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January 2009 (Volume 60, Number 8)

Notes from the Editors

This year marks the eightieth anniversary of the 1929 Stock Market Crash and the beginning of the Great Depression, the worst economic crisis in the history of capitalism. However, while the Great Depression has been very much in the news of late, this is not due so much to this anniversary as to the fact that for the first time since the 1930s an economic crisis has arisen on a scale and of a nature that invites direct comparison with that earlier deep downturn, which threatened the entire system and ended in the Second World War.

The dominant economic interpretation of the Great Depression was recently evoked by Harvard historian Niall Ferguson (“The End of Prosperity?,” Time, October 2, 2008), who wrote: “The underlying cause of the Great Depression—as Milton Friedman and Anna Jacobson Schwartz argued in their seminal book A Monetary History of the United States: 18771960, published in 1963—was not the stock-market crash but a ‘great contraction’ of credit due to an epidemic of bank failures.” It was Friedman and Schwartz’s Monetary History that led to the eventual widespread acceptance of the notion that the Federal Reserve Board could have prevented the Great Depression—if only it had opened the monetary floodgates in time to prevent the severe contraction of credit. This was later transformed into the dogma that the Fed through its overly passive approach to monetary policy caused the Great Depression.

But the idea that “the underlying cause” of the Great Depression was monetary was certainly not taken seriously in the 1930s nor was it ever supported by Keynesian or Marxian economists. Rather this view became prevalent only after the mid-1970s stagflation crisis, which led to the hegemony of monetarism and other conservative economic outlooks. It was associated with the belief that the Great Depression had nothing whatsoever to do with what economists call the “real economy” (the sphere of production/income). According to the monetarist view, in a paper-money economy a severe debt-deflation such as appeared in the 1930s could always be prevented—if all else failed—simply by printing money. Ironically, the foremost proponent of this view today is the current chairman of the Federal Reserve Board, Ben Bernanke—nicknamed “Helicopter Ben” for his suggestion that reflation could invariably be induced in a crisis through the functional equivalent of Milton Friedman’s famous “helicopter drop” of money.

But confronted at present with the possibility of a new Great Depression, the Federal Reserve Board has been doing everything it can to stop the crisis by throwing money and liquidity at the problem. Since September, the Fed has enormously expanded the monetary base (currency plus bank reserves) with no discernible effect in arresting the economic decline. The result: it has become evident that in conditions of “depression economics” this amounts—in an old Keynesian adage—to pushing on a string. “The thesis of the Monetary History,” Paul Krugman concluded from these facts,has just taken a hit” (Krugman, “Was the Great Depression a Monetary Phenomenon?,” New York Times blog, November 28, 2008). Indeed, the present economic disaster cannot be solved through monetary means at this point, since we are now face to face with the result of decades of financial leveraging on top of a stagnating economy. There is therefore no way of avoiding the weaknesses that have built up in the real economy.

This is the basic message conveyed by Rutgers historian James Livingston, in a widely circulated piece, entitled “Their Depression and Ours,” that appeared in two parts on the Politics and Letters Web site on October 6 and October 13, 2008. As Livingston wrote (replying directly to Ferguson and Bernanke):

There is another way to explain the Great Depression, of course. It requires looking at the changing structure or “long waves” of economic growth and development, digging all the while for the “real” rather than the merely monetary factors. This explanatory procedure focuses on “the fundamentals,” and typically treats the financial system as a tertiary sector that merely registers the value of goods on offer—except when it becomes the repository of surplus capital generated elsewhere, that is, when personal savings and corporate profits cannot find productive outlets and flow instead into speculative channels…

The “underlying cause” of the Great Depression was not a short-term credit contraction engineered by central bankers who, unlike Ferguson and Bernanke, hadn’t yet had the privilege of reading Milton Friedman’s big book. The underlying cause of that economic disaster was a fundamental shift of income shares away from wages/consumption to corporate profits which produced a tidal wave of surplus capital that could not be profitably invested in goods production—and, in fact, was not invested in good production….

This [the 1920s] was the first decade in which a measurable decline of net investment coincided with spectacular increases in nonfarm labor productivity and industrial output (roughly 60% for both)…

At the very moment that net investment became unnecessary to enforce increased productivity and output, income shares shifted decisively away from wages, toward profits.

Livingston went on to ask the critical question of how this shortage of net investment outlets and resulting surplus capital was related to the hyper-expansion of credit/debt—both with regard to the financial euphoria prior to the Great Depression and the speculative mania that preceded today’s Great Financial Crisis:

What could be done with the resulting surpluses piling up in corporate coffers? If you can increase labor productivity and industrial output without making net additions to the capital stock, what do you do with your rising profits? In other words, if you can’t invest those profits in goods production, where do you place them in the hope of a reasonable return?

The answer is simple—you place your growing surpluses in the most promising markets, in securities listed on the stock exchange, say, or in the Florida real estate boom, particularly in view of receding returns elsewhere. You also establish time deposits in commercial banks and start issuing paper in the call loan market that feeds speculative trading in securities.

At any rate that is what corporate CEOs outside the financial sector did between 1926 and 1929. They had no place else to put their increased profits—they could not, and they did not, invest these profits in expanded productive capacity, because merely maintaining and replacing the existing capital stock was enough to enlarge capacity, productivity, and output.

This is similar, Livingston tells us, to what is happening today: “So the current crisis does bear a strong resemblance to the Great Depression, if only because its ‘underlying cause’ is a recent redistribution of income toward profits, away from wages and consumption” and the resulting undermining of effective demand, generating stagnation tendencies and financial euphoria.

We could not agree more with this economic assessment (although we disagree with Livingston’s suggestion at one point that a regulated capitalism and government ownership of the commanding heights offer solutions to the problem of capitalist development). We recommend that MR readers examine Livingston’s piece on the Politics and Letters Web site. For a more systematic and direct account on how all of this relates to the present unfolding crisis see John Bellamy Foster and Fred Magdoff, The Great Financial Crisis (Monthly Review Press, January 2009). (To order The Great Financial Crisis call 800-670-9499 or go to

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