False Lessons from the Great Depression

Recently I read Peter Temin’s book, Lessons from the Great Depression, (MIT Press, 1989). It was interesting, had some useful statistics, and so forth, but—as an attempted bourgeois explanation of the Great Depression of the 1930s—it was basically bullshit. I won’t bother with a full review or critique of the book here, but there are two central points I do wish to discuss: First, Temin’s explanation of the cause of the Depression, and second, his contention that the means that was successfully used by the leading capitalist countries to get out of the Depression was their adoption of "socialism"! For us Marxists that second claim sounds so ridiculous that we can’t take it at all seriously, but I want to look into Temin’s view here anyway to see if there is even a grain of truth in it.

Temin’s Theory of the Cause of the Depression

Like almost all bourgeois economists, Temin cannot in any way accept that there is anything inherent in capitalism that leads to economic crises. And in particular he cannot possibly accede to the Marxist theory that the exploitation of the working class, i.e., the extraction of surplus value from their labor, must inevitably lead to economic crises. On the contrary, for him—and for most others indoctrinated with bourgeois economics—capitalism can only develop crises due to serious external (or "exogenous") shocks.

With regard to the Great Depression, the major, causative external shock that Temin identifies is World War I. But this leads to an immediate difficulty: How is it that this shock that happened in 1914-18 didn’t lead to the start of the Depression until more than a decade after the end of the war?!

Temin’s answer to this initial difficulty with his theory is that there was an intervening mechanism, namely the inappropriate adherence of the major capitalist countries to the gold standard (which he says was made obsolete by the First World War) that led to this long delay. The reason that continued adherence to the gold standard eventually led to the Depression, according to Temin, is just that it led to serious deflation.

So, in a nutshell, Temin’s theory is that the cause of the Great Depression was World War I—no, it was caused by inappropriate adherence to the gold standard (which was made obsolete by World War I)—no again, the Depression was caused by the serious deflation that was the result of the continued adherence to the gold standard (which was made obsolete by World War I). And, no—one final time—it was not that deflation either, that caused the Depression, but rather the results of that deflation, a fall in investment, in consumer demand, and so forth.

There are many, many holes in this theory. First of all, why did World War I make the gold standard obsolete? Temin never gives a good answer to that. It is true that the combatant countries suspended international gold transfers during the war (and thus suspended the gold standard for the duration), but there is no obvious reason why they should not have been able to successfully resume that standard after the War. And in fact, they did successfully readopt the gold standard for a number of years.

Second, it is far from clear that the Gold standard must inevitably lead to deflation. And even if it does, it is far from clear that this deflation is necessarily a bad thing that is going to lead to a Depression. After all, there was worldwide deflation throughout a large part of the 19th century, during not only the recessions, but also during the boom periods.

And if adherence to the gold standard after World War I did cause deflation, it still didn’t immediately lead to the Depression. They didn’t call them the Roaring Twenties for nothing. So Temin’s supposed intermediary to explain the long delay in the onset of the Great Depression after World War I really explains nothing at all. The intermediary suffers from the same unexplained delay in causation itself!

Temin’s whole causal chain looks very shaky and extremely dubious—even if someone does not have a more convincing explanation of the Depression at hand (as we Marxists do). If it all eventually comes down to consumers not buying enough, and businesses not investing enough, why not look directly at those facts and use a bit of common sense in figuring out why those facts obtained? Why construct this rickety causal sequence that traces things back to World War I—especially when we know that wars do not normally lead to Depressions?

The answer is that, for bourgeois economics, there is no alternative but to construct one or another such rickety chain of supposed causes for the Depression (or any other economic crisis). If you insist from the get-go that the workings of capitalism itself cannot lead to such crises, then you have no alternative but to construct rickety fantasies of complex external causes.

Germany’s Recovery is Inexplicable on Temin’s Theory

Temin claims that the Depression was caused by chronic deflation, and therefore one could reasonably expect that those countries which were most successful in reversing this deflation, or in economic lingo, in "reflating", would be the most successful in putting an end to the Depression. Temin’s own charts and figures show that this is not the case, however.

Temin’s Figure 1.2 (on p. 4) shows the trend of wholesale prices for four major capitalist countries (the U.S., Germany, Britain and France) from 1925 through 1938. Of the four, Germany’s wholesale prices remained very low throughout the 1930s, and after 1937 were the lowest of any country relative to their 1929 level. (In 1938 they were still well under 80% of their 1929 level.) And yet Germany’s recovery from the Depression was by far the most rapid and successful of any of the four countries!

And France, which alone among the four nations had a complete recovery in wholesale prices by 1938, had virtual no recovery in industrial production during that period. Pinpointing "deflation" as the culprit in the Depression really does seem a rather untenable proposition!

