The Great Depression
is the period
of history that followed "Black Thursday", the stock market crash of Thursday,
October 24, 1929. The events in the United States triggered a world-wide
depression, which led to deflation and a great increase in unemployment.
On the global scale, the market crash in the USA was a final straw in an
already shaky world economic situation. Germany was suffering from hyperinflation
of currency, and many of the Allied victors of World War I were having
serious problems paying off huge war debts. In the late 1920s the American
economy at first seemed immune to the mounting troubles, but with the start
of the 1930s it crashed with startling rapidity.
A fundamental misdistribution of purchasing power might have been the
Depression's main contributing factor. As industrial and agricultural production
increased, the proportion of the profits going to farmers, factory workers,
and other potential consumers was far too small to create a market for
goods that they were producing. Even in 1929, after nearly a decade of
economic growth, more than half the families in America lived on the edge
or below the subsistence level-too poor to share in the great consumer
boom of the 1920s, too poor to buy the cars and houses and other goods
the industrial economy was producing, too poor in many cases to buy even
the adequate food and shelter for themselves. As long as corporations had
continue to expand their capital facilities (their factories, warehouses,
heavy equipment, and other investments), the economy had flourished. By
the end of the 1920s, however, capital investments had created more plant
space than could be profitably used, and factories were pouring out more
goods than consumers could purchase.
The USA's economy had thus been showing some signs of distress for months
before October 1929. Business inventories of all kinds were three times
as large as they had been a year before (an indication that the public
was not buying products as rapidly as in the past); and other signposts
of economic health-freight carloads, industrial production, wholesale prices-were
There was also a serious lack of diversification in the American economy
of the 1920s. Prosperity had been excessively dependent on a few basic
industries, notably construction and automobiles; in the late 1920s, those
industries began to decline. Between 1926 and 1929, expenditures on construction
fell from $11 billion to under $9 billion. Automobile sales began to decline
somewhat later, but in the first nine months of 1929 they declined by more
than one third. Once these two crucial industries began to weaken, there
was not enough strength in other sectors of the economy to take up the
Two policies exacerbated the depression. The first is the tight money
policies of the Federal Reserve which restricted the money supply. The
second was the recourse to protectionism with measures such as the Hawley-Smoot
Tariff Act, which raised tariffs on imports in order to protect local producers
who were being hurt by foreign competition. In response, many other countries
also raised their tariffs, badly hurting US businesses that exported their
goods. This led to a chain reaction of tariff increases which fragmented
the world economy.
In the United States, Herbert Hoover was the president, and he tried
to control the situation, however, he helped little. One of the major problems
was that with deflation, the currency that you kept in your pocket could
buy more goods as the prices went down. The other was that there had been
no oversight in the stock market or other investments, and with the collapse,
many of the stock and investment schemes were found to be either insolvent,
or outright frauds. Unfortunately, many banks had invested in these schemes,
and this precipitated a collapse of the banking system in 1932. With the
banking system in shambles, and people holding on to whatever currency
that they had, there was minimal cash available for any activities that
would cause positive change.
In Germany unemployment increased drastically, fuelling widespread disillusionment
and anger. Promising to fix the situation, Adolf Hitler took over the government
there in 1933.
Likewise, many Americans were disillusioned with their system of government,
believing that Hoover's policies had driven the country to ruin. (Shantytowns
populated by unemployed people at the time were often dubbed "Hoovervilles"
to highlight the President's fading popularity). During this period, several
alternative and fringe political movements saw a considerable increase
in membership. In particular, a number of high-profile figures embraced
the ideals of Communism, though this would subsequently be used against
them during the Red Scare of the 1950s. Radio speakers such as Father Charles
Coughlin saw their listening audiences swell into the millions, as they
sought for (and often found) easy scapegoats to blame the country's woes
Roosevelt's "New Deal" in the USA
In 1932 the United States elected Franklin Delano Roosevelt to replace
Hoover as president. With unemployment near twenty five percent of the
workforce, he initiated a number of government programs to increase liquidity
and provide jobs, which jointly are called the New Deal. Some believe that
these actions helped bring the country out of the depression--though there
is considerable controversy over the extent to which this is true--and
provided some of the infrastructure, including roads that are still in
use today. Roosevelt's first major action happened on his first full day
in office on March 5, 1933 when he declared that a "bank holiday" would
go into effect the next day that would close all United States banks and
freeze all financial transactions in order to stop the run on bank deposits.
