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The Great Depression was a massive economic decline that started in 1929 and ended in the late 1930s. All countries were affected; worst hit were the most industrialized, including the Europe, United States, and Japan. Cities around the world were hit hard, especially those based on heavy industry. Rural areas likewise were hurt as prices for crops plunged. Mining and lumbering areas were perhaps the hardest hit because there was little alternative economic activity.
Causes of the Great Depression
See Causes of the Great Depression
Depression Statistics
U.S. economic statistics during the course of the Great Depression form a basis for an understanding of the actions and debate that surround this period of economic turmoil. In the U.S., says Broadus Mitchell, "Most indexes worsened until the summer of 1932, which may be called the low point of the depression economically and psychologically." (Mitchell p 404) Economic indicators show the American economy reached nadir in summer 1932 to February 1933, then recovered until the "Roosevelt Recession" of 1938-1939. Thus the Federal Reserve Index of Industrial Production hit its low of 52.8 on July 1, 1932 and was practically unchanged at 54.3 on March 1, 1933; however by July 1, 1933, it reached 85.5 (with 1935-39 = 100, and for comparison 2005 = 1,342).[1]
| Statistic |
1929 |
1931 |
1933 |
1937 |
1938 |
1940 |
| Real Gross National Product (GNP) (1) |
$101.4 |
84.3 |
68.3 |
103.9 |
96.7 |
113.0 |
| Consumer Price Index (2) |
122.5 |
108.7 |
92.4 |
102.7 |
99.4 |
100.2 |
| Index of Industrial Production (2) |
109 |
75 |
69 |
112 |
89 |
126 |
| Money Supply M2 ($ current billions) |
$46.6 |
42.7 |
32.2 |
45.7 |
49.3 |
55.2 |
| Exports ($ current billions) |
$5.24 |
2.42 |
1.67 |
3.35 |
3.18 |
4.02 |
| Unemployment (% of civilian work force) |
3.1 |
16.1 |
25.2 |
13.8 |
16.5 |
13.9 |
(1) in 1929 billion dollars (2) 1935-39 = 100
Sources: Source GNP: U.S. Dept of Commerce, National Income and Product Accounts[2]; Mitchell 446, 449, 451; Money supply M2[3]
Responses
The Depression
Hoover's Treasury Secretary Andrew Mellon advised Hoover that a shock treatment would be the best response: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . [That] will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people" (Hoover Memoirs 3:9). Hoover rejected the advice (which is similar to what the Austrian School would recommend, made Mellon an ambassador, and tried to keep wages high, farm prices high, and public works going to ameliorate the distress--but it only got worse.
The Stock Market Crash did not plunge all Americans into instant poverty. Indeed, about one third of the population was seriously hurt by 1932; the other two thirds (who were employed) were hurting but not nearly as much.
However when the market failed to rebound, and it became apparent that even highly regarded consumer goods manufacturers were in trouble (example, Atwater-Kent Radios, Willys-Overland, etc.) the effects began to impact the economy. Not only did name-brand product manufacturers fail, but their suppliers and retailers also failed.
Easy credit fueled the consumer driven economy of the 1920s, and following the depression, credit availability began to tighten, both for business and consumers. With lenders restricting their credit availability, and moving quickly to secure their liabilities, employers who were hurt by the ripple effect of Wall Street were the first to be liquidated. As employers closed their companies, the ranks of the unemployed grew, which further complicated the banking situation by reducing income from credit lines, which cascaded into a liquidity crisis leading up to the banking panic of 1933.
Consumers who had taken advantage of credit sometimes were unable to meet the monthly payment and repossession of automobiles, furniture and household goods became common.
Foreclosures on home mortgages rose throughout the period, and affected people in all income brackets. In a few localities the forced sale of personal property, drew neighbors who attempted to disrupt the proceedings as a form of protest of the action and support of the family under the eviction notice. The angry crowds also had the effect of scaring off potential bidders for auction goods. While this allowed neighbors to pay pennies on the dollar for their neighbors' possessions (which were usually given back to the family following the sale), it also did little to reduce the debt of the family being evicted.
