Crashing Hopes: The Great Depression
In 1929, Yale University economist Irving Fisher stated confidently: "The nation is marching along a permanently high plateau of prosperity." Five days later, the bottom dropped out of the stock market and ushered in the Great Depression, the worst economic downturn in American history. Although Americans often believe that the Crash was the starting point of the Great Depression, many historians point out that it wasn't the sole cause. This lecture examines the roots of the Crash and the effect of the Great Depression on the American public.
Some questions to keep in mind:
Why were Americans so confident in the stock market in the years leading up to the Great Depression?
How did the Psychology of Consumption shape the causes and effects of the Crash?
How did stock market investing change during the 1920s? Who were the main investors and how did they pay for their investments?
Explain the statement: "By 1929, much of the money that was invested in the stock market did not actually exist."
Why did Hoover choose the term "depression" for this economic downturn? Why do you think this term has remained part of the American vocabulary ever since?
Optimism and Prosperity
When Americans elected Herbert Hoover President in 1928, the mood of the general public was one of optimism and confidence in the United States economy. Most people believed that national prosperity would continue indefinitely. In his acceptance speech for the Republican party nomination for the presidency, Hoover had said:
"We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us."
Herbert Hoover (1874-1964)
Copyright 1997 State Historical Society of Wisconsin
Many Americans shared Hoover's optimism at the beginning of 1929. An editorial in the New Year's edition of the New York Times on January 1, 1929, for example, stated:
"It has been twelve months of unprecedented advance, of wonderful prosperity. If there is any way of judging the future by the past, this new year will be one of felicitation and hopefulness."
That same year, John Jacob Raskob, Chief Executive of General Motors and head of the Democratic National Committee, published an article entitled "Everybody Ought to be Rich" in the Ladies Home Journal. Raskob suggested that every American could become wealthy by investing $15 a week in common stocks. He failed to realize, however, that the weekly salary of the average American worker was between $17 and $22, but that's not important: the optimism was there.
A "Bull Market"
For five years prior to 1929, rising prices typified the stock market. During this period, American investors enjoyed an enormous "bull market." (The opposite, a market characterized by falling prices, is called a "bear market.").
Americans invested in the stock market for six reasons during the 1920s:
1. Rising stock dividends.
New investors entering the market, many who viewed it as an easy way to get rich quick, helped inflate stock prices. Economic historians, however, estimate that a relatively small number of Americans--about 4 million--had investments in the market at any one time. Yet, the constant influx of new investors coming in and old investors moving out ensured that new money was always floating around.
2. Increase in personal savings.
Higher wages meant that even average Americans now had surplus money to put into savings or invest in the stock market.
3. Relatively easy money policy.
At this time, banks made money more readily available at lower interest rates to more and more people. Although economists debate the actual influence of this phenomenon on the stock market, it's conceivable that many people took out loans not only to buy cars, but also to buy stock.
4. Companies invested their over-production profits in new production.
From 1925 on, industry was over-producing. In anticipation of eventually selling the surplus, business leaders funneled their profits right back into industry. They invested in factories and new machinery, and hired more workers, which, in turn, fueled even greater overproduction. This increased production gave the companies an aura of financial soundness, which encouraged Americans to buy more stock.
5. Lack of stock market regulation.
At this time, there were no effective legal guidelines on buying and selling stock. Free from such limitations, corporations began printing up more and more common stock. Many investors in the stock market practiced "buying on margin," that is, buying stock on credit. Confident that a given stock's value would rise, an investor put a down payment on the stock, expecting in a few months to pay off the balance of their initial investment while reaping a hefty profit. This investment strategy turned the stock market into a speculative pyramid game, in which most of the money invested in the market didn't actually exist.
6. Psychology of consumption.
We've already discussed this phenomenon in Lecture 15. The Psychology of Consumption fed the optimism of investors and gave them unquestioning faith in prosperity. When the Crash did come, it was even more devastating because of this unquestioned faith.