Besides blaming "deflation", Temin also wants to blame the adherence to the outmoded gold standard for the Depression. But once again, Temin’s own words show how erroneous such a theory is. If adherence to the gold standard was the problem, then the countries that abandoned the gold standard first should have recovered from the Depression first, and most impressively. But while Britain abandoned the gold standard in 1931, the U.S. in 1933, and France in 1936, Germany remained on the gold standard throughout the entire 1930s (Temin, p. 32). And yet Germany had by far the most impressive recovery from the Depression by the late 1930s!

Temin’s Claim that "Keynesianism" Was Not Applied in the Depression

Temin, however, does not attribute the end of the Great Depression to reflation. More surprisingly, though, he also rejects the common view that Keynesian fiscal deficits ended the Depression (at least once the massive fiscal deficits of World War II came along). Instead, he says, the thing that did the trick was the adoption of "socialism" (or "socialist measures") by the major capitalist countries. I’ll get to that claim below. For now, let’s look into his denial that Keynesianism had any success, and his further claim that Keynesianism was not really even attempted during the Great Depression.

First of all, of course, it depends on what is meant by "Keynesianism"! Temin makes a big point out of the fact that "Although many elements of what we now call Keynesian analysis were under discussion in the early 1930s, the model was only formulated by Keynes as a result of the Depression" (p. 86). But what is at issue is not Keynes’ full-blown theory and analytical apparatus, but just the very simple idea that recessions and depressions can be combated via fiscal deficits, and more specifically the view that if aggregate demand is inadequate, some means must be found to get money into the hands of those who will actually spend it. That Keynes only published his magnum opus, The General Theory of Employment, Interest and Money, in 1936 is really quite irrelevant.

And, moreover, Keynes himself did not invent this basic notion about using fiscal deficits and public works programs, which is now popularly called "Keynesianism". The idea was widespread in Europe in the early 1930s and was actually being both promoted and implemented in Sweden and Germany before Keynes ever wrote a word about it. In Sweden these "Keynesian" policies were being implemented under the economic leadership of Gunnar Myrdal, who became the leading architect of the Swedish welfare state. He convinced Ernst Wigters, the Finance Minister in the Social Democratic government, to spend money on public works and to run budget deficits to reduce unemployment. In Germany, Hjalmar Schacht became head of the Reichsbank in March 1933. Schacht had the reputation of being a financial genius, and was an intimate of the leading German industrialists and bankers. He was also a confidant and supporter of Adolf Hitler, and proceeded to support massive public works programs with fiscal deficits as Hitler desired. As the Keynesian economist Joan Robinson once admitted, "Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred."[1]

So while Temin is correct in his claim that "it violates history to assume that people in the early 1930s were what we now call Keynesians" (p. 86) provided that "Keynesian" is taken to mean someone who agrees with Keynes’ full theoretical apparatus, the claim is completely false if we are talking about Keynesianism in the everyday, popular sense of promoting public works programs and advocating fiscal deficits to fight unemployment.

Temin, citing Carey Brown (from 1956), points out that "the full-employment budget of the United States was not increased over its 1929 level in the following decade" (pp. 107-8). But instead of concluding, as Temin does, that this means that "Keynesian policies where not used" in the Great Depression, I conclude that what is now commonly called Keynesian policies were used, but too half-heartedly to pull the U.S. out of it until the massive spending of World War II began.

Temin similarly denies that Keynesianism was used in Germany, but gives no statistics to back up the claim. In the popular sense of the term, Keynesianism was definitely used in Germany and very determinedly, at that. After massive public works programs and fiscal deficits were put in place, German unemployment—which had exceeded 30% in 1932—dropped to 12% by 1935 (Temin, p. 106). Werner Abelshauser writes that from 1933 to 1937 "6 million unemployed had been reintegrated into the production process. Indeed, a worrying labour shortage was evident."[2]

One indication of how much more serious Germany was than the U.S. in implementing such Keynesian policies is the percentage of government expenditure in the national income in each country. In 1938 this was still only 10.7% in the U.S., but 35.0% in Germany.[3] No wonder that industrial production was zooming in Germany while a renewed decline had developed in America.

The Limits of Keynesianism

Sometimes it is said that it was not Keynesianism that got the major capitalist countries out of the Great Depression, but rather World War II. And in the deepest sense this is indeed correct. But the story is a bit more complicated than just saying that. And here it depends not only on what you count as "Keynesianism", but more importantly what you count as really "getting out of the Depression". Moreover, to some degree the story also varies slightly from country to country.

If all that is being claimed here is that it was war spending that got most of the capitalist countries "out of the Depression" rather than public works or other domestic spending, then this is not so much a denial of Keynesianism as it is a description of the sort of Keynesian fiscal deficits that were primarily used. Keynesian deficits caused by massive military spending are given the name "military Keynesianism".

