United States Economic History: 20th Century

Great Depression children
Figure 1.--The early color photograph was taken in 1940 near Johnstown a coal mining town in western Pennsylvania. The children's father is a coal miner. The children are probably living in company housing. America at the time was finally recovering from the Great Depression and jobs were now available. There is widely misunderstood myth, that the program of economic intervention known as the New Deal ended the Great Depression in America. It did not. It prevented the Depression from getting worse, primarily by the actions President Roosevelt took at the onset of his administration. The relief efforts assisted many desperate people. The Depression itself, however, persisted longer in America than most other countries. The Great Depression was finally ended by the War orders coming in from Europe and the beginning of American rearmament. The New Deal certainly had some accomplishments, but many economists now believe that the New Deal may have actually prolonged the Depression. Unfortunately the popular and public discourse on the Great Depression and more recent economic contractions are too often colored by ideological beliefs than economic fact. Photographer: Charles W. Cushman. Indiana University Collection.

American recessions during the 19th century were primarily local matters of national interest. There were numerous recessions and depressions in the 19th century, but the financial fluctuations of the 20th century had much greater impact on the population because it was much more urban and industrialized. With the growth of the American economy during the 19th century, American had become a world economic giant. Thus American economic fluctuations not only had more impact on the American people, but people in trading partners as well. The early-20th century continued to be an era of tremendous economic growth. A serious contraction followed World War I, but except in rural areas was of short duration. The Wall Street Crash of 1929 not only led to the Great Depression--a world-wide depression and the greatest economic crisis in history. The Depression lasted 10 years in America. President Roosevelt's New Deal attempted Keynesian stimulus to no avail. President Roosevelt's actions to save the banks and take the United States off the gold standard prevented any further economic decline. Economic recovery, however, proved elusive. Economists debate whether the New Deal helped end or prolonged the Depression. Some economists believe that stimulus was ended too soon even though it had been 5 years (1937). Other economists maintain that the Government spending and tax increased prolonged the Depression. Finally war orders from Europe helped end the Depression (1939-40). A series of recessions occurred after World War II of varying intensity, most relatively short lasting.

Panic (1907)

The financial panic of 1907 affected the American economy for a year (May 1907-June 1908). It was set off by a run on Knickerbocker Trust Company deposits (October 22, 1907). It would lead to a severe monetary contraction. The events beginning with the Panic would eventually lead to to Congress establishing the Federal Reserve System.

Recession and Global Financial Panic (1913–14)

The Recession occurred just before World War I in Europe. It lasted (January 1913 – December 1914). American economic productions and real income declined substantially. World War I broke out in Europe (August 1914). The United States, however, remained neutral until 1917. Financial dislocations began even before the fighting between the major powers began. Austria issued an ultimatum to Serbia. As Germany and Russia were drawn into the vortex, fear in global markets set off a massive financial panic as diplomats struggled to manage the crisis. Investors, fearing unpaid debts by warring nations, sold holdings of stocks and bonds in an effort to obtain cash and but gold. The London Stock Exchange, the center of global finance, eventually closed just before the Germans launched the War (July 31). The London market would remain closed for 5 straight months. Although America did not have alliances with the European states preparing for war, the New York stock exchange also experienced a mass dumping of securities by European investors desiring to obtain cash and gold. Governments also wanted cash and gold to finance their war effort. The New York stock exchange as a result closed on the same day as the London exchange. The New York exchange would remain closed for nearly 4 months. German troops entered Belgium and Britain declared war while on a bank holiday (August 4). More than 50 countries experienced some form of financial panic, including asset depletion or bank runs. As the War began (August and early September) every stock exchange in the world closed, with the exception of New Zealand, Tokyo, and the Denver Colorado Mining Exchange. These financial panics are not often mentioned in popular histories. The Federal Reserve Act was signed and went into force during this recession, thus creating the Federal Reserve System. The newly created Federal Reserve acted to manage the disruptions with very little oversight. There were further economic disruptions resulting from the the War as the Allied naval blockade cut off trade with Germany and the other central powers. The American economy recovered rapidly, however, after the trade disruptions were offset as war orders began to poor in from the Allies. Both American industry and agriculture benefited from the War orders.

Post-World War I Recession (1918-19)

A serious contraction followed World War I, but except in rural areas was of short duration. The contraction lasted ( August 1918-March 1919). World War I ended with the Armistice (November 1919). The American economy began to turn down before the actual end of the War. We are not sure just why, but Allied Governments seeing the end of the War finally in site may have begun cancelling War orders. Severe hyper-inflation in Europe as a result of the War was destabilizing European markets still left from the World War disaster. American industrialists were just gearing up for a long war and thus over-production occurred when the War ended and the Allies cancelled war orders. The recession was brief, but very sharp. Another problem was the returning American Expeditionary Force, large numbers of troops returning home and demobilizing. Such a large number of men seeking jobs at the same time resulted in a sharp spike in unemployment.

