The Green Shoots of the Great Depression

Eighty years ago today on “Black Tuesday,” the stock market collapsed, ushering in the worst economic slump in American history. The 1930s were a national nightmare—an era of great suffering, smashed dreams, and wasted opportunities.

Market Crash 1929
Photo: AP
Market Crash 1929

What we often forget when we think about the Depression, however, is that at several points the contemporary equivalent of “green shoots” led many to believe that the gloom had passed. A recently published economic journal of the period—The Great Depression: A Diary—reminds us just how wrongheaded predictions of prosperity can be, a sobering lesson for today.

For nearly two-and-a-half years, from September 1934 to February 1937, the Dow Jones Industrial Average climbed steadily with nearly no disruptions. (You can see historic prices here.) After watching this recovery closely on a daily basis, Benjamin Roth, a lawyer living in Youngstown, Ohio, wrote in his personal diary on Jan. 2, 1937: “We can formally and officially announce that the depression of 1929 has ended.” Roth was no cockeyed optimist; he was echoing what economic experts across the country were saying. And he could see signs of prosperity all around him: The region’s steel mills were back at near-full capacity, his neighbors were buying new cars, and the owner of a local dress shop told Roth that 1936 had been his biggest Christmas season ever.

Still, it didn’t all add up for him. “It is hard to understand why,” Roth wrote, “in the face of all this seeming prosperity, there are still about 8 million unemployed in the U.S.”

And so it is today. We see the ostensible signs of recovery: a relatively buoyant stock market, consumer confidence much improved from the beginning of the year, and a return to profitability for many large banks and corporations. Yet we endure the highest unemployment in a generation, and lack any clear sense of how we will revive our economy. The results of government stimulus spending are difficult to quantify, leading some economists to say that they have no effect at all. And even the most ardent proponents of stimulus spending agree that we must eventually confront our staggering national debt.

Indeed, reading about the false hopes from the Depression forces us to confront the buried, throbbing sensation that tells us that no matter how prosperous or lucky or cunning the American economy has been for the last century, we still don’t have definitive, universal answers to some very fundamental economic questions, large and small, that puzzled our fathers and grandfathers. How much debt is too much debt—for a household, a company, or a government? How much can government prop up private enterprise without creating a moral hazard that hinders market dynamism? Why can’t economies continue to expand at a steady manageable pace, without lapsing into destructive boom-and-bust cycles?

What we know about certainty.

It is humbling and a little scary to realize that, since the stock market crash 80 years ago, millions and millions of man-hours have been spent framing, quantifying, and hypothesizing these questions without creating bulletproof answers or even much of a permanent consensus. Economics uses the statistics and ostensible precision one associates with, say, physics and astronomy. Yet to survey economic opinion on even seemingly simple questions gives the impression that economists as a group cannot consent to their equivalent of the hypothesis that the Earth orbits the sun, rather than the other way around.

It’s easy to reassure ourselves about how many lessons policymakers learned from the Depression and how many more economic safety mechanisms are in place. Insurance for the unemployed and guaranteed Social Security income for the elderly and infirm are standard features of the American economy; without them, the impact of current recessions on individuals could easily be as bad as it was during the Depression. On the federal-policy level, the government guarantee of bank deposits up to a certain monetary amount makes panicky bank-runs less likely and less damaging. And when banks do close, the process is orderly and the impact on the overall financial system minimized. Moreover, decades of experience with monetary policy have given the Federal Reserve—a relatively new institution during the Depression—much greater power in steering the economy away from extremes of inflation or unemployment.

Yet it is undeniable that when it comes to economic collapse—either preparing for it or finding a way out of it—our leading authorities are no better equipped than their counterparts were in the 1920s and 1930s. We all hope that the green shoots will blossom into lasting prosperity, but we should dispense with the idea that there is anything like an economic certainty.