The Great Depression was the worst and deepest peacetime
economic shock in the history of the industrialized world.
It changed how economists thought about financial systems,
giving birth to macroeconomics as a distinct field of study.
It brought about profound social change around the world and was
a significant factor in the drift towards the Second World
War. The depth of suffering during
the depression years is hard for many of us to imagine today.
According to a 1932 study by the New York City Health Department,
more than one in five children in the city were suffering from
malnutrition, and the Great Depression was only getting
going at that point. It lasted 7 more years.
It's easy to look at the Great Crash of 1929 as the start of
the Depression. It's convenient to start with a
dramatic and well known event and claim that it both started
and caused everything that followed.
But of course, the real world is a bit more complicated than
that. Ben Bernanke, a scholar of the
Great Depression, famously said that to understand the Great
Depression is the Holy Grail of macroeconomics.
To this day, economists and historians disagree about the
cause of both the crash and the depression that followed.
But the roots of these problems can be traced to the events at
the end of the First World War. When Germany signed the
Armistice in 1918, ending hostilities, its leaders at
first thought that they were accepting a peace without
victory, as was outlined by Woodrow Wilson in his famous 14
points. By the time the Allied leaders
and representatives from Germany gathered in the Hall of Mirrors
in Versailles to sign the final treaty, the mood had changed
significantly. Germany had been denied a seat
at the negotiation table and the blame for inciting the war was
placed squarely on its shoulders.
It was forced to accept the responsibility for the losses
and damages suffered by the Allied nations and to pay
several billion in reparations to rebuild the destroyed
economies of Europe. Before the First World War,
Europe had been the centre of global power, with empires that
stretched across the planet, and it had been easy for goods and
people to cross international borders.
When war broke out, capital, instead of being used for
growth, was being spent on destruction.
Over the five year period, the great empires were severely
diminished, with some being essentially wiped out.
International trade, which had only grown in the past, was now
shrinking. The destruction that had
occurred in Europe transferred financial power to New York as
Europe had to turn to American banks for loans to rebuild their
infrastructure and repay their debts.
The reparations and war debts fuelled international tension
and weakened not just the domestic economies of some
European nations, but also the international economic
structure. European countries were now
debtors rather than creditors of the United States.
The First World War had brought unprecedented prosperity to
American farmers. As with Europe unable to grow
crops, the demand for American agricultural exports exploded,
leading to rising crop prices and rising incomes.
American farmers expanded production to meet this demand
by moving on to marginal farmland and buying machinery
like tractors, ploughs and threshers.
The debt of American farmers grew over this period as they
borrowed to invest in both land and machinery.
When the war ended, agricultural production in Europe recovered
faster than many expected and Europe no longer needed to buy
America's surplus farm production.
This led to a short depression in 1920 when American farm
prices collapsed and the consumer price index fell by
11.3%. Despite this downturn, at the
start of the decade, America's economy was growing healthily.
In the 1920's. The war had brought new
inventions and innovations in mass production.
When people think of the 1920s today, certain images come to
mind. Speakeasies, flappers, the
Charleston bathtub, gin, Duisenberg and Auburn cars.
The 20s have been described as an era when America withdrew
from the world and went into an orgy of self indulgence.
The decade's been given many names like the Jazz Age, the
Prosperity decade, the New Era, the Era of Excess, the Ballyhoo
years, and the Dry decade. The good times all unfortunately
ended with the 1929 crash, not just in the United States, but
all over the world. So why did events on Wall Street
reverberate around the world? And why did the Depression last
so long? And how did America and the rest
of the world eventually dig itself out of the financial
hole? Between 1920 and 1929, the
American economy was growing rapidly.
Worker productivity soared by 63%.
Henry Ford had perfected his assembly line to the point where
a new Model T was being built every 10 seconds.
Airplanes in the 1920s were becoming more widely used for
commercial purposes, and the decade is known as the Golden
Age of aviation. By 1929, there was one car to
every five Americans, and 1/3 of American homes had a radio.
This new invention, which would have sounded like magic a decade
earlier, was now being seen as essential from a tiny base.
In 1922, sales of radios had increased by 1400%.
By 1929, there was a similar, if not quite so spectacular,
explosion in the sales of household appliances like vacuum
cleaners, electric irons, refrigerators and washing
machines. All of these new industries
explained the economic boom of the decade.
