The Great Depression (1929-39)

Figure 1.--As in the case of War, it was the children during the Depression that were often the most affected. This family is headed west for California. Many fanilies did the same in their Model-Ts and other old jalopies. Will Rogers quipped, "America is the old country ever to go to the poor house in an automobile." Few found work once they got their. The California Highway Patrol even closed the border to those without jobs. Note the baby's bottle, made with a Coke battle. I'm not sure who the photographer was here, probably a WPA photograher. Source: Library of Congress.

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 earmings 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 emergy 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 solve economic and social problems besetting Americans. The people loved him, electing him to an unprecedented third and fourt 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 initaited 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 addressed to 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 totlalitarianism, militarism, and finally war.

Causes

Economists still debate what caused the Depression. Several factors cerinly playedcaole. The unequal distributions of wealth throughout the 1920s was a factor. The excessive stock market speculation and vulnerable financial system in the late 1920s was another factor. The persistent weakness of the farm sector also played a role. Perhaps what turned an economic down turn into the Great Depression was Government mismanagment of the crisis. President Hoover and Congress enacted the Smoot?? Harley tariff which imposed high protective tariffs. Foreign countries unable to sell to the United States enacted their own protective tariffs and international trade spiraled down, causing the economic down turn to entensify. The Federal Reserve was created to regulate the money supply. The Fed in response to the Stock Market Crash and economic decline severly cut the money supply by more than 25 pecent. One noted economnist believes that this was a very important factor not widely recognized at the time.

Uneven wealth distribution

The uneven distribution of wealth in the 1920s existed on many levels. Money was distributed unevenly among the the rich and poor, between industry and agriculture within the United States, and between the United States. and Europe. Labor Unions were week and were unable to demand fair salaries. Corporation and the wealthy were able to influence Goverment policies and decissions whch help to maintain the concentration of wealth in a few hands. A Brookings Institution study found that in 1929 the very wealthy (the top 0.1 percent of Americans) had a combined income equal to the bottom 42.0 percent. That same wealthy class in 1929 controlled 34 percent of all bank savings, while 80 percent of Americans had no savings at all, no cuchiom for emergencies. The uneven distributionof wealth also acted to reduce demand in the economy. inplybput, wokers that earned little, spent little.

A major reason for the large and growing gap between the rich and the working class in America was low wages. Here the ability of companies backed by Government to curtail the union movement was a major factor. Manufacturing output increased throughout the 1920s. From 1923-29 the average manufacturing output per worker in America increased 32 percent. At the same time average wages for workers, most without string unions, with manufacturing jobs increased only 8 percent. Thus, wages increased at a rate only as fourth as fast as productivity increased. Thus there were fewer consumers for the increasing supply of goods being produced. The benefits of the increasingly efficent production went into corporate profits. Stock ownership, however, was concentrated in the hands of the relatively small moneyed class. Corporate profits from 1923-29 rose 62 percent and dividends rose 65 percents.

The growing disparity of wealth between the wealthy and working class created instabilities in the economy. This made the economy function inefficently. For an economy to function smoothly, total demand must equal total supply. In an economy with such disparate incomes, demand usually does not equal supply. There was in the 1920s an increasing oversupply of goods. The surplus products of industrialized countries could not be purchased by poorly paid workers. The wealthy were satisfied by spending only a small portion of their income. The American economy came to rely on credit sales, luxury spending, and exports. Savings and investment were not being efficently used.
Credit: Buying on credit was a relatively new concept in post-World War I Amrica, but it proved immensly popular. Two of the most popular items in the 1920s were cars and radios. Henr Ford's mass production methods even before World war I had brought cars within the buying power of the average person. Commercial radio appeared in the 1920s. Early radiod were large pieces of furniture full of expensive tubes. They were expensive, but everyone wanted one. By the end of the 1920s, about 60 percent of cars and 80 percent of radios in America were purchased on installments credit. Between 1925 and 1929 the total amount of outstanding installment credit more than doubled from $1.4 billion to abpout $3 billion. Installment credit allowed one to get the item that he wanted right awau and "telescope" payments into the future. This device created "artificial" demand for products which people could not normally afford. There was a hidden time bomb in the installment system. Workers had in effect less disposable income from their weekly pay packets as substantial amounts went tompay the installment loans. In an expanding economy this can be handled. But the real income of workers in the 1920s was not expanding rapidly and farm income was actually falling.
Luxury spending: The U.S. economy in the 1920s was increasingly dependant on luxury spending and investment by the wealthy. Workers have to spend much of their income on the necesities of life. Luxury spending and investment is much more affected by economic trends. Such spending and investment is fueled by economic expansion and rising stock markets. When the wealty begin to lose confidence in the narket they cut back on both purchases of luxury goods and investment. The stock market crash in October 1929 thus caused a very significan reduction in luxury spending which had been a major support of the 1920s boom.