Depression (1920–21)

The Depression followed on the heels of the Recession at the end of World War I, only 10 months later. One economist calls it the 'Forgotten Depression'. It proved to be was a short depression (January 1920 - July 1921). While short it was an extremely sharp economic contraction. The American economy was still adjusting to the end of the War and loss of Government contracts as it adjusted to a more normal peacetime economy. Economists report that 1920 was the single most deflationary year in American financial history. Actual production did not decline as much as might be expected from the severe deflation. This is probably a reflection of the brevity of the contraction. The GNP decline is not precisely known. Economists estimate that it was 3-7 percent contraction. Wholesale prices. however, declined by nearly 40 percent. The brief Depression was followed by very strong recession. Modern economists do not like to discuss this depression because most like Federal Reserve Chairman Ben Bernanke and Janet Yellen believe that loosening monetary policy is the solution to an economic correction. Thus the Depression of 1920-21 is commonly dismissed as a minor, unimportant blip. Now while the debate over monetary policy is an important, unresolved one, it is not accurate to describe the 1920-21 as a minor event. Unemployment reached 12 percent. The Dow Jones Industrial average plummeted by nearly 50 percent. It was a dramatic contraction by any measure. Novelist F. Scott Fitzgerald depicted the event as a failure of capitalism, a theme that would be heard again during the Great Depression. Policy makers at the time concerned about rising inflation created the contraction. The new Federal Reserve doubled interest rates to 7 percent. Other Administration officials encouraged companies to either lower wages or at least resist increases. Agencies were ordered to cut spending. [Grant] That may sound like economic heresy today, but the approached worked. Within a mere 2 years the economy was booming again. This is why many economists like to downplay the severity of the 1920-21 Depression. But there is no doubt economists and the public at he time saw it as a severe Depression. And the reason it did not intensify may be the result of the policy prescriptions taken. The monetarists will disagree, but some economists will argue that the Depression of 1920-21 show the utility of a range of now unpopular;ar policy guidelines. First is the importance of confidence both producer and consumer. Second, allowing prices to naturally 'find their bottoms' 9known as price discovery) is important and may promote market stability in the long run, This also rings true fir for wage policy/. Third, a French economist notes that when wages are allowed to rise relative to prices , unemployment increases. Presumably employers begin cutting back on jobs. [Rueff]

The Great Depression (1929-39)

The Great Depression of the 1930s was the worst economic slump ever to affect the United States. It was not just a national economic crisis, but one which spread to virtually every country. The greatest calamity to befall Americans in the 20th century was the Great Depression--a worse calamity than even two world wars. The Depression began with the Wall Street stock market crash in October 1929. Soon business were going under and Americans were losing their jobs. All Americans were affected. Eventually about one-third of all wage earners were unemployed and many who kept their jobs saw their earnings fall. President Hoover who had engineered a humanitarian miracle in Europe during World War was unable to break away from the mindset that the Government should not intervene in the economy. President Roosevelt was elected by a landslide in 1932. He brought energy and new ideas to Washington and the Federal Government initiated programs that would have been rejected out of hand only a few years ago. Roosevelt was willing to use the Government to address economic and social problems besetting Americans. The people loved him, electing him to an unprecedented third and fourth term. The propertied class or "economic royalists" as he called them, hated him. Roosevelt's program was called the New Deal and the many programs initiated help change the face of the United States: Social Security, the Tennessee Valley Authority, Rural Electrification, the Works Progress Administration (WPA), protection for union organizers, and many others. The conservative-dominated Federal Courts struck down WPA, but many New Deal programs endure to this day. The great novel to emerge from the Depression was John Steinbeck's The Grapes of Wrath which described the problems of rural Americans and the dust bowl. Urban Americans of course also suffered. While the New Deal brought relief to many desperate Americans, the Depression lingered until orders for war material from Europe began to flood into America in the late 1930s. The rest of the world was also affected by the Depression. Britain and France also struggled with the economic down turn. The response in Germany and Japan was totalitarianism, militarism, and finally war.

Recession (1973-75)

The Recession of 1973-75 was one of the two most serious post World war II recessions. The recession lasted 16 months. The recession occurred after the Nixon resignation during the Ford presidency.

Recession (1981-82)

The Recession of 1981-82 was another serious post-World War II recession. The down turn lasted 16 months from July 1981 through November 1982. The recession followed the Carter presidency and occurred at the onset of the Reagan presidency. The contraction was severe with a loss of about 3 percent in the GDP. It was also notable for the speed and strength of the recovery. Growth reached 4.5 percent (1983), 7.2 percent (1984), and 4.1 percent (1985) and further increased were reported throughout the rest of the decade. This was the typical pattern for recessions during the 20th century, the deeper the decline, the steeper the recovery. Here the Reagan policies of lowering marginal tax rates and reducing the regulatory burden as well as Federal Reserve rate cuts helped to promote the recovery.

Sources

Grant, James. The Forgotten Depression1921: The Crash That Cured Itself (Simon & Schuster, 2014).

Rueff, Jacques.









CIH






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Created: 1:57 PM 4/2/2011
Spell checked: 7:50 PM 1/24/2015
Last updated: 7:50 PM 1/24/2015