During the decade of the 1930s Germany and Britain managed to rebuild industrial production to levels exceeding those of 1929, but the U.S. and France did not. (The U.S. matched its 1929 level in 1937, but then slipped back again.) But of the major capitalist countries only Germany showed any economic vibrancy during the second half of the 1930s. And while the initial German recovery in 1933-34 was due to domestic spending (public works, etc.), from 1935 on it was more and more due to war preparations.

U.S. military spending in 1938 was only $1 billion. In 1940 it was more than double that, $2.2 billion, and then zoomed up to $13.8 billion in 1941 (even though the U.S. only got into the war at the very end of the year).[4] So although Germany got a head start in the military Keynesian stage of its recovery, it was even more clearly the decisive factor for the U.S. recovery.

But the real issue is whether even this rampant military Keynesianism in the capitalist world could have kept things going without the subsequent unprecedented destruction of capital caused by the actual warfare that ensued. In reality it could not have.

Keynesianism can only work for a relatively short period. Fiscal deficits can be created either by having the government borrow huge sums of money from the wealthy, or else by simply printing up the money that the government will spend (beyond the tax money it collects). But the wealthy will stop lending to any government that begins to look like it is never going to repay its debts. And simply printing up greater and greater amounts of money leads to uncontrollable inflation and the eventual collapse of the currency altogether.

In the 1930s/40s none of the major capitalist countries pushed their Keynesian policies to either of these extremes. The reason they didn’t have to is that World War II came along, resulted in enormous destruction of the productive forces through Europe and Asia, and thus cleared the ground for a renewed expansion after the war was over. Even the U.S., which did not suffer any significant destruction of capital within its own borders, benefited enormously from the destruction of capital elsewhere.

In light of this, we can describe how the capitalist countries of the world came out of the Great Depression in either of two ways:

  1. Keynesian policies did the trick. At first it was mostly domestic spending, which was quite successful in Germany, but only partially successful elsewhere (because it was applied half-heartedly). Then, leading into World War II, and especially during the War itself, the huge deficits were overwhelmingly caused by military spending. This is what pulled the other countries out of the Depression, and kept all of them (including Germany) from relapsing back into stagnation or depression as long as the War continued. However, the thing that kept the capitalist world from relapsing back into a new depression after the War was the enormous destruction of capital during the War, which cleared the ground for a major new expansion that lasted for a quarter of a century.
  2. The Great Depression was the crisis phase of the world capitalist economic cycle. As such, Keynesian policies—even if applied intensely and over several years—could not possibly "end" the economic crisis. At most they could only suspend it for a while. When a country cut back—even for a brief period—in the massive deficit spending, it immediately began to sink back into the Depression. This was evident in the U.S., Britain and France in 1938, and there was even a hint of such a faltering in Germany in 1940 when industrial employment slipped 10% from that of 1939.[5] The Great Depression was only truly ended by the destruction of capital which occurred on such a massive scale in World War II. This is why the Depression did not resume after the War was over.

It is the second of these two descriptions which is the more scientifically accurate. While many still want to believe that Keynesian policies can resolve economic crises, in reality they cannot. Not really, and certainly not permanently.

Temin’s Claim that "Socialism" Ended the Great Depression

We come at last to Temin’s claim that it was "socialism" that pulled the capitalist countries out of the Depression. For Temin (and some other bourgeois thinkers) there is no contradiction is claiming that a country can be both capitalist and socialist at the same time! Thus Temin is not saying that socialism replaced capitalism in the U.S. and the western European countries, but merely that "socialist policies" were adopted by these capitalist countries, and that is what got them out of the Depression.

Before critiquing this claim, I should mention that the one genuine socialist country in the world during the 1930s—namely, the Soviet Union—did not itself undergo any sort of depression, recession, nor even the slightest economic slowdown. On the contrary, economic growth and development zoomed ahead in the USSR during this entire period. While the major capitalist countries were sinking into the depths of the Depression, gross industrial production in the USSR during the First Five Year Plan increased from 18.3 billion rubles in 1927-8 to 43.3 billion in 1932 (an increase of 136%).[6] During the Second Five Year Plan, from 1932 to 1937, gross industrial production jumped from 43.3 billion rubles to 95.5 billion (another increase of 120%).[7] From 1928 to 1940, during a decade in which the capitalist world stagnated overall, steel production in the USSR rose from 3.3 million tons to 14.9 million, coal from 35.5 million tons to 165.9 million, electricity from 5.0 billion KWH to 48.3 billion, and so forth.[8]

So it definitely is true that genuine socialism precludes any cyclic crises of the sort capitalism is subject to. And ifif!—the capitalist countries had switched over to socialism during the 1930s they could have very quickly brought the Depression to an end. But this is not at all what happened, of course. Capitalism was not by any stretch of the imagination overthrown during the 1930s.