The way people spent their leisure time was changing too.
Recreational activities like travelling, going to the movies
and professional sports became major businesses if the economy
was to keep growing. Someone of course had to buy all
of these products, and a culture of consumerism grew as more
goods reached more people than ever before.
Despite the booming economy, many bought the new goods on
credit, leading to a significant increase in household debt by
the end of the decade. There was a mild recession in
1924 and another in 1927, which is blamed on Ford closing all of
its production auction lines for six months to retool for the new
Model A. That gives you an idea of how
important the automobile industry was at the time.
Not everyone shared in the benefits of America's rapid
industrialization. In 1810, eighty 1% of Americans
had worked in agriculture. By 1920, agricultural employment
had declined to 22% as farming became more mechanized and
people moved to the cities to work in factories.
In 1920, the farmers that made-up 22% of the population
received 15% of the national income.
Eight years later, in 1928, farm families accounted for just 9%
of national income as the price of farm produce was falling.
By 1929, the annual income of a farm worker was 36% of what was
being earned by the average American.
While farm workers suffered heavily during the Great
Depression, it's worth remembering that they'd been
suffering in the decade leading up to the Great Depression, too.
It's argued that the Great Depression had roots in a number
of global economic dislocations that arose when European
agricultural production came back online after the First
World War. The chronic overproduction of
agricultural produce both in Europe and the United States
drove produce prices down, making it even harder for
countries with large external war debts, like Germany, to earn
the hard currency they needed to make interest payments to their
foreign creditors. Overproduction from the
perspective of farmers doesn't mean producing more food than
the planet can eat. There was a severe famine in
Russia in the early 20s. Overproduction from a farmer's
perspective just means producing more food than there was a
paying market. For farmers, difficulties were
compounded by the rise of the automobile in the 20s, as cars
replaced the demand for beasts of burden that farmers had bred
and provided to the country. The First World War had also
increased the power of organised labour in Europe, much more so
than in the United States. This made it difficult for
European employers to cut wages when deflation was boosting the
real income of workers and wiping out the profit margins of
employers. European businesses were forced
at the time to choose between worker layoffs or bankruptcy,
and they chose layoffs. While the cultural memory of the
1920s and 30s is of a great economic boom in the 20s
followed by depression in the 30s, that is a very US centred
view of history. In Britain the economic
experience was reversed. The 1920s were hard years for
the British economy, particularly in industrial
regions which were plagued by high unemployment, weakly growth
and deflation. The British economy started its
recovery in 1931 when it came off the gold standard and the
pound was allowed to fall to its natural level.
So why was Europe so different to the United States?
Well, World War One had destroyed the economies of
Europe and left the European powers heavily indebted. the US
had displaced the UK as the world's banker, and Britain was
struggling to repay its wartime debt while trying to restore the
British pound to its former role as the world's reserve currency.
In 1925 Winston Churchill, the British Chancellor of the
Exchequer at the time, made his first significant policy
initiative to restore the gold standard after the country had
suspended convertibility 9 years earlier so that it could freely
finance its war effort. The Bank of England were pushing
this idea, which Churchill initially opposed.
He consulted a number of economists, which is always a
mistake, who endorsed the change and so in his first budget he
controversially announced the return to the gold standard at
the pre war exchange rate of £4.25 to the ounce, the rate
that had been set by Isaac Newton when he had been Master
of the Royal Mint in 1717. The British pound had fallen to
as low as $3.40 in gold based dollars in 1920 and while it was
rising back to its old value it was still about 10% overvalued
at that price. John Maynard Keynes wrote to
Churchill at the time explaining the consequences of this
decision. It meant that British exports
would be too expensive and imports too cheap.
This would harm British businesses and workers.
During this period, due to physical gold shortages, most
nations other than the United States had stopped domestic
circulation of gold and held their international reserves in
the form of either U.S. dollars or British pounds.
International transactions used dollars or pounds and sometimes
French francs, all of which were pegged to gold at fixed exchange
rates. The Overvaluation of the pound
and the undervaluation of the franc at the same time caused
all sorts of problems. The British trade deficit led to
a capital outflow, higher interest rates, and a weak
economy. The French trade surplus led to
the importation of gold that the French government didn't allow
to circulate so that it wouldn't expand the money supply.