The Crash
Most economists of the 1920s believed that the stock market--not housing starts, sales of durable goods, or the financial health of banks--was the chief indicator of the fiscal health of the United States. In September of 1929, stock prices began to fluctuate, but market analysts dismissed this as temporary. What many of these analysts did not realize--or refused to admit--however, was that stock prices were totally out of proportion to actual profits. Sales of goods and the construction of factories were falling rapidly while stock values continued to climb. Still, very few were worried; they still accepted Adam Smith's "self-adjusting economy" as dogma and believed the problems would correct themselves.
Historians refer to October 24, 1929 as "Black Thursday." On this day, people began dumping their stocks as quickly as they could. Sell orders inundated market exchanges and the bull market suddenly shifted to a bear market. By that evening, J.P. Morgan and other financiers bought up stock to stop the panic and keep the market afloat. On Friday, October 25, the House of Morgan continued to keep the market stable and it seemed that the panic was over. Yet, many investors began to worry during the weekend. George and Martha and thousands of their friends decided to sell whatever stock they still had as soon as the market opened on Monday. As a result, on Monday, October 28, there was another wave of sell orders. The next day, October 29, 1929, "Black Tuesday," was the beginning of the Great Crash.
"Black Tuesday" was the single most devastating financial day in the history of the New York Stock Exchange. Within the first few hours the stock market was open, prices collapsed and wiped out all the financial gains of the previous year. Since most Americans viewed the stock market as the chief indicator of the health of the American economy, the Great Crash shattered public confidence. Between October 29 and November 13, the day when stock prices hit their lowest point, over $30 billion disappeared from the American economy. This amount was comparable to the total amount of money that the federal government had spent to fight the First World War.
Still, optimism persisted and many leaders declared that the worst was over. J. D. Rockefeller said:
"These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again."
Such optimism, however, did not last long. Popular songs of the day mirrored the transition from optimism to despair. In 1930, people sang "Happy Days Are Here Again" and the national income dropped from $87 billion to $75 billion. In 1931, somewhat more dejectedly, people sang "I've Got Five Dollars" and the nation's income dropped to $59 billion. The song of 1932 was "Brother, Can You Spare a Dime," when the domestic economy fell to $42 billion. Eventually, the American economy bottomed out at $40 billion in 1933.
Former President Coolidge had this insightful observation about the economic health of the United States:
"This country is not in good condition."
The Depression
So as not to alarm the public, President Hoover chose his words carefully when he discussed the state of the economy in 1929. American economists and politicians had referred to previous economic downturns as "Panics," such as the "Panic of 1873" and the "Panic of 1893." Hoover, however, called this latest downturn a "Depression" rather than a "Panic," and the name stuck.
Of course, America was not alone in the Great Depression; it struck all the industrialized nations of the world, including Germany, Britain, and France. Moreover, Germany still had huge reparation payments to make to the Allies in the aftermath of WWI. These reparation payments fueled spiraling inflation in Germany and crippled that nation's economy. The Allies themselves had borrowed money from the United States during the war, were unable to pay it all back during the 1920s, and were now not only broke, but in debt.
Social Problems
These perplexing economic problems in the United States exacerbated a host of social problems, including:
Unemployment and poverty
Breakdown of families
Soaring high school dropout rates (2 to 4 million)
Homelessness
Organized protests
Around the country, the homeless built settlements of cardboard and tar-paper shacks, called "Hoovervilles" in sardonic reference to President Hoover.
Farmers armed with guns and pitchforks marched on the local banks to prevent foreclosures.
"The Bonus Expeditionary Force." A group of WWI veterans who had been denied their pensions organized the first march on Washington in protest. In 1932, twenty thousand men set up a tent city, vowing to stay until they got their money. President Hoover overreacted and sent in the army (led by future war heroes Douglas MacArthur and Dwight D. Eisenhower) to break up this peaceful demonstration.