The wealthy, who had significant investments in Wall Street, did experience losses; however those losses depended on how investments were structured. As a result, all but the very well-off curtailed their spending habits. Some of the wealthiest families, like the Kennedys, were virtually unfazed by the Stock Market Crash, and were able to continue living their lives largely as they had before the Depression. Others, like the Hellers, used independent investments to "float" for several years after the Crash, most bottoming out by the mid-1930's. Many wealthy American families found their extensive finances wiped out over night, and went literally "from riches to rags."
A massive series of bank runs in early 1933 caused 4,004 banks to close permanently that year, with an average of $900,000 in deposits. These banks were merged into stronger banks; many months later the depositors received about 85% of their money. It is an urban legend that millions lost their money in banks; rather they were forced to withdraw their deposits to pay their bills. The total of all deposits in all 9,106 banks that suspended 1929-33 was $6,886 million; losses to depositers were $1,336 million, or 19%. [Historical Statistics series X741-755]
High end consumer goods providers, such as the luxury automobile industry, saw their sales number dwindle. Cleveland, Ohio had the highest concentration of luxury automobile manufacturers outside of Detroit. Between 1929 and 1934, production of Peerless, Jordan, Stearns-Knight cars all ceased; Peerless, as a company, did survive, but did so by discontinuing automobile production and regrouping as a brewery.
Purchases of cheaper cars also slowed. General Motors attempted to encourage consumers to buy cars by advertising that “the sale of one car keeps an autoworker employed for three months, allowing that worker and his family to buy goods and services with their salary.” However a sizable percentage of Americans couldn't even pay for a tank of gas, let alone a new car and the entire auto industry struggled to maintain sales at a profitable level.
Drought first struck the Eastern United States in 1930. By 1931 it began moving westward where the weather pattern stalled over the Great Plains states. By 1934, the plains had been turned to desert. While weather was the catalyst for the Dust Bowl (a name coined in 1935), the root cause was poor farming and soil conservation techniques on land that was better suited to growing prairie grasses and native flowers than it was for growing corn. When the thin layer of top soil turned to a dry powder, and the winds swept through, dust storms resulted producing a filth and grime that was difficult to wash out of fabric and clean out of buildings. Once the top soil was depleted, the under layer of clay that remained proved unsuitable for cash crops, leading to farm failures and mortgage foreclosures.
Migrants who trekked west to California were called Okies, and Arkies, as they flooded the labor supply of the agricultural fields. Their story was dramatized in the famous novels The Grapes of Wrath and Of Mice and Men by John Steinbeck.
In the South, rural workers and share croppers migrated north by train with plans to work in auto plants around Detroit. In the Great Lakes states, farmers had been experiencing depressed market conditions for their crops and goods since the end of World War I. Family farms that had been mortgaged during the Twenties to provide money to “get through until better times” risked foreclosure when their owners failed to make payments. Unlike the dustbowl states, the midwest experienced near normal weather conditions in the 1930s, and farmers could make a living if they spent their incomes in a wise and prudent way. Unable to pay wages for hired help, families whose farms were located near railroad tracks often hired men who volunteered to work for food.
However, a large percentage of the American middle class was able to survive the ordeal. Those in professions where skills and jobs were considered “depression proof” (government positions, teachers in well-funded districts, doctors, lawyers, etc.) continued to work. Daily life was made more secure if these workers had little debt before the stock market crash, had liquid savings and generally lived without overt extravagances. American middle class households managed to get through the economic depression by adapting to conditions, spending wisely and avoiding unnecessary purchases.