The International Monetary arrangements of the 20s were
destabilizing because they were not allowed to operate as a
price mechanism promoting equilibrating adjustments.
Gold convertibility had historically constrained trade
in important ways, as trade imbalances were limited by the
ability of a country to maintain convertibility into gold.
Large trade imbalances like exporting too much or importing
too much, threatened convertibility as each country's
promise to exchange currency for gold became less credible when
foreign holdings of the country's currency rose relative
to its central bank's gold reserves.
This system, despite its many problems, did keep global trade
broadly balanced. Countries that exported more
than they imported would experience an inflow in gold,
raising the supply of money, which would spark inflation.
In response, exports from that country would decrease and
imports would increase as foreign products became more
competitively priced. The opposite would occur when
countries imported more than they export supported, as the
outflow of gold would cause deflation, making goods more
attractive for export. Because of this mechanism,
demand contraction in deficit countries was always matched by
demand expansion in surplus countries.
Everything balanced out. This system changed in the wake
of the First World War, as there were massive reconstruction
costs which the victors had imposed on Germany.
Germany made its first reparations payment in 1921, but
after that paid little in cash and fell behind in its
deliveries of commodities like coal and timber.
When Germany defaulted in 1923, French and Belgian troops
occupied the roar. Germany responded with passive
resistance to the occupation and the government printed money to
pay the idle workers which fuelled the hyperinflation which
was destroying the German economy.
The DOS plan of 1924 was set in place to ease the problem.
Under the plan, Americans lent money to Germany to pay
reparations to the European allies, who in turn made debt
payments to the United States. This arrangement kicked off
American foreign lending on a massive scale. the US was
running a large trade surplus at the time, exporting much more
than they imported, not unlike what China does today.
Finished goods left the country and gold came in, and America
could afford to lend money abroad.
This lending financed foreign purchases of American goods.
American foreign lending hit $900 million in 1924 and 1.25
billion in both 1927 and 1928. This financing of foreign
purchases of American goods helped the unbalanced U.S.
economy where more goods were being produced and could be
consumed domestically, and it helped it avoid collapse for a
few years. But ultimately it made the crash
even worse when it eventually came.
The British had fulfilled the role of the world's banker
before the First World War, and British lending in the 1800s had
generally been counter cyclical. When times were good at home,
domestic investment opportunities drew British
capital away from international loans.
But during slumps in the domestic economy, the British
expanded foreign lending. This ebb and flow had a globally
stabilizing influence. American foreign lending in the
20s and early 30s followed an opposite pattern.
In the late 1920's, the US was a huge exporter, but the American
farmer was still suffering as overproduction had continued to
depress the prices of agricultural goods.
In the lead up to the 1928 election, Senators Smoot and
Hawley put forth the idea that raising tariffs on imports would
alleviate the overproduction issue.
Now, while there had been an increase in imports of
manufactured goods, manufactured exports were rising even faster.
Food exports had been falling, but the value of food imports
from abroad was actually very small.
Overall, the United States was a huge exporter, and these tariffs
made no sense whatsoever. Herbert Hoover, who was running
for election in 1928, pledged that as part of his program to
help farmers, he would seek higher duties on agricultural
imports. And once elected, he called a
special session of Congress for the purpose of selective
revision of the tariffs. Public discussions about the
tariffs centred on helping the American farmer and equalizing
production costs at home and abroad.
These arguments couldn't have been more wrong, as once trade
partners retaliated, farmers ended up losing more from
increased costs on items they import than they gained from
price increases for their products, most of which faced
almost no foreign competition anyhow.
An American Farm Bureau Federation study indicated that
American farmers would gain $30 million from the increases in
agricultural tariffs and lose 330 million in increased costs.
Hoover's special session dragged on, and the House of
Representatives eventually passed the act in May 1929.
If the United States wasn't going to buy goods from other
countries, there was no way for other countries to earn dollars
to buy from Americans, and, more importantly, no way to earn
dollars to meet the interest payments on American loans.
By September 1929, Hoover's administration had received
protest notes from 23 trading partners.
Some countries just protested, while others also retaliated
with trade restrictions and tariffs of their own.
American exports to the protesting nations fell 18% and
exports to those who retaliated fell by 31%.