"Bonus Army" WWI Veterans protesting unpaid pensions
Copyright 1997 State Historical Society of Wisconsin
"Bonus Army" WWI Veterans making camp in Washington, D.C., to protest unpaid pensions
Copyright 1997 State Historical Society of Wisconsin
Handpainted sign on Bonus Army truck states: "We Done a Good Job in France, Now You Do a Good Job in America"
Copyright 1997 State Historical Society of Wisconsin
Images of the Depression
There are many stereotypical images of the depression, images enforced by the mass media. These include:
Bread lines
Hoboes hopping freight trains
College grads becoming gas station attendants (or enrolling in graduate school in record numbers)
Skyrocketing rates of suicide and mental illness
Former businessmen selling pencils or apples on street corners
"Okies"--Oklahoma farmers escaping the dust bowl for migrant farm work in California, most vividly portrayed in John Steinbeck's novel The Grapes of Wrath (1939)
These stereotypes, many of which have become romanticized in popular culture, only depict the experience of a small number of the American people. The reality of long-term unemployment, the day-to-day despair, was much less dramatic, and thus more dismal. Two basic economic facts soured the lives of average Americans:
1. Unemployment. In his inaugural address, Franklin D. Roosevelt recognized:
"Now let's be frank. You and I know that immediate relief of the unemployed is the immediate need of the hour."
2. Inability to sell goods and services. With so much of the work force unemployed, nobody had money to buy things.
The Great Depression hit farmers especially hard. Many had gone into debt to buy machinery and land, and now could not make their payments. Low crop prices wiped out potential profits. In addition to the usual challenges of agriculture, a great drought took place in 1931 and 1932 in the Midwest and the South and turned much of the trans-Mississippi West into a dust bowl. Nevertheless, if farmers couldn't make a profit selling their products, at least they could still eat, so most stayed put. In contrast to popular images of farmers leaving the land, the 1930s actually had the lowest rate of migration from farms to cities.
Sam Nichols, tenant farmer, Boone County, Arkansas, October 1935
Copyright 1997 State Historical Society of Wisconsin
Escapism
One-third of Americans were below the poverty line, yet some industries actually managed to make a profit at the beginning of the 1930s as the public looked for a way to escape. If Americans couldn't find work, at least they could go for a drive, have a cigarette, or go to a movie. Correspondingly, sales of oil, gas, cigarettes, and movie tickets all went up. Humorist Will Rogers remarked,
"We're the first nation in the history of the world to go to the poorhouse in an automobile."
Laying the Blame
The American public found the "Three B's" responsible for the Crash and the Depression:
Bankers
Brokers
Businessmen
However, the Crash was not the immediate cause of the Depression. It alone was not responsible for a decade of worldwide economic catastrophe. But what was responsible for the Depression? And what were the long-term consequences of the Great Depression in the United States? The Depression itself was responsible for a dramatic transformation in the structure of American politics, for a change in Americans' expectations about government, and for a shift in United States foreign policy during the 1930s. These are remarkably important issues, so important, that we'll take them up in Lecture 19: "The Great Depression and the New Deal."
Great Depression
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"The Great Depression" redirects here. For other uses, see The Great Depression (disambiguation).
The Great Depression was a worldwide economic downturn, starting in 1929 and lasting through most of the 1930s. It ended at different times in different countries. It centered in the United States and Europe, but had damaging effects around the world. Almost all countries were affected; the worst hit were the most industrialized, including the United States, Germany, Britain, France, Canada, Australia, and Japan. Cities around the world were hit hard, especially those based on heavy industry. Construction virtually halted in many countries. Farmers and rural areas suffered as prices for crops fell by 40-60% [1] Mining and lumbering areas were perhaps the hardest hit because demand fell sharply and there was little alternative economic activity.