One industry that flourished in America during the 1930s was the movie industry (Hollywood). The emergence of sound films in the late 1920s, combined with the escapism that film provided to a nation down on its luck, made the film industry one of the few that produced profits throughout the 1930s. Films commonly featured rich sets and carefree characters, allowing an increasingly depression-weary nation to leave its cares behind - if only for the duration of a movie. Shirley Temple's films were leading attractions, perhaps because her characters' unwavering hopefulness in the face of trying circumstances spoke to American audiences. Conversely, the film version of Steinbeck’s Grapes of Wrath (see above), now considered by many to be a masterpiece of American cinema, was a commercial disappointment when it debuted--possibly because it reminded too many moviegoers of the harsh realities of their own situations.
Movie genres that thrived during the 1930s were screwball comedies, lavish musicals (notably, The Wizard of Oz), Westerns and gangster movies.
End of the Great Depression
New Deal in the United States
For further details, see the main New Deal article.
From 1932 onward Roosevelt argued that a restructuring of the economy--a "reform" would be needed to prevent another depression. New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending, by:
- Reform the financial system, especially the banks and Wall Street. This was done in 1933 through the Securities and Exchange Commission (still in effect in 2006), federal insurance of deposits by the FDIC (still in effect), and the Glass-Steagal Act (which remained in effect for 50 years).
- instituting regulations which ended what was called "cut throat competition" which kept forcing down prices and profits for everyone. (The NRA--which ended in 1935)
- Set minimum prices and wages and competitivce conditions in all industries (NRA)
- encourage unions that would raise wages, to increase the purchasing power of the working class (NRA)
- cut farm producrtion so as to raise prices and make it possible to earn a living in farming (done by the AAA and successor farm programs)
The most controversial of the New Deal agencies was NRA which ordered
- business work with government to set price codes;
- the NRA board to set labor codes and standards;
These reforms (together with relief and recover measures) are called by historians the First New Deal. It was centered around the use of an alphabet soup of agencies set up in 1933 and 1934, along with the use of previous agencies such as the Reconstruction Finance Corporation, to regulate and stimulate the economy. By 1935 the "Second New Deal" added Social Security, a national relief agency the WPA, and, throught the National Labor Relations Board a strong stimulus to the growth of labor unions.
In 1929, federal expenditures constituted only 3% of the GDP. Between 1933 and 1939, federal expenditure tripled, funded primarily by a growth in the national debt. That was much too large for conservatives who after 1937 were able to stop further expansion of the New Deal (and by 1943 abolished all the relief programs).
Between 1939 and 1944 (the peak of wartime production), the nation's output more than doubled. Consequently, unemployment plummeted—from 19% in 1938 (already down from 1933's 24.9% peak) to 1.2% in 1944—as the labor force grew by ten million, and 16 million young men were moved from the labor force into the military. On the other hand, according to economist Robert Higgs, when looking only at the supply of consumer goods significant GDP growth only resumed in 1946. (Higgs does not estimate the value to consumers of collective goods like victory in war.) (Higgs 1992) To Keynesians, the war economy showed just how large the fiscal stimulus required to end the downturn of the Depression was, and it led, at the time, to fears that as soon as America demobilized, that it would return to Depression conditions and industrial output would fall to its pre-war levels. That is, Keynesians predicted a new depression would start after the war--a false prediction. `
Political Perspectives on Causes and Cures
There are multiple competing interpretations about what caused the Great Depression. The debate is important because the public and policy makers ever since 1929 have demanded that such a disaster never again happen, so it is imperative to explain why. Economists do not agree on what caused the depression or what prolonged it. The political interpretations especially important in the USA are as follows:
The Stock Market Crash to blame
Most people at the time and since blame the stock market crash. The timing was right; the magnitude of the shock to expectations of future prosperity was high. The market was in a bubble with prices far too high compared to the real economy. Economists agree that somehow it shared some blame--but how much no one has estimated. Milton Friedman concluded, "I don't doubt for a moment that the collapse of the stock market in 1929 played a role in the initial recession" [Parker p. 49]
Macroeconomists: debt to blame
Ben Bernanke has revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher. People who are seriously in debt when a price deflation occurs are in serious trouble and risk default, perhaps bringing down their banks with them. Indeed, prices and incomes fell 20-50%--but the debts remained at the same dollar amount. If most people have debts and they all have to tighten their belts, then consumer spending falls precipitously, and the whole economy goes into tailspin. With future profits looking poor, capital investment slows or stops. In the face of bad loans and worsening future prospects banks become more conservative. They build up their reserves, which intensifies the deflationary pressures. The downward spiral speeds up. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression. (Parker, p. 14)
Trade Decline; Smoot-Hawley Tariff Act to blame
Many economists at the time argued that the sharp decline in international trade after 1930 helped to worsen the depression. Some also argued that the growing body of economic intervention after 1932 contributed to the markets inability to react to abrupt changes and kept unemployment high in some countries, such as the US. The British Empire promoted trade inside the Empire (and not with the U.S.A.) Germany promoted economic autarky in which countries received benefits (or threats) for trading with Germany.
