The Great Depression – Plenty of Blame to Share

[This is part of a series, which is introduced in the posting titled \”Unintended Consequences\” here.] [Edited September 13, 2011]

There are plenty of options for pointing to government policies and behavior that brought about the Great Depression, deepened it, and helped it to last much longer.

The Gold Standard and France against the World.

I owe most of the following to an EconTalk podcast with Douglas Irwin, a professor at Dartmouth College (October 11, 2010.

Before the Great Depression most of the world was on the gold standard. French leaders were very afraid of inflation and so wanted to keep the value of their currency low relative to the rest of the developed world. By following this policy, they gradually accumulated more and more foreign exchange reserves. In 1927 they held 7% of the world’s gold reserves and by 1932 they held 27% of the world’s gold reserves. Given the structure of and support for the gold standard taken by the other major economies this created a shortage of money in the rest of the world, which hampered economic activity. Irwin said “If the country is losing gold reserves, it has to raise interest rates, tighten monetary policy to prevent that outflow, and pursue more contractionary policies.”

Irwin reported that “countries not on the gold standard managed to avoid the Great Depression almost entirely, while countries on the gold standard did not begin to recover until after they left it.” The US left the gold standard in 1933 and according to Irwin, that action alone may deserve the lion’s share of the credit for the U.S.’s eventual recovery.


  • EconTalk podcast with Douglas Irwin of Dartmouth College
  • Douglas Irwin has a paper entitled “Did France Cause the Great Depression?”(Direct link: to the paper (pdf).

Monetary policy was restrictive instead of expansionary

It is fairly common in the economic story of the Great Depression to point fingers at monetary policy authorities in the United States for maintaining a contractionary monetary position during the depression, which restricts economic activity exactly at the time they should have been striving to promote economic activity. Prices fell dramatically during the depression, so inflation shouldn’t have been a worry leading them to proceed cautiously. I’d like to know more about the link between this contractionary economic policy and France’s accumulation of gold reserves. Irwin’s argument would imply that the monetary authorities in the U.S. did not have much of a choice in the matter. I’d welcome any suggestions for information on this topic.

Minimum Wage

The minimum wage was established in 1938 at 25 cents an hour. (source) This reduced the incentive to hire workers, raised the cost of business, reduced the incentive to grow businesses – all while the Great Depression was dragging on. The minimum wage gave a windfall to those who already had low-paying jobs but at the cost of leaving more people unemployed and raising costs for everyone. It seems hard to see how this could not have helped but worsen the general economic conditions.

Restrictions on Free Trade

It is also fairly common in the economic story of the Great Depression to point fingers at congress and the president for creating tariffs and lowering import quotas during the depression. This brought a lot of economic activity to a halt and raised prices. This rewarded domestic industries in protected areas but moved the costs on to everyone else in the country.

What Got Us Out of the Depression?

How did the U.S. finally escape the clutches of the Great Depression? A commonly heard narrative was that the massive government spending of the New Deal created the fiscal stimulus to bring around aggregate demand and get us out of the Depression. I have read and heard quite a bit lately that debunks that particular myth. Here are some citations to some of the material on this subject.

  • Russ Roberts has had several guests on EconTalk discussing the Great Depression. Searching there will get you several hits. My favorite was a discussion with Robert Higgs in an EconTalk podcast on December 5, 2008. If you want more from Higgs he has written a book on the topic.
  • Amity Shlaes talks with Russ Roberts in an EconTalk podcast on June 4, 2007.
  • Arthur Herman writes September 12, 2011 in the \”The Ultimate Stimulus?: Weekly Standard on World War Two and economic growth\”.


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