Economic Theories of the Great Depression:

By Robert Hupel

There are multiple theories on what caused The Great Depression and what fixed it, but in looking at these different theories, the one conclusion that is noted is that no one is for sure what caused The Great Depression. In looking at the theories and reviewing them there is another possibility that has not been addressed in the material that has been assessed in this research. That possibility is that all the factors that have been noted and parts of these theories all played a role in the cause and continuation of the depression. The one that that is for certain is that none of the programs that were instituted to correct the issue worked, and it was the United States entering World War II that ended the Great Depression.

There were many different theories that try to explain The Great Depression. The ones discovered in this research are noted as the cartelization theory, the sticky-wage theory, and the investment-friction theory. In the cartelization theory it is assumed that the increase in cartelization and unionization led to a slow recovery from the depression. The sticky-wage theory is that increased wages together with monetary contractions created a downward turn in industrial output which would slow a rebound as well. The last one is looking at the investment-friction theory which notes that friction in the financing creates a wedge between the intertemporal margin rates of substitution in consumption and the marginal product of capital. In short, the one is noting that with unions pushing for higher wages and less work, that there will not be enough product produced, which leads back to supply and demand. If there are not enough products being made and there is an increase in demand for the said product, the cost is going to increase. This theory also plays into the numbers as the cost to make the product increases, the cost of the product is also going to increase which makes it less affordable for most consumers which would then decrease the amount of products being made. That theory also links into the sticky-wage theory where the company pays the employees an over fair wage for the product which then increases the cost of the product which then decreases the demand as the consumers cannot afford to buy the product. The idea is that a good wage will keep employees at the same company, and will make for a stable environment, but it leads to possible stagnation and retention of lower quality workers. It also, as the other creates a wedge as the costs go up to make the product the profit margin drops for the investors, who then need to raise the cost of the product or cut the cost to make the product by decreasing the number of employees needed to make the product. These then lead to other theories. This does not cover the banking industry and the use of credit on unsecured investments and other issues that were also a part of The Great Depression, these theories are just looking at the industry side.

In response to the Great Depressions the United States government did make multiple attempts to correct the situation which included President Herbert Hoover attempting a program which followed much of the sticky-wage theory as he prompted the industrial leader to keep paying the workers a fair to good wage while he kept the unions at bay from pushing higher wages, but this action did not increase production, nor did it decrease unemployment, if anything it had the opposite effect. These actions are close to what would be done by President Franklin Delano Roosevelt in his New Deal plans which were an attempt to bring the United States out of The Great Depression, but even with the progressive plans which he would employ. The United States and the World were still stuck in the Depression. It was not until Europe started to gear up for war that the United States economy would start to turn, and even in that it was slow and once it started, the United States was drawn into World War II.

In the 1930s the United States was still struggling to get out of the depression and were not doing well all the way up to 1939 as Europe went to war with Britian and France declaring war on Germany for the invasion of Poland. In that moment Roosevelt understood and feared that the United States would not be prepared for war and went to Congress in 1940 to ask for money for aircraft production, one-billion dollars for 50,000 aircraft. The United States production started to increase, and industry had returned to its former position and were producing and selling their products again. It was at the start of the war with Japan that the government attempted to draw civilian production to convert to military production, and the auto industry initially baulked at the idea as they were finally seeing exceptional profit margins and merchandise output.

In the Spring of 1942, the War Production Board intervened as they outlawed the production of cars and trucks by the auto industry, but even with that, due to the extensions and exemptions that had been granted, it was a lengthy process to start the conversion to wartime production. Some of the companies that started to convert before the others were Packard, who started making Rolls Royce engines. Chrysler would start the production of tanks, and Henry Ford took the most dramatic venture. Ford like the other three companies started production in 1940, even before the United States entered the war, Ford created a bomber plant in southeastern Michigan, which started with a contract to build 1,200 B-24 bombers. The construction plant covered sixty-seven acres and ran as a single continuous assembly line that pumped out one of the most produced heavy bombers of World War II.

In the end, The Great Depression ended due to World War II.

Resources:

Chari, V. V, Patrick J Kehoe, and Ellen R McGrattan. “Accounting for the Great Depression.” American Economic Review 92, no. 2 (April 1, 2002): 22–27. https://doi.org/10.1257/000282802320188934.

Ohanian, Lee E. “What – or Who – Started the Great Depression?” Journal of Economic Theory 144, no. 6 (November 2009): 2310–35. https://doi.org/10.1016/j.jet.2009.10.007.

Prescott, Edward C. “Some Observations on the Great Depression.” Quarterly Review 23, no. 1 (December 1999). https://doi.org/10.21034/qr.2312.

Winkler, Allan M. Home Front U.S.A.: America During World War II. 3rd ed. Hoboken: Wiley, 2012.