Many scholars have argued that while the Smoot Hawley tariff
had disastrous economic effects that it can't be blamed for the
stock market collapse of October 1929 since it wasn't signed into
law until the following June. Others argue that investors were
aware that the tariffs were in the pipeline and would have
tried to anticipate the likelihood of the ACT passing
and it's expected economic effects.
If investors did anticipate the effects of the tariffs and sold
their stocks, they might have been wise to do so as exports
fell from $7 billion in 1929 to 2 1/2 billion dollars by 1932.
Federal spending was only $2.6 billion in 1929 and reached 3.2
billion in 1932. The tariffs didn't exactly help
the American farmer either. Trade accounted for 17% of
farming come before the tariffs, and farm exports were slashed to
a third of their 1929 level by 1933.
On the eve of the crash, the United States was actually in
good economic shape. There was no shortage of
productivity enhancing technological innovation, which
meant that the same amount of Labor now produced significantly
more goods. Businesses like Ford were doing
well and were able to pay their workers well.
America was applying science and invention to industry like never
before, and even management practices were being
revolutionized by men like Alfred Sloan at General Motors.
RCA, which was the hottest tech stock of the 1920s, rose by 940%
between 1925 and 1929. It's PE ratio at the peak was
73, which is high, but we've also seen higher and for slower
growing companies the stock bubble encouraged A rush of new
IP OS. It's not true, however, that
everyone was speculating madly in 1929.
Just 3% of Americans owned any stock at the time, and only
around 1% owned enough stock to keep an account with a broker.
The majority owned only a few shares.
The Great Depression can't be simply blamed on the bursting of
the stock bubble or the imposition of tariffs.
Real life is, of course, a bit more complicated than that.
By 1920, the United States held around 40% of the world's
monetary gold. France had been accumulating
gold too, and its share of the world's gold supply rose from 9%
in 1927 to 17% by 1929 and reached 22% in 1931.
Before the crash in 1928, the US Fed was worried about its loss
of gold and also about the ongoing boom in the stock
market, and so it hiked interest rates to stop the outflows.
As the US and France accumulated more and more of the world's
monetary gold, other central banks took measures to stem the
outflow of gold too. In country after country, these
deflationary strategies began contracting economic activity,
and by 1928 some countries in Europe, Asia, and South America
had fallen into recession due to a shortage of money.
More countries economies began to decline in 1929, including
the United States, and by 1930 a depression was in force for
almost all of the world's market economies.
Contrary to popular beliefs, the 29 crash was not a two day
event. Instead it was a long rolling
downward slide that went on for weeks from September the 3rd
until November 13th. There were brief upsurges after
some of the worst days, but down and down it went.
A week before Black Thursday, Irving Fisher, an economics
professor at Yale, announced that the US stock prices had
reached a permanently high plateau.
Given the growth in productivity and technology, it was
reasonable for earnings to only trend higher, he said.
The stock market had unfortunately been slipping for
over a month at that point, and on Black Monday dove 13% in a
day, falling a further 12% the next day.
Over the next three years, the US stock market declined almost
90%, reaching its low in July 1932.
The market didn't return to its prior peak until November 1954 /
25 years later. This collapse if it didn't
actually 'cause it coincided with the start of the worst
economic shock in the history of the industrialized world.
In the United States, economic output collapsed by a third.
Unemployment reached 25%, or closer to 33% if a modern
definition of unemployment was used.
The Depression was a global catastrophe that saw prices and
output decline in almost every economy in the world.
Only Germany saw a severe and economic decline.
As in America, international trade shrunk by 2/3 as countries
tried to hide behind tariffs and import quotas to defend their
internal economies. The Soviet Union, with its
planned economy, was the only country that appeared to be
unaffected. The deflation that took place in
the first three years of the Great Depression was the most
dramatic deflation that the US has ever experienced.
Prices dropped an average of 7% per year between 1930 and 1933.
Deflation led to business bankruptcies, bank runs and
rising rates of unemployment. Between the summer of 1929 and
early 1933, the wholesale price index fell 33%.
President Hoover, in trying to boost American spirits after the
crash, told journalists that the fundamental business of the
country, that is the production and distribution of commodities,
is on a sound and prosperous basis.