Vulnerable financial system

Amerivans bought company stock in increasing numbers in the 1920s. Many smaller investors who had never before purchased stocks entered the market. Many were unsophisticated investors who bought on rumors and tips and purchased on margin. Investors searched for ever greater returns and turned to speculative issues. Government agencies did nor carefully control the issuance of stocks. Nor did government agencies carefully regulate banks. Depositor accounts were not insured. In the stock market frenzy, investment capital was not in many cases being efficently used. When the stock market crash came in October 1929, many speculative investors were wiped out. Worse came when banks started closing and even conservative investors lost their life savings.

Money supply

The Federal Reserve was created to regulate the money supply. The Fed in response to the Stock Market Crash and economic decline severly cut the money supply by more than 25 pecent. One noted economnist believes that this turned what might have been a severe recession into the Great Depression. [Freeman] This was a factor that was not widely recognized at the time and for quite some time after the Depression.

International Trade

President Hoover and Congress enacted the Smoot?? Harley tariff which imposed high protective tariffs. Foreign countries unable to sell to the United States enacted their own protective tariffs and international trade spiraled down, causing the economic down turn to entensify.

Government policy

Stock Market Crash (October 1929)

The 1920s had experienced a gigantic bull market. The economic expansion was one of the greatest in American history (July 1921-August 1929). America experuenced low unemployment and significan increases in the Gross Domestic Product (GDP). Fortunes were made in the booming economy that followed World War I. There were new industries like radio and automobile manufacturing. Inexperienced investors with no knowledge of finance eventually began investing. The center of this activity was the New York Stock Market. Stocks were bid up to unrealistic price-earlings level. There was little government regulations of copanies and financial markets. Finally prices reached unsustaunable levels. The United States began to experience a minor ecinomic decline (August 1929). The New York Stock Market peaked and prices began to decline (September 1929). Then the crash came in October. As prices plummeted, investors began to panic. Investors began to see for what ever they could get to salvage something. And to make matters worse, many investors had bought on margin, essentially investing money they did nit have. Ptices fell precipitously. The worse day was October 24 known as Black Tuesday. It was the worse stock market crash in American history. Sone companies were not financially strong. But even major companies like Ford and General Motors also plummeted. The Crash was only the beginning of the decline, the Market continued to decline for 3 years, although at a less precipitous pace. The Dow Jones Industrials Average incredibly fell nearly 90 percent from a high of 381 to only 41. The stock Market Crash did not by itself cause the Depression. What it did was to turn a minor economic downturn into the Great Depression. The magnitude of the Crash and the publicity it received created uncertaihty in the minds of many Americans, not only investors but Americans far removed from Wall Street. [Galbraith, p.1] It shook the confidence of many in their econmonic future.

Impact on America

The greatest calamity to befall Americans in the 20th century was the Great Depression--a worse calamity than even two world wars. Of course the Depression was related in many ways to World War II. The Depression began with the Wall Street stock market crash in October 1929. The most immediate impact of the Stock Market Crash was on investors, especially those who had invested carelessly or on margin. The Crash soon, however, began affecting for larger numbers of Americans who had never invested in the stock market. In the difficult economic envirmoment, people began to economize and as sales declines, companies began cutting back and laying off workers. Miners were affected by declining demand for raw materials and were affected as well. Business began going under and Americans were losing their jobs. Economic production by 1932 had declined over 50 percent. Millions had lost their jobs. Unemployed workers had no money to spend. But even those still with jobs cutback. Some because wages declined. Others because of the uncertaintty. This created a self-perpetuating downward economic spiral. It was not only industrial America that was affected. Farmers had not experienced the great prosperity of the 1920s. And now with consumers stapped for cash, they had little to spend even for necesities. With people spending less on groceries and farm produce, farm prices also fell as well as farm land values. And if that wasn't serious enough , farmers in the Mid-West had to conront the Dust Bowl. America had experienced other economic down turns earlier. There were serious down turns in the 1830s and 1890s as well as smaller downturns, but note approached the magnitude of what came to be called the Great Depression. All Americans were affected. Eventually about one-third of all wage earners were unemployed and many who kept their jobs saw their earmings fall. As the economy continued to decline, banks which were weekly regulated began to fail. People began losing their life savings. By the time Franklin Roosevelt was inagurated large numbers of banks teertered on financial sovenvcy.