Most historians and economists assign the Smoot-Hawley Tariff Act of 1930 part of the blame for worsening the depression by reducing international trade and causing retaliation. As for the United States, foreign trade was a small part of overall economic activity; it was a much larger factor in most other countries. [4] The average ad valorem rate of duties on dutiable imports for 1921-1925 was 25.9% but under the new tariff it jumped to 50.0% in 1931-1935. In spite of the objection of more than a thousand members of the American Economic Association Hoover signed the tariff for several reasons. It embodied his recommendations of increased agricultural protection, and reorganizing the Tariff Commission. Hoover constantly praised the law for helping American farmers and the American home market; he ignored the threat to exporters. It became a major campaign issue in 1932, but Hoover rejected Roosevelt's charges that "the Hawley-Smoot Tariff is one of the most important factors in the present world-wide depression," and that "it has destroyed international commerce." Hoover responded, "So they would have us believe this world catastrophe and this destruction of foreign trade happened because the United States increased tariff on one-fourth of one-third of one-eighth of the world's imports. Thus we pulled down the world, so they tell us, by increases of less than one per cent of the goods being imported by the world." [Hoover State Papers, II, 343]
In dollar terms American exports declined from $5.2 billion in 1929 to $1.7 billion in 1933; but prices also fell so the physical volume of exports did not decline as much. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this theory, the collapse of farm exports caused many American farmers to default on their loans leading to the bank runs on small rural banks that characterized the early years of the Great Depression.
Monetarism: Federal reserve to blame
Milton Friedman and Ben Bernanke stress the negative role of the Federal Reserve System. It cut the money supply by one-third from 1929 to 1932. There was much less money to go around, businessmen could not get new loans--and could not even get their old loans renewed. They had to stop investing. Not because they did not want to (as the Keynesian model said), but because banks could not lend them the money they needed. This interpretation blames the government and calls for a much more careful Federal Reserve policy. Bernanke became the Chairman of the Federal Reserve System in 2006. Friedman argues that: [A Program for Monetary Stability (1960) pp 18-19]
"The serious fault of the Federal Reserve dates from the end of 1930, when a series of bank failures... changed the monetary character of the contraction. Prior to that date, there was no sign of a liquidity crisis--the ratio of currency to deposits was relatively stable or falling. From then on, the economy was plagued by recurrent liquidity crises. A wave of bank failures would taper down for a while, and then start up again as a few dramatic failures or other events produced a new loss of confidence in the banking system and a new series of runs on banks.... From the end of October 1930 through July 1931, nearly 1,400 banks holding $1 billion in deposits or about 2% of all deposits in commercial banks failed, the money stock declined by 6% in addition to the 3% decline up to October, and deposits in commercial banks fell by 8%.... [In August 1931] the System raised discount rates sharply....The measure was also accompanied by a spectacular increase in bank failures and runs on banks. All told, in the six months from August 1931 through January 1932, 1,860 banks with deposits of $1,449 million suspended operations, and total deposits in commercial banks fell by 15%."