A year later, in 1930, he told Americans that prosperity was
just around the corner, and he likely believed it at the time,
as recessions and depressions had always come and gone within
a year or two. Other than during the First
World War, business activity had fallen in only seven of the last
60 years, and the only two year set back had been nineteen O 7
to 19 O 8. Historically, the average annual
decline in real GDP during a slowdown was 1.6%, and the worst
decline had been 5 1/2 percent. This time around it was a lot
worse. Production fell 9.3% in 1930 and
a further 8.6% in 1931. At the very bottom, in June
1932, GDP was 55% below its 1929 peak, so roughly 10 times worse
than the worst example that had been seen up until that point.
And rather than lasting one or two years, the downturn would
last a decade. Even during the boom of the
1920s, American economic growth had been below its long term
growth trend. Starting in 1870 when the United
States was in its hyper growth phase, a number of recessions
and depressions had hit the United States during that prior
period of growth. But the historian Robert
Mcelvain, in his excellent book The Great Depression, notes that
each slowdown over that period had hit harder than the prior. 1
He argues that as the United States became less agrarian and
more industrial, less rural and more urban, an ever increasing
percentage of the population became susceptible to the
vagaries of the market economy. In the less industrial era,
Americans had of course been victims of economic collapse,
but they had mostly been able to feed themselves and their
families during hard times as they were mostly farmers.
By the 1930s, Americans were more dependent on wages as the
nation had industrialized. Urban working class people who
rented their homes and worked in factories found themselves in
desperate straits when they lost their jobs and couldn't find new
ones. And over time there were more
and more of these people, and the population was sensitive to
economic conditions rather than growing conditions.
Herbert Hoover is often accused of doing nothing for the people
in the early days of the Depression, but that's not
really fair to say. He did spend heavily on public
works, schools, roads and hospitals, and in fact engaged
in more peacetime spending than any president had done before
him. But it simply wasn't enough.
The international part of the crisis began in 1931 when the
credence styled Bank of Vienna collapsed, starting a domino
effect that spread to the rest of Europe.
The reason this collapse was so impactful is that it was not
just the largest bank in Austria, but it was larger than
all of the other Austrian banks combined.
It had a strong ties to the rest of Europe and it's collapse led
to a Europe wide crisis. The runs on gold in Europe LED
Britain to leave the gold standard in 1931 and devalue the
pound. Leaving the gold standard was a
politically controversial move at the time.
It was by no means a cure all, but overall devaluation helped
Britain to become more competitive and the 1930s proved
a far less painful period for the UK than they were for most
other major economies at the time.
A more competitive British pound allowed for a strong British
recovery and significantly greater middle class prosperity.
While on the gold standard standard Britain had been forced
to slash spending and raise taxes, which were not exactly
flowing in due to the depressed business environment and high
unemployment. While things were now improving
in the UK, they were only getting worse in the United
States. Technological improvements in
the 1920s, like mechanized plowing and harvesting, had made
it possible to operate larger farms in the United States
without higher labor costs. With insufficient understanding
of the ecology of the Great Plains, farmers had been plowing
the virgin topsoil, displacing the native deep rooted grasses
that normally trapped soil and moisture even during periods of
drought and high winds. The Plains entered an unusually
dry era in the summer of 1930, and over the next decade the
Northern Plains suffered 4 of their seven driest calendar
years in recorded history. The dry weather caused crops to
fail, leaving the plowed fields exposed to wind erosion.
The soil eroded and was carried eased by strong continental
winds. This catastrophe intensified the
economic impact of the Great Depression in the region, and
farming families who had already been suffering for a decade were
forced to abandon their farms and migrate to other parts of
the country seeking work. The catastrophe led to
widespread hunger, homelessness and poverty.
Over the decade of the Great Depression, about 3 1/2 million
people migrated as Dust Bowl refugees out of the Plains
state. Robert Mckelvin writes in his
book on the Depression that history is usually viewed from
the top or through the eyes of elites by examining the
activities of governments and intellectuals.
But the Great Depression, he argues, needs to be examined
through the eyes of the ordinary person to understand how it
caused a fundamental shift in the values of the American
people. Older Americans will remember
how their parents or grandparents who lived through
these times scrimped and saved even when times were good, and
were careful not to waste anything in case hard times were
to come again. Mckelphain writes that the
initial reaction to the depression by its many victims
was bewilderment, defeat and self blame.