Initial Government Respose (1929-33)

People in 1929 before the New Deal had a very different attitude toward the role of Government. The Government was there to provide national defense and to maintain law and order as well to administer the legal system. The Progressive Era had introduced laws to provide governent regulation in economic areas such as labor laws to protect women abd children and food and drug legislation to protect the public. The Government was, however, not seen as responsivle for the economic well being of individuals. This was seen as a private responsivility. There was no unemployment insurance or old age retirement systems. Nor were there programs to assess the poor. Poverty and unemployment were seen as character flaws and not the result of ecomomic fluctustions beyound the capability of individuals to deal with. Some state Governments attempted to address the problem, but the crisis was beyound the abolity of state government to handele. Ironically President Hoover was noted for his humanitarian efforts in Europe during and After World war I. His ideological mindset, however, his ability to address the challenge of the Great Depression. Private charities struggled to provide food and other support. The demessions of what was nned went far beyond the capoibilities of chaity to address. Hoover's initial resomse was to cut Government spending and ballance the budget. Hoover announced that while he would keep the Federal budget balanced, he would cut taxes and expand public works spending. In would be wrong to suggest that Hoover was unfeeling or that he did nothing to address the Depression. Rpercussions from Europe by 1931 were deepening the crisis, even though the President presented to Congress a program asking for creation of the Reconstruction Finance Corporation to aid business, additional help for farmers facing mortgage foreclosures, banking reform, a loan to states for feeding the unemployed, expansion of public works, and drastic governmental economy. At the same time he reiterated his view that while people must not suffer from hunger and cold, caring for them must be primarily a local and voluntary responsibility.

John Maynard Keynes

A key economist in any assessment of understanding the Depression and efforts to end it is John Maynard Keynes. Once asked if there had ever previously been anything like the Great Depression. Keynes replied, "Yes. It was called the Dark Ages, and it lasted 400 years." Keynes is considered by many to be the the "Father of modern Economics". He was the first economist to develop useful insights into the causes and develop remedies for financial down turns, recessions and depressions. Keynes theorized that in anormal economy there is a circular low of money. In essence any individul's spending becomes part of another individuals your earnings. Thus income increases by some individuals can cause others to benefit, especially if those increases are widely shared. By the same token low income (such as blacks in the South until the Civil Rights movement can depress the economy of an entire region). For a variety of trasons, the normal circular flow of money can become distorted. People lose their jobs or start hoarding money rather than spending it when times become tough. Excessive concentration o0f wealth also has this effect by taking money out of the hands of people most likely to spend it. Thus ecomonic down turns feed on themselves. Tough times cause people to spend less thus throwing more people out of work and further depressing business investment. Thus modest economic downnturns can turn into recessions or in the case of the 1930s a massive workd-wide depression. Government actions of reducing spending and ballancing the budget just made matters worse according to Keynes. These actions restrictedcthe money supply and further restricted the money flow. Keynes sollution was for the givernmebnts to act to restablish the circular flow of money. Keynes suggested that the central banks, the Federal Reserve in the United States, should activeky expand the money supply. He felt that such action would put more money in people’s hands, inspire consumer confidence, and encourage them to resume spending once more. Keynes saw a depression, as a particularly severe recession in which people continue hoarding money no matter how much the central bank tries to expand the money supply. In such circumstances his remedy was for the government to do what the people were not doing, namely spend money and a lot of it. He called this "priming the pump" of the economy. Liberal New Deal officials took Keynes to heart and did just that. Conservatives were agast at the resulting defecits and expansion of the Federal Government. Most economists believe that only World War II (1939-45) finally got America out of the Depression, first orders from the Allies and then even larger U.S. defense spending tht finally ended the Depression.

President Hoover

President Hoover during the 1928 made a number of statements about prosperity that would come back to haunt him once the Depression began soon after he took office. 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

President Roosevelt was elected by a landslide in 1932. He brought emergy 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 solve economic and social problems besetting Americans. The people loved him, electing him to an unprecedented third and fourt term. The propertied class or "economic royalists" as he called them, hated him.

Leadership

Winston Churchill at the time still out of favor in Britain wrote of the new American president who took office in 1934, that Franklin Roosevelt had a "generous sumpathy" for those most serious affected by the Depression. More importantly, with capatalism verging on collapse, Roosevelt was a beacon and a beacon "which as it glows the brighter may well eclipse the lurid flames of German Nordic self-assertion and the baleful unnatural lights which are diffused from Soviet Russia". As the two men would go on to save Western Democracy in one of the great parterships in world history, this comment was profetic. There were in the 1930s different approaches to the Depression, including German NAZIism (Hitler), Italian Fascism (Mussolini), British Tory Socialism (Baldwin and Chamberlin), and the American New Deal (Roosevelt). As Soviet Communism shielded Russians from market forces, many at the time were convered to or flirted with Communism. Some have assumed that the history of these countries and the character of their people pre-ordained these varying national responses. In fact it was the leadership of these strong, capable men that created the destinctive national responses.

