The Great Depression began in August 1929, when the United States economy first went into an economic recession. Although the country spent two months with declining GDP, it was not until the Wall Street Crash in October 1929 that the effects of a declining economy were felt, and a major worldwide economic downturn ensued. The market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation, plunging farm incomes, and lost opportunities for economic growth and personal advancement. Although its causes are still uncertain and controversial, the net effect was a sudden and general loss of confidence in the economic future.
- The depression in the cities
- Global comparison of severity
- Canada and the Caribbean
- Australia and New Zealand
- Political results of the depression
- Recession of 1937
- Facts and figures
The usual explanations include numerous factors, especially high consumer debt, ill-regulated markets that permitted overoptimistic loans by banks and investors, and the lack of high-growth new industries, all interacting to create a downward economic spiral of reduced spending, falling confidence and lowered production.
Industries that suffered the most included construction, agriculture as dust-bowl conditions persisted in the agricultural heartland, shipping, mining, and logging as well as durable goods like automobiles and appliances that could be postponed. The economy reached bottom in the winter of 1932–33; then came four years of very rapid growth until 1937, when the Recession of 1937 brought back 1934 levels of unemployment.
The Depression caused major political changes in America. Three years into the depression, President Herbert Hoover, widely blamed for not doing enough to combat the crisis, lost the election of 1932 to Franklin Delano Roosevelt in a landslide. Roosevelt's economic recovery plan, the New Deal, instituted unprecedented programs for relief, recovery and reform, and brought about a major realignment of American politics.
The Depression also resulted in an increase of emigration of people to other countries for the first time in American history. For example, some immigrants went back to their native countries, and some native US citizens went to Canada, Australia, and South Africa. It also resulted in the mass migration of people from badly hit areas in the Great Plains and the South to places such as California and the North, respectively (see Okies and the Great Migration of African Americans). Racial tensions also increased during this time. By the 1940s immigration had returned to normal, and emigration declined. A well-known example of an emigrant was Frank McCourt, who went to Ireland, as recounted in his book Angela's Ashes.
The memory of the Depression also shaped modern theories of economics and resulted in many changes in how the government dealt with economic downturns, such as the use of stimulus packages, Keynesian economics, and Social Security. It also shaped modern American literature, resulting in famous novels such as John Steinbeck's The Grapes of Wrath and Of Mice and Men.
There are multiple originating issues: what factors set off the first downturn in 1929, what structural weaknesses and specific events turned it into a major depression, how the downturn spread from country to country, and why the economic recovery was so prolonged.
Banks began to fail in October 1930 (one year after the crash) when farmers defaulted on loans. There was no federal deposit insurance during that time as bank failures were considered quite common. This worried depositors that they might have a chance of losing all their savings, therefore, people started to withdraw money and changed it into currency. As deposits taken out from the bank increased, the money supply decreased because the money multiplier worked in reverse, forcing banks to liquidate assets (such as call in loans rather than create new loans.) This caused the money supply to shrink and the economy to contract and a significant decrease in aggregate investment. The decreased money supply further aggravated price deflation, putting further pressure on already struggling businesses.
The US government's commitment to the gold standard prevented it from engaging in expansionary monetary policy. High interest rates needed to be maintained, in order to attract international investors who bought foreign assets with gold. However, the high interest also inhibited domestic business borrowing. The US interest rates were also affected by France's decision to raise their interest rates to attract gold to their vaults. In theory, the U.S. would have two potential responses to that: Allow the exchange rate to adjust, or increase their own interest rates to maintain the gold standard. At the time, the U.S. was pegged to the gold standard. Therefore, Americans converted their dollars into francs to buy more French assets, the demand for the U.S. dollar fell, and the exchange rate increased. The only thing the US could do to get back into equilibrium was increase interest rates.
The depression in the cities
One visible effect of the depression was the advent of Hoovervilles, which were ramshackle assemblages on vacant lots of cardboard boxes, tents, and small rickety wooden sheds built by homeless people. Residents lived in the shacks and begged for food or went to soup kitchens.The term was coined by Charles Michelson, publicity chief of the Democratic National Committee, who referred sardonically to President Herbert Hoover whose policies he blamed for the depression.
Unemployment reached 25 percent in the worst days of 1932-33, but it was unevenly distributed. Job losses were less severe among women, workers in nondurable industries (such as food and clothing), services and sales workers, and those employed by the government. Unskilled inner city men had much higher unemployment rates. Age also played a factor: young people had a hard time getting their first job, and men over the age of 45, if they lost their job, would rarely find another one because employers had their choice of younger men. Millions were hired in the Great Depression, but men with weaker credentials were never hired, and fell into a long-term unemployment trap. The migration that brought millions of farmers and townspeople to the bigger cities in the 1920s suddenly reversed itself, as unemployment made the cities unattractive, and the network of kinfolk and more ample food supplies made it wise for many to go back. City governments in 1930-31 tried to meet the depression by expanding public works projects, as president Herbert Hoover strongly encouraged. However, tax revenues were plunging, and the cities as well as private relief agencies were totally overwhelmed by 1931; no one was able to provide significant additional relief. People fell back on the cheapest possible relief, soup kitchens which provided free meals for anyone who showed up. After 1933 new sales taxes and infusions of federal money helped relieve the fiscal distress of the cities, but the budgets did not fully recover until 1941.