People who had taken credit for the success that they had
enjoyed in the 20s felt that they had little choice but to
accept responsibility for their unfortunate circumstances in the
30s as they tried to understand the calamity that had befallen
them. Conditions were particularly bad
for farmers who were now in the second decade of their
depression. By 1932, a bushel of wheat would
fetch only 10% of what it had bought 12 years earlier.
The farmer now had to deal not only with low prices for his
products, but also with general deflation.
Farmers crushed by long term debt were threatened with
foreclosure. Penny auctions were one example
of how bankrupt farmers stuck together.
Neighbours of a bankrupt farmer would prevent, by thread of
force if necessary, realistic bids to buy a foreclosed farm.
They would then buy it back for a nominal fee, often $1.00, to
return it to its original owner. Workers lined up hopelessly
outside factories looking for work, knowing full well that
none was available. Hardworking Americans, used to
supporting themselves and their families, felt great shame
lining up in bread lines and at soup kitchens.
In rural areas, hungry people sometimes turned to eating
weeds, and urban dwellers turned to rooting through garbage cans
and city dumps for food. A Chicago widow reported that
she would remove her glasses before eating spoiled meat as
the sight of it was so revolting.
Records of the time describe how the lack of money, work and self
esteem caused problems at home too, as when a father's dignity
was based on his occupation and his role as a provider.
The loss of his job meant a decline in his status within the
family. People often withdrew socially
to hide the shame of being out of work, not realizing how many
of their friends were in the same situation.
Men over the age of 40 became unemployable.
They would often spend their last few pennies on a second
hand suit of clothes so that they would look decent when
applying for jobs. They began to look and feel
older than they actually were. The lack of nutrition left them
underweight, and their shabby clothes with frayed collars,
worn shoes, and their missing teeth added decades to their
appearance. Women lost proportionally fewer
jobs than men during the Great Depression, as the type of work
that they did at the time was more personal in nature.
School teachers, domestic servants, and clerical workers
were more valued by their employers as individuals, and
they weren't considered interchangeable like factory
workers and farmhands were. When the New Deal was
introduced, even more roles which were considered women's
work, like social work and clerical work, were created than
had existed before the Depression.
Additionally, because women earned less than men, they were
cheaper to keep on during hard times.
A 1940 study found that in the five most depressed sectors,
women represented only 2% of the workforce.
In stark contrast, women held 30% of the jobs in the
industries which experienced the least layoffs.
Employment discrimination, both in terms of what constituted a
female job as well as the wage gap, kept more women in steady
work than men. Racial minorities fared the
worst during the Depression, often being the first to be laid
off and the last to be rehired. I should mention that many today
only see the bleakness of the Great Depression, and it was a
bleak time, but this is partially due to the stark black
and white photographs that remain to this day.
The novelist Josephine Herbst writes that there was also an
almost universal liveliness that countervailed universal
suffering. The home, she says, became a
center of leisure activity, with an evening by the radio, a
reading aloud from books, which provided a cheap form of family
entertainment. She went on to say that talking
was the Great Depression pastime.
Unlike the movies, talk was free.
By the election of 1932, the American voter had had enough
with Herbert Hoover, who they blamed for the economic
downturn. Franklin D Roosevelt aligned
himself with the growing public hostility to bankers and greedy
businessmen and swept to power in 1933 when his party won its
biggest advantage in the Senate and the House since the Civil
War. Even in the prosperous 20s,
nearly 7000 American banks had failed.
Most of these had been small country banks, and their
failures had hardly been noticed.
In 1930, the situation got a lot worse.
There were 1345 failures that year, including a large bank,
the Bank of the United States, in New York.
More than 2000 banks failed in 1931, and depositors of the time
were unable to distinguish good banks from bad.
As his first act in office, FDR declared a nationwide bank
holiday where banks were closed until examiners could decide if
they were good or not. He submitted to Congress an
emergency banking bill drawn up largely by bankers, and both
houses passed the bill without debate.
A rolled up newspaper was used to symbolize the proposed
legislation until the still wet copies of the bill arrived.
Roosevelt signed it into law 8 hours after its introduction in
Congress. The ACT provided assistance to
private bankers and gave them a government stamp of approval.
It created the FDIC, which began insuring bank accounts at no
cost for deposits of up to $2500 per customer.
The ACT additionally gave the president executive power to
operate independently of the Federal Reserve during times of
financial crisis. In 1933, Roosevelt abandoned the
gold standard, delinking the value of the dollar to gold,
which caused the dollar to fall 11 1/2%.