Dorothea Lange's Migrant Mother depicts destitute pea pickers in California, centering on Florence Owens Thompson, a mother of seven children, age 32, in Nipomo, California, March 1936.Contents [hide]
1 Causes of Depression
2 Political Perspectives on Causes
2.1 The Stock Market crash
2.2 Debt
2.3 Trade Decline and the Smoot-Hawley Tariff Act
2.4 United States Federal Reserve
2.5 Capitalism
2.6 Business
2.7 Public behavior
3 Effects
3.1 The Great Depression in Canada
3.2 The Great Depression in the United Kingdom
3.3 The Great Depression in France
3.4 The Great Depression in Italy and Germany
3.5 The Great Depression in Spain
3.6 The Great Depression in Australia
3.7 The Great Depression in East Asia
3.8 The Great Depression in Latin America
3.9 The Great Depression in South Africa
3.10 The Great Depression in the United States
4 Responses
4.1 New Deal in the United States
5 Keynesian models
6 The recession of 1937 and new spending
7 Gold Standard
8 Rearmament and recovery
9 Political consequences
10 See also
11 Notes
12 References
13 External links
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Causes of Depression
Main article: Causes of the Great Depression
Although the Wall Street Crash of 1929 was the immediate cause triggering the Great Depression, there are other deeper causes which explain the crisis. The vast economic cost of the World War I weakened the ability of the world to respond to a major crisis. In Europe, the question of the war reparations was fundamental to the economic and political history of France and Germany, and also of Britain, as large American loans funded German repayments.
Contemporaries had difficulty understanding the causes of the crisis, and therefore also the solutions to give to it. New theories were developed to renew former economic theories. In the last decades, many theories have been advocated to describe the emergence of the crisis. These theories may be broadly classified into main two points of view. Firstly, there is orthodox classical liberal, monetarist, Keynesian, and neoclassical economic theory, which focuses on the macroeconomic effects of money supply, including production and consumption. Secondly, there are structural theories, including those of institutional economics, that point to underconsumption and overinvestment (economic bubble), or to malfeasance by bankers and industrialists.
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Political Perspectives on Causes
There are multiple competing interpretations about what caused the Great Depression. The political interpretations especially important in the USA are as follows:
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The Stock Market crash
Most people at the time and since blame the stock market crash of October 1929. 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. [White 1990] 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]
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Debt
Macroeconomists, including Ben Bernanke, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher. In the 1920s, the widespread use of the home mortgage and credit purchases of automobiles and furniture boosted spending but created consumer debt. People who were deeply in debt when a price deflation occurred were in serious trouble --even if they kept their jobs--and risked default. Indeed, prices and incomes fell 20-50%—but the debts remained at the same dollar amount. As the debtors tightened their belts, consumer spending fell, and the whole economy weakened. With future profits looking poor, capital investment slowed or stopped. In the face of bad loans and worsening future prospects, banks became more conservative. They built up their reserves, which intensified the deflationary pressures. The downward spiral sped up. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression. (Parker, p. 14)
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Trade Decline and the Smoot-Hawley Tariff Act
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 market's inability to react to abrupt changes and kept unemployment high in some countries, such as Canada, the United Kingdom and the US. The British Empire promoted trade inside the Empire, Germany promoted economic autarky in which countries received benefits (or threats) for trading with Germany.
Most historians and economists assign the US 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. [1] 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 US$5.2 billion in 1929 to US$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.
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United States Federal Reserve
Monetarists including Milton Friedman and Ben Bernanke stress the negative role of the United States Federal Reserve System. It cut the money supply by one-third from 1929 to 1932. With significantly less money to go around, businessmen could not get new loans—and could not even get their old loans renewed, forcing many 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%."
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Capitalism
The revolutionary left, including some socialists, together with communists and some anarchists, saw the Great Depression as the beginning of capitalism's final collapse. There was a belief that the free market was inherently unstable. However, under Hoover the market was far less free than it had been previously. Government intervention in the economy expanded greatly including high levels of spending, price controls and intervention in labour disputes. If the free market were to blame, it caused the collapse when it was weakest. 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.
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Business
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 1975-1985.
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Public behavior
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 spend 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.
