international equilibrium of prices.

5. By the middle of the ’twenties, this intense disorder had come to an end. One by one, budgets were balanced and disordered currencies were restored to some kind of stability. In the spring of 1925, Great Britain and the British dominions returned to the Gold Standard. By the end of the year, of the important countries, only France was still on a fluctuating standard.

There followed a period of good trade—a period, indeed, which in the light of more complete knowledge of the relevant statistics can be seen to have been, for some parts of the world, one of the biggest booms in economic history. Trade revived, incomes rose. Production went ahead by leaps and bounds. International investment was resumed on a scale surpassing even pre-war dimensions. The stock exchanges of the more prosperous centres displayed such strength that speculation for a rise seemed a more certain path to a secure income than all the devices of ancient prudence. It was a period in which the finance ministers of the world, looking forward to years of increasing revenue, felt no hesitation in incurring fresh obligations on the side of expenditure. Men of the type of the late Ivar Kreuger moved rapidly from one capital city to another, arranging without fuss or inconvenience to anybody, what were described as “good constructive loans”—the acolytes of the “new economics”. It was in these days that it was said that the trade cycle had become extinct.

Nevertheless, there were certain features of this phase which were such as to distinguish it, if not in kind, at any rate in degree, from other periods of expanding trade. It was pre-eminently an industrial boom. The rise in profitability was essentially a feature of manufacture and raw material producing industry. Throughout the period, the profitability of certain lines of food production was relatively low. In the United States—then as now the centre of the world fluctuation—side by side with extreme prosperity in the manufacturing industries, there existed severe difficulties, and in parts even distress, among the producers of agricultural products. All over the world the relative decline of agriculture was giving rise to severe political strain and desperate attempts, in the shape of pools and restriction schemes, to evade the consequences of technical progress.

Moreover, even in manufacturing industry the boom was not universal. Important areas of manufacturing production experienced its influence only indirectly. Throughout the boom years in the United States, industrial activity anywhere in Great Britain could never have been described as more than moderately good. There were large areas in the North where this description would have been an exaggeration. In Central Europe, particularly in Austria, partly as a result of the peace settlement, partly as a result of internal policy, there was definitely discernible a tendency to capital consumption. In Germany, the appalling shortage of capital created by the war and the post-war inflation was partly compensated by large imports of capital. But the business situation was never normal, and at a much earlier date than elsewhere it became quite obviously perilous.

At the same time, in the financial centres of the world there existed conditions wholly without parallel in any earlier period of prosperity. The stabilisation of European currencies and the fixing of new parities, after the colossal fluctuations of the post-war years, had been carried through on the basis of what very often could only be described as hit-or-miss methods; and although in some cases the miss was not very great, in others it was considerable. In the case of Great Britain, the parity chosen was almost certainly too high. In France there is reason to suppose that the error was in the opposite direction. The result was a most peculiar state of inter-local monetary disequilibrium. The centres which had returned too high were continually in danger of losing gold; the centres which had returned too low were almost embarrassed by the gold they attracted. Now it so happened that the centre which suffered chiefly from over-valuation was also the chief centre of organised capital export. While the over-valued exchanges made long-term capital export from London a highly difficult operation, the relatively high rates, which were necessary to keep gold from flowing out, were especially tempting to short-term balances. Hence, throughout the whole of this period there existed in one of the chief financial centres of the world a lack of balance between long- and short-term investment which was itself conducive to disequilibrium and latent with dangers of extensive catastrophe, should anything occur to disturb the insecure prosperity elsewhere.

6. Thus, in spite of the appearance of considerable prosperity and a very real measure of revival of trade and industry, the period immediately preceding the slump was not without conditions which might justifiably have given rise to very grave anxiety. Clearly, if the forces making for prosperity were to slacken, the ensuing depression was likely to be a depression of more than usual severity.

They did slacken. Looking back, it is possible to dis-oern the beginning of the depression about the end of 1928, when the flow of American lending to Germany first began to lose its pace. By the middle of 1929, the evidences of serious weakening in that part of the world were unmistakeable. In certain raw material producing centres, too, there were signs of weakness quite early in the summer.

But the main tide of American speculation continued to flow with undiminished strength until the autumn. As early as February the authorities of the Federal Reserve System had become persuaded that the boom had reached such dimensions that a crash was inevitable. But, in spite of private warnings, rising discount rates, and all kinds of unofficial indications, the rise of stock exchange values continued. Then suddenly there came a crack. The collapse of the Hatry swindles in London caused a sudden tightening of markets there. The rate of interest was advanced to 612 per cent. In New York there was a sympathetic movement. On October 23rd the Dow-Jones index of the price of industrial shares in New York dropped about 21 points ; during the next six days it fell about 76 points more. Prosperity was at an end. The bottom had dropped out of the market.

7. The depression which followed has dwarfed all preceding movements of a similar nature both in magnitude and in intensity. In 1929 in the United States the index of security prices stood in the neighbourhood of 200-210. In 1932 it had fallen to 30-40. Commodity prices in general fell in the same period by 30 to 40 per cent; the fall in particular commodity markets was even more catastrophic. Production in the chief manufacturing countries of the world shrank by anything from 30 to 50 per cent: and the value of world trade in 1932 was only a third of what it was three years before. It has been calculated by the International Labour Office that in 1933, in the world at large, something like 30 million persons were out of work.¹ There have been many depressions in modern economic history but it is safe to say that there has never been anything to compare with this. 1929 to 1933 are the years of the Great Depression.

1For more extensive statistical information see Tables 1 to 12, Statistical Appendix.

CHAPTER II
MISCONCEPTIONS

1. WHY did these things happen?

Before proceeding to a tentative explanation, there are certain misconceptions which demand our attention both on account of their widespread acceptation and their possible influence on policy. Incidentally their examination will bring to light certain matters which have an important bearing on the explanations eventually to be offered.

2. Perhaps the most conspicuous feature of the statistics which we have just cited is the fall of commodity prices. A fall of 40 per cent in gold prices in four years is an event without precedent. In popular discussion, people often speak as if this were, not only a symptom, but actually the cause of the slump and its various attendan...

Table of contents

• Cover Page
• Title Page
• Copyright
• Dedication
• Contents
• TABLES IN THE STATISTICAL APPENDIX
• INTRODUCTION TO THE TRANSACTION EDITION
• CHAPTER I 1914-1933
• CHAPTER II MISCONCEPTIONS
• CHAPTER III THE GENESIS OF THE DEPRESSION
• CHAPTER IV THE CAUSES OF DEFLATION
• CHAPTER V GREAT BRITAIN AND THE FINANCIAL CRISIS
• CHAPTER VI INTERNATIONAL CHAOS
• CHAPTER VII RESTRICTIONISM AND PLANNING
• CHAPTER VIII CONDITIONS OF RECOVERY
• CHAPTER IX PROSPECTS
• STATISTICAL APPENDIX