In 1934. He relinked it at a lower gold
content than before. Roosevelt was elected for four
consecutive terms, while there was a tradition of only serving
2 terms. There were no presidential term
limits in law at the time. Roosevelt's first 100 days in
office saw an unprecedented amount of legislation being
passed. He established a number of
agencies and measures designed to provide relief for the
unemployed and to end the Depression.
The Federal Emergency Relief Administration distributed
relief to state governments. The Public Works Administration
oversaw the construction of large scale public works like
dams, bridges, and schools. The Rural Electrification
Administration brought electricity to rural homes, and
the Civilian Conservation Corps hired 250,000 unemployed man for
rural projects. FDR expanded Hoover's
Reconstruction Finance Corporation, which financed
railroads and industry. He gave the Federal Trade
Commission broad regulatory powers and provided mortgage
relief to millions of farmers and homeowners.
Roosevelt passed 2 securities acts, one in 1933 and another in
1934, establishing the Securities and Exchange
Commission and the securities regulations that we have today.
He set up the Agricultural Adjustment Administration to
increase commodity prices by paying farmers to leave land
uncultivated and cut herd. This was probably his most
controversial act, as in order to drive up agricultural
commodity prices, he ordered the slaughter of over 6,000,000
pigs, the plowing under of 10 million acres of crops, all at a
time when Americans were struggling to feed themselves.
There had been 30 deaths from starvation in America in the
very year when all of this food was being ordered to be spoiled.
The Agricultural Adjustment Administration concept of
limiting agricultural production was no better in a country where
people were able to feed their children and agricultural
workers couldn't find work. Roosevelt tried to cut the
federal budget too. This included a reduction in
military spending and a 40% cut in spending on veterans
benefits. Half a million veterans and
widows were removed from the pension rolls and benefits were
reduced for the remainder. Federal salaries were cut and
spending on research and education was reduced too.
The veterans were well organized, protested, and won
the right to transform their benefits from payments due in
nine years time to immediate cash.
This change pumped enough money into the consumer economy to
have a major stimulus effect in 1936 when it was paid out.
In his second term, Roosevelt introduced the minimum wage and
Social Security. While Social Security will have
helped reduce elder poverty eventually, it was quite a
flawed piece of legislation as it excluded the neediest
workers, farm and domestic workers, and it worked as a form
of payroll tax, taking spending money out of the economy where
it was needed. Workers badly in need of
spending money had to start paying into Social Security
right away, and no future payments were scheduled until
1941. The most important part of the
Second New Deal was the Works Progress Administration, which
divided $5 billion among several different agencies to create
work for the unemployed. There were problems with the
WPA. The pay was very low, amounting
to half of the subsistence wage at the time.
The reason for the low wages was that firstly there was not
enough money to go around, but also because Roosevelt wanted to
be sure that work relief was not attractive in comparison with
private employment. So wages were kept low and the
projects taken on were mostly unimportant as it was designed
to not compete with private businesses.
The Public Works Commission, on the other hand, was seen as a
means of bringing about recovery but also providing valuable
public infrastructure to the American people.
The PwC was headed by Harold Ike, who refused to spend for
the sake of spending, so much of the money was spent on
materials, engineers and skilled workers.
Private contractors often did the work.
The agency was efficiently run and left public structures like
bridges, dams, schools, municipal building, sewage
systems, port facilities and hospitals.
The clear purpose of PwC projects and the careful
spending kept it above much of the criticism that was levelled
at other New Deal programs. Scarcely anyone in government at
the time, including Roosevelt, liked the idea of the dole.
It was believed that direct relief payments stripped people
of their sense of independence and their sense of individual
destiny. Roosevelt, who spoke directly to
the American people on the radio in his fireside chats, the first
time an American president was able to communicate directly
with voters, received masses of mail from the public, which were
a treasure trove of information for historians trying to
understand the times. Americans wrote to the president
asking for work rather than Dole.
Robert Mcgillvane provides excerpts from these letters in
his book. My pride took an awful beating
when I had to apply for relief, a Minneapolis man wrote.
But I feel different about the WPA.