The Far Left: capitalism to blame
The revolutionary left, including some socialists, together with communists and anarchists, saw the Great Depression as the beginning of capitalism's final collapse. Their remedy was to build up their movements to take over the labor unions, and perhaps eventually the government. The New Deal did change the laws to help unions grow--but they split into warring AFL and CIO factions and neutralized much of their potential political influence. Unions grew even faster during the war.
New Dealers: Business to Blame
Roosevelt and most of the New Dealers primarily blamed the excesses of big business for causing an unstable bubble-like economy. The problem was that business had too much power, and the New Deal intended to remedy that by empowering labor unions and farmers (which they did), and by raising taxes on corporate profits (they tried and failed). Regulation of the economy was a favorite remedy. Some of those regulations, such as establishing the Securities and Exchange Commission which regulates Wall Street, won widespread support and continue to this day. Most of the other regulations were abolished or scaled back in a bipartisan wave of deregulation 1975-85.
Keynesianism: public behaviour to blame
The British economist John Maynard Keynes coined the term "the paradox of thrift" to describe the deepening of the Great Depression after 1929. The paradox of thrift indicates that when people decide to save more this may end up causing people to save less. The increased savings (reduced spending) due to the panic following the stock market crash of 1929 left markets saturated, contributing to price deflation, perpetuating the Great Depression. When people decided to save more (spend less) businesses responded by cutting back on production and laying off workers. Businesses, cutting back on investment spending because they were pessimistic about the future as well, were also doing their share of causing a reduction in aggregate expenditures, reducing their investments, setting in motion a dangerous cycle: less investment, fewer jobs, less consumption and even less reason for business to invest. The lower aggregate expenditures in the economy contributed to a multiple decline in income well below full employment. The economy may reach perfect balance, but at a cost of high unemployment and social misery. At the lower income levels during the Great Depression savings were much lower than before-- hence, the paradox of thrift. As a result, Keynesian economists were increasingly calling for government to take up the slack.
The New Deal and Keynesian economics
In the early 1930s, before John Maynard Keynes wrote The General Theory, he was advocating public works programs and deficits as a way to get the British economy out of the Depression. Although Keynes never mentions fiscal policy in The General Theory, and instead advocates the need to socialize investments, Keynes ushered in more of a theoretical revolution than a policy one. Keynes's basic idea was simple. In order to keep people fully employed, governments have to run deficits when the economy is slowing because the private sector won't invest enough. Many politicians, however, failed to understand his idea.
As the Depression wore on, Franklin D. Roosevelt tried public works, farm subsidies and other devices to restart the economy, but he never completely gave up trying to balance the budget. As a result, unemployment remained high throughout the New Deal years; consumption, investment, and net exports-- the pillars of economic growth-- remained low. With fiscal policy, however, government could provide the needed increased spending by decreasing taxes, increasing government spending, increasing individuals' incomes. As individuals incomes would increase, they would spend more. As they spent more, the multiplier effect would take over and expand the effect on the initial spending. Expansionary fiscal policy thus involves decreasing taxes or increasing government spending to counteract cyclical unemployment and slow growth during a recession.
It was World War II, not the New Deal, that finally ended the crisis. Nor did the New Deal substantially alter the distribution of power within American capitalism; and it had only a small impact on the distribution of wealth among the American people.
Keynes's visit to the White House in 1934 to urge President Roosevelt to do more deficit spending was a debacle. A dazed, overwhelmed Roosevelt complained to Labor Secretary Frances Perkins, "He left a whole rigmarole of figures-- he must be a mathematician rather than a political economist." Keynes, equally frustrated with the encounter, later told Secretary Perkins that he had "supposed the President was more literate, economically speaking."