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Effects
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The Great Depression in Canada
Main article: Great Depression in Canada
Canada is sometimes considered to be the country hardest hit by the Great Depression. The economy fell further than that of any nation other than the United States, and it took far longer to recover. It hit especially hard in Western Canada, where a full recovery did not occur until the Second World War began in 1939.
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The Great Depression in the United Kingdom
Main article: Great Depression in the United Kingdom
The World Depression broke at a time when the United Kingdom was still far from having recovered from the effects of the First World War more than a decade earlier.
A major cause of the international financial instability, which preceded and accompanied the Great Depression, was the debt which many European countries had accumulated to pay for their involvement in the war. This debt destabilised many European economies as they tried to rebuild during the 1920s.
Also, Great Britain was driven off the gold standard in 1931.
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The Great Depression in France
Main article: Great Depression in France
The crisis affected France a bit later than other countries, around 1931. As in the United Kingdom, France was recovering from World War I, trying without much success to recover the reparations from Germany. This led to the occupation of the Ruhr at the beginning of the 1920s, which failure in turn led to the implementation of the Dawes Plan of August 1924 and the Young Plan of 1929. However, the depression had drastic effects on the local economy, and partly explains the February 6, 1934 riots and even more the formation of the Popular Front, led by SFIO socialist leader Léon Blum, which won the elections in 1936.
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The Great Depression in Italy and Germany
Mussolini and Hitler followed an autarky economic policy, which, composed with the militarist, xenophobic and nationalism characteristics of the fascist and nazi ideology, led to World War II. On a purely economic level, the work needed to build the military power necessary for its expansionist goals was a relative success, although it was treading a path of autodestruction.
This section is a stub. You can help by adding to it.
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The Great Depression in Spain
Main article: Great Depression in Spain
Due to the fact that Spain had a relatively isolated economy, with high protective tariffs and was experiencing other economic problems: need for land reform, overall development, improving education levels, etc., it was not one of the main countries affected by the Depression. However, because the country was destroyed by civil war and suffered from isolation because of Francisco Franco's fascist regime, GDP levels of 1939 were not recovered until 1953.
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The Great Depression in Australia
Main article: Great Depression in Australia
Australia, with its extreme dependence on exports, particularly primary products such as wool and wheat, is thought to have been one of the hardest-hit countries in the Western world along with Canada and Germany. Unemployment reached a record high of 29% in 1932, one of the highest rates in the world. There were also incidents of civil unrest, particularly in Australia's largest city, Sydney.
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The Great Depression in East Asia
Main article: Great Depression in East Asia
Japan, with a growing industrial base, was hurt slightly, with GDP falling 8% 1929-30. The economy recovered by 1932.
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The Great Depression in Latin America
Main article: Great Depression in Latin America
Before the 1929 crisis, links between the world economy and Latin American economies had been established through American and British investment in Latin America and Latin American exports to the world. As a result, Latin Americans export industries felt the depression quickly. World prices for commodities such as wheat, coffee and copper plunged. Exports from all of Latin America to the US fell in value from $1.2 billion in 1929 to $335 million in 1933, rising to $660 million in 1940.
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The Great Depression in South Africa
Main article: Great Depression in South Africa
The Great Depression had a pronounced economic and political effect on South Africa, as it did to most nations at the time. As world trade slumped, demand for South African agricultural and mineral exports fell drastically. Many historians think that the social discomfort caused by the depression was a contributing factor in the defeat of Barry Hertzog and his National Party in the 1933 general election.
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The Great Depression in the United States
Main article: Great Depression in the United States
The Great Depression had a significant impact on the economy and people of the United States. President Herbert Hoover was widely blamed, and he was defeated in 1932 by Franklin D. Roosevelt. Roosevelt launched a New Deal designed to provide emergency relief to upwards of a third of the population, to recover the economy to normal levels, and to reform failed parts of the economic system. Unemployment lingered until the early 1940s.
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Responses
US President Herbert 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, 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.