When banks were finally allowed to open on March 13, depositors found that
they would never again be allowed to withdraw the gold that they had deposited.
This confiscation of wealth substantially reduced the rate of bank closures,
and allowed the government to finance further "New Deal" programs. The
United States Congress went to work on its first 100 days of enacting New
Deal legislation on March 9, 1933.
Because the US was still in a state of depression when it entered World
War II, the New Deal's success is still debated. Much of the debate is
centered around when to measure the success from or what constitutes success.
Those who measure success as return to the economic levels of 1928 argue
that the new deal was a failure. In 1928, the level of Gross National Product
(GNP) was at 100 billion, and Consumer Goods purchased was at 80 billion.
By 1933, when Roosevelt took office, the economy had shrunk to a GNP of
billion and CGP of 45 billion. Some argue, that the American economy had
probably hit an economic peak around 1928, and that it would be unreasonable
to return to those levels. By 1939 the US GNP had risen to 85 billion with
a CGP of 65 billion.
For those who view the New Deal as a failure, the reasons are open to
debate. Some argue that the inherent instability of a market economy caused
such a bad depression that even the well-chosen interventions of the New
Deal could not correct it quickly. Others argue that because this longest
depression in US history was also marked by the greatest degree of government
intervention in US history, although this claim is highly contentious.
It is known that Roosevelt's New Deal programs were initially struck
down by the Supreme Court, so that his initial interventions in the economy
were all halted. During this time the economy was on a slow improving trend.
After the Court began to uphold his interventionist legislation, the economy
took a sharp downward dip, which has been called a depression within a
depression, from which it was only slowly recovering when the US entered
WWII. Thus it is claimed by some that his intervention delayed the economic
recovery that had been underway.
The Influence of the World War
Many believe that it was government-induced World War II spending that
restarted world-wide economic expansion, but this is at best only partly
true. Germany and Italy had "recovered" prior to WWII by making massive
military and infrastructure investments. The US moved to full employment
during WWII through massive military investments, but also by shifting
a very large percentage of the potential work force into the military.
While this was necessary, it meant the US economy had not returned to natural
market conditions, and when the war ended a period of readjustment was
necessary when millions of soldiers returned home. One of the purposes
of the G.I. Bill was to ease this transition. In countries such as France,
England and the Netherlands, of course, the war caused tremendous harm,
rather than being a source of economic revival. While war is always profitable
to particular businesses, it causes social and economic dislocations that
outweigh any stimulus effects it might have. It is interesting to note
that in a single generation popular opinion went from viewing war as the
cause of the Depression to being the cure for the Depression, in both cases
with dubious causality.
The End of the Great Depression
By this time, business had been reinforced by government expenditures as
a consequence of depression and the war. Between 1929 and 1933 unemployment
soared from 3 percent of the workforce to 25 percent, while manufacturing
output collapsed by one-third. Franklin Roosevelt's New Deal programs tried
to stimulate demand and provide work and relief for the impoverished through
increased government spending. The philosophy behind this was belatedly
provided by the British economist John Maynard Keynes. Between 1933 and
1939, federal expenditure tripled, and Roosevelt's critics charged that
he was turning America into a socialist state. But the cost of the New
Deal pales in comparison with World War II. In 1939, federal expenditure
was $9 million; it had increased tenfold by 1945. And war spending financially
cured the depression, pulling unemployment down from 14 percent in 1940
to less than 2 percent in 1943 as the labor force grew by ten million.
The war economy was not so much a triumph of free enterprise as the result
of government deficit spending stimulating economic activity.