The Great Depression
By: Calvin Kuykendall
The causes and effects
The Great Depression was an economic slump in North America, Europe, and other industrialized areas of the world that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world.
Though the U.S. economy had gone into depression six months earlier, the Great Depression may be said to have begun with a catastrophic collapse of stock-market prices on the New York Stock Exchange in October 1929. During the next three years stock prices in the United States continued to fall, until by late 1932 they had dropped to only about 20 percent of their value in 1929. Besides ruining many thousands of individual investors, this precipitous decline in the value of assets greatly strained banks and other financial institutions, particularly those holding stocks in their portfolios. Many banks were consequently forced into insolvency; by 1933, 11,000 of the United States' 25,000 banks had failed. The failure of so many banks, combined with a general and nationwide loss of confidence in the economy, led to much-reduced levels of spending and demand and hence of production, thus aggravating the downward spiral. The result was drastically falling output and drastically rising unemployment; by 1932, U.S. manufacturing output had fallen to 54 percent of its 1929 level, and unemployment had risen to between 12 and 15 million workers, or 25-30 percent of the work force.
The Great Depression began in the United States but quickly turned into a worldwide economic slump owing to the special and intimate relationships that had been forged between the United States and European economies after World War I. The United States had emerged from the war as the major creditor and financier of postwar Europe, whose national economies had been greatly weakened by the war itself, by war debts, and, in the case of Germany and other defeated nations, by the need to pay war reparations. So once the American economy slumped and the flow of American investment credits to Europe dried up, prosperity tended to collapse there as well. The Depression hit hardest those nations that were most deeply indebted to the United States, i.e., Germany and Great Britain. In Germany, unemployment rose sharply beginning in late 1929, and by early 1932 it had reached 6 million workers, or 25 percent of the work force. Britain was less severely affected, but its industrial and export sectors remained seriously depressed until World War II. Many other countries had been affected by the slump by 1931.
Almost all nations sought to protect their domestic production by imposing tariffs, raising existing ones, and setting quotas on foreign imports. The effect of these restrictive measures was to greatly reduce the volume of international trade: by 1932 the total value of world trade had fallen by more than half as country after country took measures against the importation of foreign goods.
The Great Depression had important consequences in the political sphere. In the United States, economic distress led to the election of the Democrat Franklin D. Roosevelt to the presidency in late 1932. Roosevelt introduced a number of major changes in the structure of the American economy, using increased government regulation and massive public-works projects to promote a recovery. But despite this active intervention, mass unemployment and economic stagnation continued, though on a somewhat reduced scale, with about 15 percent of the work force still unemployed in 1939 at the outbreak of World War II. After that, unemployment dropped rapidly as American factories were flooded with orders from overseas for armaments and munitions. The depression ended completely soon after the United States' entry into World War II in 1941. In Europe, the Great Depression strengthened extremist forces and lowered the prestige of liberal democracy. In Germany, economic distress directly contributed to Adolf Hitler's rise to power in 1933. The Nazis' public-works projects and their rapid expansion of munitions production ended the Depression there by 1936.
At least in part, the Great Depression was caused by underlying weaknesses and imbalances within the U.S. economy that had been obscured by the boom psychology and speculative euphoria of the 1920s. The Depression exposed those weaknesses, as it did the inability of the nation's political and financial institutions to cope with the vicious downward economic cycle that had set in by 1930. Prior to the Great Depression, governments traditionally took little or no action in times of business downturn, relying instead on impersonal market forces to achieve the necessary economic correction. But market forces alone proved unable to achieve the desired recovery in the early years of the Great Depression, and this painful discovery eventually inspired some fundamental changes in the United States' economic structure. After the Great Depression, government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services, or deficit spending, came to assume a principal role in ensuring economic stability in most industrial nations with market economies.
That is people that are getting hired.
Getting a job
These people are trying to get a job.
Living in a shack
Some people had to live in this for years. They also had to beg.
TIMELINES OF THE GREAT DEPRESSION:
- During World War I, federal spending grows three times larger than tax collections. When the government cuts back spending to balance the budget in 1920, a severe recession results. However, the war economy invested heavily in the manufacturing sector, and the next decade will see an explosion of productivity... although only for certain sectors of the economy.