The federal programs launched by Hoover and greatly expanded by President Roosevelt's New Deal used massive construction projects to try to jump start the economy and solve the unemployment crisis. The alphabet agencies ERA, CCC, FERA, WPA and PWA built and repaired the public infrastructure in dramatic fashion, but did little to foster the recovery of the private sector. FERA, CCC and especially WPA focused on providing unskilled jobs for long-term unemployed men.
The Democrats won easy landslide victories in 1932 and 1934, and an even bigger one in 1936; the hapless Republican Party seemed doomed. The Democrats capitalized on the magnetic appeal of Roosevelt to urban America. The key groups were low skilled ethnics, especially Catholic, Jewish, and black people. The Democrats promised and delivered in terms of political recognition, labor union membership, and relief jobs. The cities' political machines were stronger than ever, for they mobilized their precinct workers to help families who needed help the most navigate the bureaucracy and get on relief. FDR won the vote of practically every demographic in 1936, including taxpayers, small business and the middle class. However, the Protestant middle class voters turned sharply against him after the recession of 1937-38 undermined repeated promises that recovery was at hand. Historically, local political machines were primarily interested in controlling their wards and citywide elections; the smaller the turnout on election day, the easier it was to control the system. However, for Roosevelt to win the presidency in 1936 and 1940, he needed to carry the electoral college and that meant he needed the largest possible majorities in the cities to overwhelm rural voters. The machines came through for him. The 3.5 million voters on relief payrolls during the 1936 election cast 82% percent of their ballots for Roosevelt. The rapidly growing, energetic labor unions, chiefly based in the cities, turned out 80% for FDR, as did Irish, Italian and Jewish communities. In all, the nation's 106 cities over 100,000 population voted 70% for FDR in 1936, compared to his 59% elsewhere. Roosevelt worked very well with the big city machines, with the one exception of his old nemesis, Tammany Hall in Manhattan. There he supported the complicated coalition built around the nominal Republican Fiorello La Guardia, and based on Jewish and Italian voters mobilized by labor unions.
In 1938, the Republicans made an unexpected comeback, and Roosevelt's efforts to purge the Democratic Party of his political opponents backfired badly. The conservative coalition of Northern Republicans and Southern Democrats took control of Congress, outvoted the urban liberals, and halted the expansion of New Deal ideas. Roosevelt survived in 1940 thanks to his margin in the Solid South and in the cities. In the North the cities over 100,000 gave Roosevelt 60% of their votes, while the rest of the North favored Willkie 52%-48%.
With the start of full-scale war mobilization in the summer of 1940, the economies of the cities rebounded. Even before Pearl Harbor, Washington pumped massive investments into new factories and funded round-the-clock munitions production, guaranteeing a job to anyone who showed up at the factory gate. The war brought a restoration of prosperity and hopeful expectations for the future across the nation. It had the greatest impact on the cities of the West Coast, especially Los Angeles, San Diego, San Francisco, Portland and Seattle.
Global comparison of severity
The Great Depression began in the United States of America and quickly spread worldwide. It had severe effects in countries both rich and poor. Personal income, consumption, industrial output, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Unemployment in the U.S. rose to 25%, and in some countries rose as high as 33%.
Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60%. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as grain farming, mining and logging, as well as construction, suffered the most.
Most economies started to recover by 1933–34. However, in the U.S. and some others the negative economic impact often lasted until the beginning of World War II, when war industries stimulated recovery.
There is little agreement on what caused the Great Depression, and the topic has become highly politicized. At the time the great majority of economists around the world recommended the "orthodox" solution of cutting government spending and raising taxes. However, British economist John Maynard Keynes advocated large-scale government deficit spending to make up for the failure of private investment. No major nation adopted his policies in the 1930s.
Canada and the Caribbean
Australia and New Zealand
Political results of the depression
In the "First New Deal" of 1933–34, programs, such as the National Recovery Administration (NRA), sought to stimulate demand and provide work and relief through increased government spending. To end Deflation the Gold standard was suspended and a series of panels comprising business leaders in each industry set regulations which ended what was called "cut-throat competition," believed to be responsible for forcing down prices and profits nationwide.
The NRA, which ended in March 1935 when the Supreme Court of the United States declared it unconstitutional, had these roles:
In 1934–36, during what the U.S. Department of State calls the "Second New Deal," Roosevelt and his party added social security; the Works Progress Administration (WPA), a national relief agency; and, through the National Labor Relations Board, a strong stimulus to the growth of labor unions. Unemployment fell by ⅔ in Roosevelt's first term (from 25% to 9%, 1933–1937), but fell continually until the war.