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New Deal in the United States
Main article: New Deal
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:
Reforming the financial system, especially the banks and Wall Street. In 1933 the Securities Act of 1933 comprehensively regulated the securities industry. This was followed by the Securities Exchange Act of 1934 which created the Securities and Exchange Commission. (Though amended, the key provisions of both Acts are still in force as of 2006). Federal insurance of bank deposits was provided by the FDIC (still operating as of 2006), 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).
Setting minimum prices and wages and competitive conditions in all industries (NRA)
encouraging unions that would raise wages, to increase the purchasing power of the working class (NRA)
cutting farm production 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:
businesses to 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 Works Progress Administration (WPA), and, through the National Labor Relations Board a strong stimulus to the growth of labor unions. Unemployment fell by two-thirds in Roosevelt's first term (from 25% to 9%), but then remained stubbornly high until 1942.
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. The debt as proportion of GNP rose under Hoover from 20% to 40%. FDR kept it at 40% until the war began, when it soared to 128%. (See graph below) Conservatives after the Recession of 1937, were able to form a bipartisan Conservative coalition that stopped further expansion of the New Deal (and by 1943, had abolished all of the relief programs).
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, 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.
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Keynesian models
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.
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. According to the Keynesians he had to spend much more money; they were unable to say how much more money. With fiscal policy, however, government could provide the needed Keynesian spending by decreasing taxes, increasing government spending, increasing individuals' incomes. As incomes increased, they would spend more. As they spent more, the multiplier effect would take over and expand the effect on the initial spending. The Keynesians did not estimate what the size of the multiplier was. The Keynesian model, as Roosevelt complained, was all about diagrams. Keynes's visit to the White House in 1934 to urge President Roosevelt to do more deficit spending was a debacle. Roosevelt complained to Labor Secretary Frances Perkins, "He left a whole rigmarole of figures— he must be a mathematician rather than a political economist." That is, Keynes was all theory with no practical advice whatsoever. Neither Keynes nor his followers was ever able to estimate how much additional spending was needed. They were not even able to estimate their own "multiplier." They assumed that poor people would spend new incomes and not pay back debts owed to landlords, grocers and family. Their ideas of the consumption function were disproven in the 1950s (by Milton Friedman and Franco Modigliani.)
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The recession of 1937 and new spending
During the Recession of 1937 the American economy took an unexpected nosedive 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.
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 pleas of the Treasury Department, 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. 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.
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Gold Standard
Britain departed from the gold standard in September 1931, allowing the sterling to float. As a result, the value of the sterling dropped significantly and British exports became cheaper. In 1933, the United States followed suit and dropped the gold standard.
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Rearmament and recovery
The massive rearmament policies to counter the threat from Nazi Germany helped stimulate the economies of many countries around the world. By 1937 unemployment in the United Kingdom had fallen to 1.5 million. The mobilisation of manpower following the outbreak of war in 1939 finally ended unemployment.
In the United States, the massive war spending doubled the GNP, helping end the depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output as an expression of patriotism. Patriotism drove most people to voluntarily work overtime and give up leisure activities to make money after so many hard years. Patriotism meant that people accepted rationing and price controls for the first time. Cost-plus pricing in munitions contracts guaranteed that businesses would make a profit no matter how many mediocre workers they employed, no matter how inefficient the techniques they used. The demand was for a vast quantity of war supplies as soon as possible, regardless of cost. Businesses hired every person in sight, even driving sound trucks up and down city streets begging people to apply for jobs. New workers were needed to replace the 12 million working-age men serving in the military. These events magnified the role of the federal government in the national economy. In 1929, federal expenditures accounted for only 3% of GNP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state. However, spending on the New Deal was far smaller than on the war effort.
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Political consequences
The crisis had many political consequences, among which the abandon of classic economic liberal thesis, which Roosevelt replaced in the US by keynesian policies. It was a main factor in the implementation of social-democracy and planned economy in European countries after the war. It wouldn't be until the 1970s and the beginning of monetarism that this keynesian economy was put into doubt, leaving the way to neoliberalism.Between 1929 and 1933 unemployment soared from 3 percent of the workforce to 25 percent.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.