- An average of 600 banks fail each year.
- Organized labor declines throughout the decade. The United Mine Workers Union will see its membership fall from 500,000 in 1920 to 75,000 in 1928. The American Federation of Labor would fall from 5.1 million in 1920 to 3.4 million in 1929.
- Over the decade, about 1,200 mergers will swallow up more than 6,000 previously independent companies; by 1929, only 200 corporations will control over half of all American industry.
- By the end of the decade, the bottom 80 percent of all income-earners will be removed from the tax rolls completely. Taxes on the rich will fall throughout the decade.
- By 1929, the richest 1 percent will own 40 percent of the nation's wealth. The bottom 93 percent will have experienced a 4 percent drop in real disposable per-capita income between 1923 and 1929.
- Individual worker productivity rises an astonishing 43 percent from 1919 to 1929. But the rewards are being funneled to the top: the number of people reporting half-million dollar incomes grows from 156 to 1,489 between 1920 and 1929, a phenomenal rise compared to other decades. But that is still less than 1 percent of all income-earners.
- The conservative Supreme Court strikes down federal child labor legislation.
- President Warren Harding dies in office. Calvin Coolidge, becomes president. Coolidge is no less committed to laissez-faire and a non-interventionist government.
- Supreme Court nullifies minimum wage for women in District of Columbia.
- The stock market begins its spectacular rise. Bears little relation to the rest of the economy.
- The top tax rate is lowered to 25 percent - the lowest top rate in the eight decades since World War I.
- Between May 1928 and September 1929, the average prices of stocks will rise 40 percent. The boom is largely artificial.
- Herbert Hoover becomes President.
- Annual per-capita income is $750. More than half of all Americans are living below a minimum subsistence level.
- Backlog of business inventories grows three times larger than the year before.
- Recession begins in August, two months before the stock market crash. During this two month period, production will decline at an annual rate of 20 percent, wholesale prices at 7.5 percent, and personal income at 5 percent.
- Stock market crash begins October 24. Investors call October 29 Black Tuesday. Losses for the month will total $16 billion, an astronomical sum in those days.
- By February, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Treasury Secretary Andrew Mellon announces that the Fed will stand by as the market works itself out: 'Liquidate labor, liquidate real estate... values will be adjusted, and enterprising people will pick up the wreck from less-competent people'.
- The Smoot-Hawley Tariff passes on June 17. With imports forming only 6 percent of the GNP, the 40 percent tariffs work out to an effective tax of only 2.4 percent per citizen. Even this is compensated for by the fact that American businesses are no longer investing in Europe, but keeping their money stateside. The consensus of modern economists is that the tariff made only a minor contribution to the Great Depression in the U.S., but a major one in Europe.
- Supreme Court rules that the monopoly U.S. Steel does not violate anti-trust laws as long as competition exists, no matter how negligible.
- The GNP falls 9.4 percent from the year before. The unemployment rate climbs from 3.2 to 8.7 percent.
- No major legislation is passed addressing the Depression.
- The GNP falls another 8.5 percent; unemployment rises to 15.9 percent.
- This and the next year are the worst years of the Great Depression. For 1932, GNP falls a record 13.4 percent; unemployment rises to 23.6 percent.
- Industrial stocks have lost 80 percent of their value since 1930.
- 10,000 banks have failed since 1929, or 40 percent of the 1929 total.
- GNP has also fallen 31 percent since 1929.
- Over 13 million Americans have lost their jobs since 1929.
- International trade has fallen by two-thirds since 1929.
- Congress passes the Federal Home Loan Bank Act and the Glass-Steagall Act of 1932.
- Top tax rate is raised from 25 to 63 percent.
- Popular opinion considers Hoover's measures too little too late. Franklin Roosevelt easily defeats Hoover in the fall election. Democrats win control of Congress.
- Roosevelt inaugurated; begins 'First 100 Days'; of intensive legislative activity.