The recession of 1937 and recovery
The Roosevelt administration was under assault during FDR's second term, which presided over a new dip in the Great Depression in the fall of 1937 that continued through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. It was, in the largest measure, a result of a premature effort by the administration to balance the budget by reducing federal spending.
The administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the new dip. The president appointed an aggressive new direction of the antitrust division of the Justice Department, but this effort lost its effectiveness once World War II, a far more pressing concern, began.
But the administration's other response to the 1937 deepening of the Great Depression had more tangible results. Ignoring the vitriolic pleas of the Treasury Department and responding to the urgings of the converts to Keynesian economics and others in his administration, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power. The New Deal had in fact engaged in deficit spending since 1933, but it was apologetic about it, because a rise in the national debt was opposite of what the Democratic party had always preached. Now they had a theory to justify what they were doing. Roosevelt explained his program in a fireside chat in which he finally acknowledged that it was therefore up to the government to "create an economic upturn" by making "additions to the purchasing power of the nation."
Business-oriented observers explained the recession and recovery in very different terms from the Keynesians. They argued that the New Deal had been very hostile to business expansion in 1935-37, had encouraged massive strikes which had a negative impact on major industries such as automobiles, and had threatened massive anti-trust legal attacks on big corporations. All those threats diminished sharply after 1938. For example, the antitrust efforts fizzled out without major cases. The CIO and AFL unions started battling each other more than corporations, and tax policy became more favorable to long-term growth.
External links
See also
References
External Sources: World
- Ambrosius, G. and W. Hibbard, A Social and Economic History of Twentieth-Century Europe (1989)
- Bernanke, Ben S. "The Macroeconomics of the Great Depression: A Comparative Approach" Journal of Money, Credit & Banking, Vol. 27, 1995
- Brown, Ian. The Economies of Africa and Asia in the inter-war depression (1989)
- Davis, Joseph S., The World Between the Wars, 1919-39: An Economist's View (1974)
- Feinstein. Charles H. The European economy between the wars (1997)
- Garraty, John A., The Great Depression: An Inquiry into the causes, course, and Consquences of the Worldwide Depression of the Nineteen-Thirties, as Seen by Contemporaries and in Light of History (1986)
- Garraty John A. Unemployment in History. (1978)
- Garside, William R. Capitalism in crisis: international responses to the Great Depression (1993)
- Haberler, Gottfried. The world economy, money, and the great depression 1919-1939 (1976)
- Hall Thomas E. and J. David Ferguson. The Great Depression: An International Disaster of Perverse Economic Policies (1998)
- Kaiser, David E. Economic diplomacy and the origins of the Second World War: Germany, Britain, France and Eastern Europe, 1930-1939 (1980)
- Kindleberger, Charles P. The World in Depression, 1929-1939 (1983)
- Madsen, Jakob B. "Trade Barriers and the Collapse of World Trade during the Great Depression"' Southern Economic Journal, Vol. 67, 200
- Mundell, R. A. "A Reconsideration of the Twentieth Century' "The American Economic Review" Vol. 90, No. 3 (Jun., 2000), pp. 327-340
- Rothermund, Dietmar. The Global Impact of the Great Depression (1996)
- Salsman, Richard M. “The Cause and Consequences of the Great Depression” in The Intellectual Activist, ISSN 0730-2355. (Salsman argues that the Great Depression was fundamentally caused by statist government policy, and ended only when government policy became less statist and more laissez-faire.)
- “Part 1: What Made the Roaring ’20s Roar”, June, 2004, p. 16-24.
- “Part 2: Hoover's Progressive Assault on Business”, July, 2004, pp. 10-20.
- “Part 3: Roosevelt's Raw Deal”, August, 2004, pp. 9-20.
- “Part 4: Freedom and Prosperity”, January, 2005, pp. 14-23.
- Tipton, F. and R. Aldrich, An Economic and Social History of Europe, 1890–1939 (1987)
Academic secondary sources: USA