The New Deal (1933-39)

Franklin Roosevelt's program in America was called the New Deal and the many programs initaited 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 new president undertook immediate actions to initiate his New Deal. To halt depositor panics, he closed the banks temporarily. Then he worked with a special session of Congress during the first "100 days" to pass recovery legislation which set up alphabet agencies such as (Agricultural Adjustment Administration (AAA) to support farm prices and the (Civilian Conservation Corps (CCC) to employ young men. Other agencies assisted business and labor, insured bank deposits, regulated the stock market, subsidized home and farm mortgage payments, and aided the unemployed. These measures revived confidence in the economy. Banks reopened and direct relief saved millions from starvation. But the New Deal measures also involved government directly in areas of social and economic life as never before and resulted in greatly increased spending and unbalanced budgets which led to criticisms of Roosevelt's programs. However, the nation-at-large supported Roosevelt, electing additional Democrats to state legislatures and governorships in the mid-term elections. Another flurry of New Deal legislation followed in 1935 including the establishment of the Works Projects Administration (WPA) which provided jobs not only for laborers but also artists, writers, musicians, and authors, and the Social Security Act which provided unemployment compensation and a program of old-age and survivors' benefits. Roosevelt managed to achieve needed social legislation in a still very conservative country. His genius was in pursuing "nobel objectives within the tactics of the feasible". [Freidel]

Literature

The great novel to emerge from the Depression was John Steinbeck's The Grapes of Wrath which addressed to problems of rural Americans and the dust bowl.

Rural America

Urban America

Urban Americans of course also suffered.

Blacks

No group in America were more adversely affected by the Depression than Blacks. Few Blacks had any financial savings to coution them from the full affect of the Depression. Blacks who had difficulty getting jobs in prosperous times had ever more problems as competition for a dwindling number of jobs intensified. As a result, while the New Deal did not address lynching and other issues of great concern to Black-Americans, many Blacks bnefitted from the the overall New Deal relief programs. Mrs. Roosevelt in particular was concerned about the special difficulties encountered by racism. She worked to make sure that Black Americans were included in and bebefitted by New Deal programs. For the first time since Reconstruction, Black Americans began to feel they had friends in the White House. As a result, Blacks in the North began voting strongly Democratic for the first time. Blacks in the South were still largely prevented from voting by a variety of legal subterfuces (such as the "grandfather clause" and poll taxes) an extralegal terror.

Duration

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.

Alternative Approaches

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 totlalitarianism, militarism, and finally war. The American answer to the Depression was President Roosevelt's New Deal. This and his leaderhip before and during World War II have lead some historians to classify him as the most important statesman of the 20th century. He was widely popular in America as through his Fire Side Chates, many Americans felt as though they knew him personally. He was at the time, however, and continues to be highly controversial as does the New Deal. The New Deal was criticised from both left and right. Many Americans on the left saw Soviet Communism as a way of avoiding such severe econmoic swings and maintain a more socially just distribution of wealth. Many young people, especially college students joined the Communist Party or front organizations. There was also support among immigrant communities, especially Eastern European Jewish immigrants. There was also opposition from the right. Important politicans like former President Hoover formed the Liberty League which assussed the President of trying to establish a dictatorship. Some on the right looked emnviously at European Fascists because of their suppression of unions and other discedents. Some even saw the German NAZIs and Itlalian Fascists as progressive. Especially impressive at the time ws the fact that they seemed to be putting people to work.

Individual Experiences

Quite a number of personal accounts exist on the Depression. This includes accounts of individuals with children as well as adults looking back on their childhood. The accounts of course do not deal with the Depression in a macro sence of causes and punlic policy. They do graphically describe what the Depression meant in real terms to actual people and are very valuable social documents. We have just begun this section and would appreciate references to any of these books HBC readers have noted.

Student Project: Questionnaire

The Depression is a topic that manyof our student readers have asked about. One reader would like to collect information from individuals who lived through the Depression. He has prepared a questionnaire and would greatly appreciate any interested HBC readers filling it out. HBC will forward the results on to him as well as post them here in the Depression section.

Sources

Freeman, Milton.

Galbraith, John K. The Great Crash (Boston: Houghton Mifflin Company, 1979).

Fridel, Frank. Franklin D. Roosevelt: Launching the New Deal (Little Brown: Boston, 1973), 574p.

Hanby, Alonzo. For the Survival of Democracy.

Powell, Jim. FDR's Folly: How Franklin D. Roosevelt and the New Deal Prolonged the Great Depression. Powell's book is a popular summary of a number of economists who have challenged prevailing opinions on the New Deal.

Wells, H.G. The Outline of History: The Whole Story of Man (Double Day: New York, 1971), 1103p.

Created: January 3, 2003
Last updated: 7:32 AM 11/17/2006