What does Temin mean by "socialism" anyway? Basically, for him, "socialism" is a matter of more government intervention and control of the capitalist economy. More explicitly, Temin says:

It is not possible to define socialism as clearly as the gold standard. I offer a definition here to distinguish socialism from other kinds of government intervention in the economy. A socialist economy has the following properties: (1) public ownership or regulation of "the commanding heights" of the economy, particularly of utilities and banking; (2) heavy government involvement in wage determination; and (3) a welfare state providing everyone with, in Oscar Lange’s words, "a social dividend constituting the individual’s share in the income derived from the capital and the natural resources owned by society". (p. 111; emphasis in original.)

So! If the government sets up a few feeble regulatory commissions, like the FCC, FDA, and so forth, and if it sets up some weak Labor Relations Board to control labor strife (in the interests of the capitalists!), and if it establishes some totally inadequate social programs (such as Social Security and short-term unemployment insurance), then it is "socialist"—even if nothing essential about the capitalist economy and the capitalist exploitation of the working class changes one iota!

I especially admire Temin’s watering down of the usual social-democratic claim that nationalizing industry is "socialism". For us Marxists, nationalized industries such as the Post Office, are no more "socialist" than General Motors is. All that they amount to is the capitalist class as a whole collectively owning them and running them in their own class interests. But Temin takes this sort of fraud one step further; for him socialism doesn’t even require so-called "public ownership"—mere "government regulation" of industry is sufficient!

Well, I won’t dwell on all this foolishness. I’ll just point out that the first essential characteristic of real socialism is neither the nationalization nor "regulation" of industry by the government, but rather the genuine control of the government and society by the working class! And this is completely impossible under capitalism, no matter how nominally "democratic" the regime claims to be.

But suppose we ignore Temin’s absurd claim that those policies he identifies are "socialism", and simply ask if those policies—whatever we call them—might have been somewhat helpful in mitigating or even "ending" (i.e., suspending) the Great Depression. And the answer is, yes, they were helpful insofar as they amounted to an expression of Keynesianism! To the extent that these so-called "socialist" policies put the unemployed to work (via WPA programs, etc.), or put money into the hands of the unemployed, disabled, and retired, then, certainly they mitigated the Depression. And when all these capitalist countries prepared for and went to war against each other, and thus when these governments organized the construction of factories to make weapons and other war materiel and put everybody back to work, then, yes, they did manage to finally suspend the Depression everywhere.

What it all comes down to is just this: Temin’s "socialism" is what ordinary people call liberalism and war, and the economic effects of these liberal and war policies was what is now ordinarily called Keynesianism. Far from showing that it was "socialism" that ended the Depression rather than Keynesianism, all Temin has done is to rename Keynesianism as "socialism". Though, once again, these Keynesian policies didn’t really end the Depression, but merely interrupted it until the massive destruction of the war could put a genuine end to it.

—Scott H. (7/14/03)


[1] Joan Robinson, "The second crisis of economic theory", American Economic Review: Papers and Proceedings, vol. 62, 1972, p. 8. Of course, Hitler did not permanently "cure" unemployment! As I proceed to argue in the text, he merely used Keynesian measures to temporarily interrupt the Depression, and the unemployment and stagnation that were inherent parts of it. The Depression would have returned after all the Keynesian measures were used to their maximum possible extent. But before that time arrived, World War II broke out and led to massive destruction of capital. This cleared the ground for a renewed quarter-century capitalist boom after the war. But since the early 1970s the world economy has qualitatively slowed down, and is now edging ever closer to a new depression. Europe already has had a decade or more of unemployment at levels unseen since the 1930s. And unemployment is growing and becoming more persistant in Japan and the U.S. as well (despite statistical tricks to try to hide those facts). There is no permanent cure for unemployment under capitalism.

[2] Werner Abelshauser, "Germany: guns, butter, and economic miracles", in Mark Harrison, ed., The Economics of World War II: Six great powers in international comparison, (Cambridge University Press, 2000 (1998)), p. 124.

[3] Werner Abelshauser, ibid., p. 139.

[4] U.S. war statistics taken from Hugh Rockoff, "The United States: from ploughshares to swords", in Mark Harrison, op. cit., p. 83.

[5] See: Abelshauser, op. cit., p. 151.

[6] Alec Nove, An Economic History of the U.S.S.R., (NY: Penguin, 1975 (1969)), p. 191. Both figures are expressed in terms of the value of the ruble in 1926-7.

[7] Ibid., p. 225.

[8] Maurice Dobb, Soviet Economic Development Since 1917,(NY: International, 1966), p. 326. The statistics in light industry were also impressive, though agriculture, and grain production specifically, only increased modestly.

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