- A third banking panic occurs in March. Roosevelt declares a Bank Holiday; closes financial institutions to stop a run on banks.
- Alarmed by Roosevelt's plan to redistribute wealth from the rich to the poor, a group of millionaire businessmen, led by the Du Pont and J.P. Morgan empires, plans to overthrow Roosevelt with a military coup and install a fascist government modelled after Mussolini's regime in Italy. The businessmen try to recruit General Smedley Butler, promising him an army of 500,000, unlimited financial backing and generous media spin control. The plot is foiled when Butler reports it to Congress.
- Congress authorizes creation of the Agricultural Adjustment Administration, the Civilian Conservation Corps, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Emergency Relief Administration, the National Recovery Administration, the Public Works Administration and the Tennessee Valley Authority.
- Congress passes the Emergency Banking Bill, the Glass-Steagall Act of 1933, the Farm Credit Act, the National Industrial Recovery Act and the Truth-in-Securities Act.
- Roosevelt does much to redistribute wealth from the rich to the poor, but is concerned with a balanced budget. He later rejects Keynes' advice to begin heavy deficit spending.
- The free fall of the GNP is significantly slowed; it dips only 2.1 percent this year. Unemployment rises slightly, to 24.9 percent.
- Congress authorizes creation of the Federal Communications Commission, the National Mediation Board and the Securities and Exchange Commission.
- The economy turns around: GNP rises 7.7 percent, and unemployment falls to 21.7 percent. A long road to recovery begins.
- Sweden becomes the first nation to recover fully from the Great Depression. It has followed a policy of Keynesian deficit spending.
- The Supreme Court declares the National Recovery Administration to be unconstitutional.
- Congress authorizes creation of the Works Progress Administration, the National Labor Relations Board and the Rural Electrification Administration.
- Congress passes the Banking Act of 1935, the Emergency Relief Appropriation Act, the National Labor Relations Act, and the Social Security Act.
- Economic recovery continues: the GNP grows another 8.1 percent, and unemployment falls to 20.1 percent.
- Top tax rate raised to 79 percent.
- Economic recovery continues: GNP grows a record 14.1 percent; unemployment falls to 16.9 percent.
- The Supreme Court declares the National Labor Relations Board to be unconstitutional.
- Roosevelt seeks to enlarge and therefore liberalize the Supreme Court. This attempt not only fails, but outrages the public.
- Economists attribute economic growth so far to heavy government spending that is somewhat deficit. Roosevelt, however, fears an unbalanced budget and cuts spending for 1937. That summer, the nation plunges into another recession. Despite this, the yearly GNP rises 5.0 percent, and unemployment falls to 14.3 percent.
- No major New Deal legislation is passed after this date, due to Roosevelt's weakened political power.
- The year-long recession makes itself felt: the GNP falls 4.5 percent, and unemployment rises to 19.0 percent.
- The United States will begin emerging from the Depression as it borrows and spends $1 billion to build its armed forces. From 1939 to 1941, when the Japanese attack Pearl Harbor, U.S. manufacturing will have shot up a phenomenal 50 percent!
- The Depression is ending worldwide as nations prepare for the coming hostilities.
- Roosevelt began relatively modest deficit spending that arrested the slide of the economy and resulted in some astonishing growth numbers. (Roosevelt's average growth of 5.2 percent during the Great Depression is even higher than Reagan's 3.7 percent growth during his so-called 'Seven Fat Years!') When 1936 saw a phenomenal record of 14 percent growth, Roosevelt eased back on the deficit spending, worried about balancing the budget. But this only caused the economy to slip back into a recession in 1938.
- World War II starts with Hitler's invasion of Poland.
- Although the war is the largest tragedy in human history, the United States emerges as the world's only economic superpower. Deficit spending has resulted in a national debt 123 percent the size of the GDP. By contrast, in 1994, the $4.7 trillion national debt will be only 70 percent of the GDP!
- The top tax rate is 91 percent. It will stay at least 88 percent until 1963, when it is lowered to 70 percent. During this time, America will experience the greatest economic boom it had ever known until that time.
See also cycle of past depressions.