Here I am working for what I'm getting, a woman wrote in saying
it means that I can look people in the eye because I'm not on
the dole. Another man wrote that the work
allowed him to sleep nights instead of lying awake thinking
of desperate things he might do. Roosevelt won his third term in
1940, winning 55% of the popular vote.
There was a strong class division in the vote, and a
survey conducted after the election found that 80% of those
on relief had voted for Roosevelt, as had 60% of those
who said that they wouldn't get by without relief for one month
if they lost their jobs. The unemployment rate in 1940
was still at 14.6%, and even in 1941, as the defense industries
moved into high gear exporting arms to Europe, the mean
unemployment rate was still 9.9%, representing almost
6,000,000 Americans who wanted to work.
Industrial production, which had finally surpassed its 1929
level, soared 30% above its 1929 level level in 1941.
The Great Depression was a global phenomenon.
By the late 1930s, every country had replied to economic
difficulties by devaluing their currency and raising tariffs,
all in an attempt to push economic distress from their
country to others. The failure to cooperate on
economic matters had said every country against its neighbors.
Economic failures had led to political failures, and
extremist governments took power in many countries.
When war kicked off in Europe, nations around the world moved
gold to the United States for safety.
American banks filled with gold were now willing to land again.
Military spending boosted American exports and possibly
saved the reputation of the New Deal and the Roosevelt
presidency. Without the military boom,
Roosevelt's presidency might have been remembered as
compassionate and helpful, but ineffective in solving the
fundamental problems of the Depression.
Whether you owned a business, had a job, invested, borrowed
money, or even just had a bank account in the 1930's, the
Depression found a way to hurt you financially.
Globalization, and then the retreat from globalization meant
that the effects of the Great Depression were felt around the
world. The economic effects hit Germany
particularly hard, leading to the rise of Hitler, who used the
despair of the German people as a rallying call.
In the 1950s, Milton Friedman and Anna Schwartz began
compiling historical data on monetary variables.
As they examined the data, they say that it became obvious that
the data was at odds with the standard Keynesian explanation
for the Great Depression. In their 1963 book Monetary
History of the United States, they presented the evidence that
led them to the conclusion that the Great Depression was not the
necessary and direct result of the stock market crash of
October 1929. Friedman and Schwartz argued
that the Depression was brought about by the Fed's failure to
carry out its role as the lender of last resort rather than
providing liquidity through loans.
They say that the Fed just watched as banks dropped like
flies, oblivious to the effect this would have on the monetary
supply. They say that the Fed could have
offset the decrease created by bank failures by engaging in
bond purchases, but it didn't do so.
They say that the Federal Reserve System should have
engaged in large scale, open market purchases of government
bonds, providing banks with additional cash to meet the
demands of their depositors. This would have ended or at
least sharply reduced the stream of bank failures and would have
prevented bank runs from reducing the quantity of money.
Unfortunately, the Fed's actions were hesitant and small.
In the main, it stood by idly and let the crisis take its
course. In 2002, Ben Bernanke, then a
member of the Federal Reserve Board of Governors, publicly
acknowledged that the Federal Reserve's mistakes contributed
to the worst economic disaster in American history.
Michael Pettis, when writing about Chinese overproduction,
compared it to American overproduction in the 1920s.
He explained that the 1929 crash cut off funding for countries
who are buying US exports. If foreign countries could no
longer absorb US overcapacity, he argues, then the US needed to
either increase domestic consumption or cut back on
domestic production. One way or another, production
and consumption needed to balance.
He says that there was, of course, more to the story than
just a drop in foreign demand for American goods, and that
with the collapse of parts of the domestic U.S. banking
system, domestic private consumption also fell.
He says that the slack in demand should have been taken up by US
fiscal expansion, but instead of expanding aggressively, both
Hoover and Roosevelt expanded cautiously.
Since US production exceeded US consumption, the need for demand
creation most logically resided in the United States.
But the US had other ideas. Rising unemployment pressures
prompted US senators to respond with tariffs.
With the tariffs, Washington was trying to create additional
demand for American goods by upping the prices foreign made
goods, forcing the brunt of the adjustment onto trading partners
who of course retaliated, causing international trade to
decline by nearly 70% in three years.
Without global trade, each country had to adjust domestic
supply to match domestic demand, but in such a situation, export
driven economies, which the United States was at the time
and China is today, are more vulnerable to a reduction in
trade than countries who mostly buy foreign goods are.
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