In 1929, federal expenditures constituted only 20% of the GDP. Between 1933 and 1939, federal expenditures tripled, but the national debt remained about level at 40% of GDP. (The debt as proportion of GDP rose under Hoover from 20% to 40%; the debt as % of GDP soared during the war years, 1941–45.) Following the Recession of 1937 and the debate on "court packing", southern Democrats joined with Republicans in a conservative coalition to stop further expansion of the New Deal. By 1943, during World War II, all of the relief programs had ended with the exception of Social Security. The labor laws were revised by conservatives in the Taft Hartley Act of 1947.
The New Deal was, and still is, widely debated. The Great Depression and the New Deal remain a benchmark amongst economists for evaluating severe financial downturns, such as the economic crisis of 2008.
Recession of 1937
By 1936, all the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high. In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. A contributing factor to the Recession of 1937 was a tightening of monetary policy by the Federal Reserve. The Federal Reserve doubled reserve requirements between August 1936 and May 1937 leading to a contraction in the money supply.
The Roosevelt Administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the depression, and appointing Thurman Arnold to break up large trusts; Arnold was not effective, and the campaign ended once World War II began and corporate energies had to be directed to winning the war. By 1939, the effects of the 1937 recession had disappeared. Employment in the private sector recovered to the level of the 1936 and continued to increase until the war came and manufacturing employment leaped from 11 million in 1940 to 18 million in 1943.
Another 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 in an effort to increase mass purchasing power.
Business-oriented observers explained the recession and recovery in very different terms from the Keynesian economists. They argued the New Deal had been very hostile to business expansion in 1935–37. They said it had encouraged massive strikes which had a negative impact on major industries and had threatened anti-trust attacks on big corporations. But 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.
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) 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. The incorrect prediction by Alvin Hansen and other Keynesians that a new depression would start after the war failed to take account of pent-up consumer demand as a result of the Depression and World War.
The government began heavy military spending in 1940, and started drafting millions of young men that year; by 1945, 17 million had entered service to their country. But that was not enough to absorb all the unemployed. During the war, the government subsidized wages through cost-plus contracts. Government contractors were paid in full for their costs, plus a certain percentage profit margin. That meant the more wages a person was paid the higher the company profits since the government would cover them plus a percentage.
Using these cost-plus contracts in 1941–1943, factories hired hundreds of thousands of unskilled workers and trained them, at government expense. The military's own training programs concentrated on teaching technical skills involving machinery, engines, electronics and radio, preparing soldiers and sailors for the post-war economy.
Structural walls were lowered dramatically during the war, especially informal policies against hiring women, minorities, and workers over 45 or under 18. (See FEPC) Strikes (except in coal mining) were sharply reduced as unions pushed their members to work harder. Tens of thousands of new factories and shipyards were built, with new bus services and nursery care for children making them more accessible. Wages soared for workers, making it quite expensive to sit at home. Employers retooled so that unskilled new workers could handle jobs that previously required skills that were now in short supply. The combination of all these factors drove unemployment below 2% in 1943.
Roosevelt's declining popularity in 1938 was evident throughout the US in the business community, the press, and the Senate and House. Many were labeling the recession the "Roosevelt Recession". In late December 1938, Roosevelt looked to gain popularity with the American people, and try to regain the nation's confidence in the economy. His decision that December to name Harry Hopkins as Secretary of Commerce was an attempt to achieve the confidence he so badly needed. The appointment came as a surprise to most because of Hopkins' lack of business experience, but proved to be vastly important in shaping the years following the recession.
Hopkins made it his mission to strengthen ties between the Roosevelt administration and the business community. While Roosevelt believed in complete reform (The New Deal), Hopkins took a more administrative position; he felt that recovery was imperative and that The New Deal would continue to hinder recovery. With support from Secretary of Agriculture Henry Wallace and Treasury Secretary Henry Morgenthau, Jr, popular support for recovery, rather than reform, swept the nation. By the end of 1938 reform had been struck down, as no new reform laws were passed.
The economy in America was now beginning to show signs of recovery and the unemployment rate was lowering following the abysmal year of 1938. The biggest shift towards recovery, however, came with the decision of Germany to invade France at the beginning of WWII. After France had been defeated, the U.S. economy would skyrocket in the months following. France's defeat meant that Britain and other allies would look to the U.S. for large supplies of materials for the war.
The need for these war materials created a huge spurt in production, thus leading to promising amount of employment in America. Moreover, Britain chose to pay for their materials in gold. This stimulated the gold inflow and raised the monetary base, which in turn, stimulated the American economy to its highest point since the summer of 1929 when the depression began.
By the end of 1941, before American entry into the war, defense spending and military mobilization had started one of the greatest booms in American history thus ending the last traces of unemployment.
Facts and figures
Effects of depression in the U.S.: