(From Grolier Multimedia Encyclopedia)

The Depression

The economic depression that beset the United States and other countries in the 1930s was unique in its magnitude and its consequences. At the depth of the depression, in 1933, one American worker in every four was out of a job. In other countries unemployment ranged between 15% and 25% of the labor force. The great industrial slump continued throughout the 1930s, shaking the foundations of Western capitalism.

Economic Aspects

President Calvin Coolidge had said during the long prosperity of the 1920s that "The business of America is business." Despite the seeming business prosperity of the 1920s, however, there were serious economic weak spots, a chief one being a depression in the agricultural sector. Also depressed were such industries as coal mining, railroads, and textiles. Throughout the 1920s, U.S. banks had failed—an average of 600 a year—as had thousands of other business firms. By 1928 the construction boom was over. The spectacular rise in prices on the stock market from 1924 to 1929 bore little relation to actual economic conditions. In fact, the boom in the stock market and in real estate, along with the expansion in credit (created, in part, by low-paid workers buying on credit) and high profits for a few industries, concealed basic problems. Thus the Great Crash of the U.S. stock market that occurred in October 1929, with huge losses, was not the fundamental cause of the Great Depression, although the crash sparked, and certainly marked the beginning of, the most traumatic economic period of modern times.

By 1930 the slump was apparent, but few people expected it to persist; previous financial panics and depressions had reversed in a year or two. The usual forces of economic expansion had vanished, however. Technology had eliminated more industrial jobs than it had created; the supply of goods continued to exceed demand; the world market system was basically unsound. The high tariffs of the Smoot-Hawley Act (1930) exacerbated the downturn. As business failures increased and unemployment soared—and as people with dwindling incomes nonetheless had to pay their creditors—it was apparent that the United States was in the grip of economic breakdown. (Most European countries were hit even harder, because they had not yet fully recovered from the ravages of World War I.)

The deepening depression essentially coincided with the term in office (1929-33) of President Herbert Hoover. The stark statistics scarcely convey the distress of the millions who lost jobs, savings, and homes. From 1930 to 1933 industrial stocks lost 80% of their value. In the four years from 1929 to 1932 approximately 11,000 U.S. banks failed (44% of the 1929 total), and about $2 billion in deposits evaporated. The gross national product (GNP), which for years had grown at an average annual rate of 3.5%, declined at a rate of over 10% annually, on average, from 1929 to 1932. Agricultural distress was intense: farm prices fell by 53% from 1929 to 1932.

President Hoover opposed government intervention to ease the mounting economic distress. His one major action, creation (1932) of the Reconstruction Finance Corporation to lend money to ailing corporations, was seen as inadequate. Hoover lost the 1932 election to Franklin D. Roosevelt.

The New Deal

The depression brought a deflation not only of incomes but of hope. In his first inaugural address (March 1933), President Roosevelt declared that "the only thing we have to fear is fear itself." But though his New Deal grappled with economic problems throughout his first two terms, it had no consistent policy.

At first Roosevelt tried to stimulate the economy through the National Recovery Administration, charged with establishing minimum wages and codes of fair competition. It was based on the idea of spreading work and reducing unfair competitive practices by means of cooperation in industry, so as to stabilize production and prevent the price slashing that had begun after 1929. This approach was abandoned after the Supreme Court declared the NRA unconstitutional in Schechter Poultry Corporation v. United States (1935).

Roosevelt's second administration gave more emphasis to public works and other government expenditures as a means of stimulating the economy, but it did not pursue this approach vigorously enough to achieve full economic recovery. At the end of the 1930s, unemployment was estimated at 17.2%. Other innovations of the Roosevelt administrations had long-lasting effects, both economically and politically. To aid people who could find no work, the New Deal extended federal relief on a vast scale. The Civilian Conservation Corps took young men off the streets and sent them out to plant forests and drain swamps. The government refinanced about one-fifth of farm mortgages through the Farm Credit Administration and about one-sixth of home mortgages through the Home Owners Loan Corporation. The Works Progress Administration employed an average of over 2 million people in occupations ranging from laborers to musicians and writers. The Public Works Administration spent about $4 billion on the construction of highways and public buildings in the years 1933-39.

The depression years saw a burst of union organizing, aided by the National Labor Relations Act of 1935. New industrial unions came into existence through the efforts of organizers led by John L. Lewis, Walter Reuther, Philip Murray, and others; in 1937 they won contracts in the steel and auto industries. Total union membership rose from about 3 million in 1932 to over 10 million in 1941.

Political and Cultural Effects

The expanded role of the federal government came to be accepted by most Americans by the end of the 1930s. Even Republicans who had bitterly opposed the New Deal shifted their stance. Wendell Willkie, the Republican presidential nominee in 1940, declared that he could not oppose reforms such as the regulation of the securities markets and the utility holding companies, the legal recognition of unions, or Social Security (see social security) and unemployment allowances. What bothered him and other critics, however, was the extension of the federal bureaucracy.

The depression caused much questioning of inherited economic and political ideas. Sen. Huey P. Long of Louisiana found a national following for his "Share the Wealth" program. The socialist writer Upton Sinclair was nearly elected governor of California in 1934 with a similar program for redistributing the state's wealth. Many writers and other intellectuals swung even further left, concluding that capitalism was on its way out; they were drawn to the Communist party by what they supposed to be the accomplishments of the USSR.

In other countries the depression had even more profound effects. As world trade fell off, countries turned to nationalist economic policies that only exacerbated their difficulties. In politics the depression strengthened the extremes of right and left, helping Adolf Hitler to power in Germany and swelling left-wing movements in other European countries. The depression was thus a time of massive insecurity among peoples and governments, contributing to the tensions that produced World War II. Ironically, however, the massive military expenditures for that war provided the economic stimulus that finally ended the depression.

Francis S. Pierce

Further Reading:

Bernanke, Ben S., Essays on the Great Depression (2000; repr. 2004).

Bernstein, Irving, A Caring Society: The New Deal, the Worker, and the Great Depression (1985).

Bierman, Harold, The Causes of the 1929 Stock Market Crash: A Speculative Orgy or a New Era? (1998).

Davis, Joseph S., The World between the Wars, 1919-39 (1974).

Galbraith, John Kenneth, The Great Crash 1929, rev. ed. (1997).

Garraty, John A., The Great Depression (1986).

James, Harold, The End of Globalization: Lessons from the Great Depression (2001).

Kennedy, David, Freedom from Fear: The American People in Depression and War, 1929-1945 (1999).

Kindleberger, Charles P., The World in Depression, 1929-39, rev. ed. (1986).

McElvaine, Robert S., The Great Depression (1985; repr. 1994).

Markowitz, Gerald, and Rosner, David, eds., Slaves of the Depression: Workers' Letters about Life on the Job (1987).

Mitchell, Broadus, Depression Decade: From New Era to New Deal, 1929-1941 (1947; repr. 1969).

Rothbard, Murray N., America's Great Depression (1963; repr. 2000).

Rothermund, Dietmar, The Global Impact of the Great Depression, 1929-1939 (1996).

Shlaes, Amity, The Forgotten Man: A New History of the Great Depression (2007).

Swados, Harvey, ed., The American Writer and the Great Depression (1966).

Terkel, Studs, Hard Times: An Oral History of the Great Depression in America (1970; repr. 2000).

Watkins, T. H., The Great Depression: America in the 1930s (1993), and The Hungry Years: America in an Age of Crisis, 1929-1939 (1999).

Wicker, Elmus, The Banking Panics of the Great Depression (1996; repr. 2001).