Faith in the System - Getting In and Out of the Great Depression

During the Great Depression, the United States and its people suffered a significant economic downturn, struggled to recover, and finally emerged, leading up to the Second World War to become an economic industrial powerhouse and global superpower by its conclusion. Many underlying events contributed to both the decline and the rise. However, I would argue that an underlying system is sometimes overlooked when we pin the blame on the Great Depression on one or more particulars. We fail to “see the forest for the trees” as we look to overproduction, the Dust Bowl, and the stock market for the downfall; or the increased employment, global demand for American material, and arms production for the rise. These are simply parts of the bigger picture, the bigger picture being the exchange of value (time, labor, material), to which events create the conditions for its stagnation or decline.

Michael A. Bernstein’s article, “The Great Depression as Historical Problem,” goes to great lengths to argue various perspectives by noting that “no general agreement about its causes, although there tends to be some consensus regarding its consequences (Bernstein 2001, 3). Instead, there are different schools of thought related to the causes of economic depression - four are put forth by the author.

• First, the stock market crash of 1929 created uncertainty in the market, which, in turn, created a “short-run” fiscally chaotic environment in which people could not trust the systems of credit and banking on which they previously relied. The author discusses “a dangerous circle of obligations and risks” regarding credit, coupled with the influx of gold into the United States that exacerbated it (Bernstein 2001, 4).

• Second, economic policy set the conditions for the financial system's failure to recover from the initial crash. Policies came from government and private sector decision-making, negatively impacting recovery. Government regulation inadvertently raised labor costs, and private businesses raised prices to counter their debt (Bernstein 2001, 5).

• Third, a “long-run” perspective asserts that the conditions for the eventual collapse of our system were set in motion before the 1929 crash; indeed, the crash may have been exacerbated by those initial conditions. The causes of these conditions originate from the uneven distribution of wealth and purchasing power throughout the United States during the 1920s. This meant that economic exchange was hindered beforehand, and after the crash, price increases further limited consumer engagement (Bernstein 2001, 5).

• Fourth, stagnation as a socioeconomic phenomenon. The author discusses the positions of other theorists who postulated that waves or cycles of activity within the United States culminated in the Great Depression. One was related to the appearance of major inventions, demographic shifts and dispersion, and the life cycle of inventory, as the setting for initial conditions. Another saw upwards and downward trends that naturally occurred in spans of “fifteen to twenty years in length” regardless of societal efforts (Bernstein 2001, 6-7).

While the causes of the Great Depression were debated, the relief from economic depression has been more readily identified. Generally speaking, America’s approach and entrance into the Second World War rallied people behind a common cause against an imminent threat. Both the Author and the Library of Congress acknowledged this perspective.

“World War II achieved in the United States, of course, what the New Deal could not - economic recovery.  With the start of war in Europe, the unemployment rate began to fall so that by the time of the Japanese naval offensive at Pearl Harbor, only 7 percent of the labor force remained idle. American entry into the war brought almost instantaneous resolution of the persistent economic difficulties of the interwar years. (Bernstein 2001, 8-9).”

“Mobilizing the economy for world war finally cured the depression. Millions of men and women joined the armed forces, and even larger numbers went to work in well-paying defense jobs. World War Two affected the world and the United States profoundly; it continues to influence us even today (Library of Congress 2022).”

In any case, these perspectives create a marketplace where value exchange is hindered by uncertainty only to be be later countered by a common cause. In every theory, people are concerned about the value of their limited resources (time, labor, material), and this causes them to be cautious and recoil from exchange, uncertain about the actual value of things. When prices fluctuated wildly, this shook confidence. This is because, as Thomas Sowell would state, prices are a signal of value and through this signal, economic exchange can occur to determine where best to distribute “scarce resources that have alternative uses.”

"Price-coordinated markets enable people to signal to other people how much they want and how much they are willing to offer for it, while other people signal what they are willing to supply in exchange for what compensation. Prices responding to supply and demand cause natural resources to move from places where they are abundant, like Australia, to places where they are almost non-existent, like Japan (Sowell 2015, Chapter 2)."

If uncertainty is created, exchange is less likely to occur, creating stagnation and eventual decline. As much of our credit system relies on continuous growth, any impact on faith in the system will prevent participation. 

“Business transactions among strangers are an essential part of a successful modern mass economy... Where neither the honesty of the general population nor the integrity of the legal system can be relied upon, economic activities are inhibited, if not stifled (Sowell 2015, Chapter 18).”

With the threat of totalitarian and militaristic regimes threatening our way of life, uncertainty in the system became replaced with a mass mobilization to safeguard our nation, and then rallied in righteous vengeance. Practically everyone became involved in the exchange of value: they gave their time, labor, and material, with a lesser concern for the inherent value of things, believing in the long-term success of the nation. In the face of losing one's life, or the lives of their loved ones, time, labor, and material are of lesser value and more easily exchanged or sacrificed for the common cause. Unified in their effort, the system rebounded and flourished.

As men entered into military service, women stepped up to replace many of them. People worked, industries boomed, and the exchange of value in various forms facilitated the recovery of the economy.

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References:

Bernstein, Michael A. “The Great Depression as Historical Problem.” OAH Magazine of History, vol. 16, no. 1, 2001, pp. 3–10. JSTOR, http://www.jstor.org/stable/25163480. Accessed 16 Apr. 2025.

Library of Congress.“Overview | Great Depression and World War II, 1929-1945 | U.S. History Primary Source Timeline | Classroom Materials at the Library of Congress | Library of Congress.” Library of Congress. 2022. https://www.loc.gov/classroom-materials/united-states-history-primary-source-timeline/great-depression-and-world-war-ii-1929-1945/overview/. 

Sowell, Thomas. Basic Economics: A Common Sense Guide to the Economy. 5th ed. New York: Basic Books, 2015.