The Great Depression transformed America in many ways.
On “Black Tuesday,” October 29, 1929, over 16 million shares of stock were traded on the New York Stock Exchange, a dramatic crash that resulted in billions of dollars in losses. While this event alone did not lead to a depression, it began one of the most challenging decades in our country’s history. 1930s America was one of high unemployment, poverty, shuttered factories, breadlines, and unease. This was the Great Depression.
The economic statistics of the period are shocking. By 1933, 24.9% of the workforce —roughly 12.83 million people —were unemployed. For those who had a job, their wages fell an astonishing 42.5% between 1929 and 1933. Prices and productivity in 1933 fell to about one-third of their levels in 1929. For example, 4.5 million automobiles were produced in 1929, while just 1.1 million were produced in 1932. In 1932, new investment fell to one-tenth of its pre-1929 level.
The banking sector was hit particularly hard. Banks failed nationwide as masses of people made “runs” to withdraw their money. In 1930 alone, 30,000 banks across the country closed. Another 37,000 closed in 1931 and 1932.
As the economic situation deteriorated, prices for agricultural goods fell dramatically. This led to many farms across the country being forced into foreclosure. With fewer farms came fewer products.
The economic situation affected America in other ways. Marriages and birth rates declined in the country while suicide rates increased. Many children were denied real childhoods as they had to take on adult responsibilities to support struggling households. Unemployed teens and young adults called hobos rode the rails in search of work because their families could not support them.
The Great Depression started under the administration of President Herbert Hoover. What Hoover had to address then are the same questions debated today: Why was this happening and what was the proper response?
The general consensus is that a combination of different factors caused the Great Depression. While the stock market crash set events in motion, other elements turned what should have been just a temporary economic recession into a depression. Deflation, the opposite of inflation, was the leading problem. There was not enough money in the consumer’s hands. Many believe the Federal Reserve limited the money supply too severely between 1929 and 1932.
Others point to the Federal Reserve’s policies during the 1920s that led to excessive consumer credit, which could not be repaid. Many took out loans to invest in the stock market, believing it was easy money. When the market crash occurred, not only were those individual consumers left in troubling financial circumstances, but their creditors were not paid.
Another problem was that the Depression was worldwide, meaning ordinary trade partners could not buy inventory from other countries. At the time of the stock market crash, the world was not in good economic shape. Global trade imbalances dating back to World War I created instability. Trade suffered as a result.
A Stanford-educated mining engineer, Hoover could have let the market correct itself over time with little government involvement. There is a common misperception that this is what he did. Hoover did the opposite. He tried to engineer a solution to the growing economic situation through government intervention in private business. It didn’t work.
Hoover met with the CEOs of some major American businesses, including Ford Motor, General Motors, and DuPont Chemicals. He told these industries to keep wages at their current levels and not lay off workers. In return, Hoover would bargain with labor not to strike or demand greater benefits.
In 1930, the prices for consumer goods continued to fall and deflation continued. Hoover then made what most economists consider his biggest mistake. Despite warnings from many at the time, Hoover signed the Smoot-Hawley Tariff, a protective tariff for American farmers and textile mills that imposed the highest import rates in a century. All this did was create retaliatory tariffs from European trading partners that dramatically cut American exports.
With no markets for their products, the price of American industrial goods continued to decline and American industry was in further trouble. Business leaders sought to cut the wages of their employees. Hoover refused to allow them to, fearing a union backlash. Business leaders had no choice but to cut wages anyway, and then, with little market for their goods, layoffs followed. Unemployment spiked dramatically.
With Hoover’s support, Congress passed legislation to address the deepening crisis. This legislation targeted key sectors of the economy, including banks, railroads, insurance, the mortgage industry, corporations, and homeowners. Congress appropriated funds for public works projects, hoping they would create jobs.
While trying to support business, Congress simultaneously raised the top individual income tax rate from 25% to 63%. Under the circumstances, those individuals who fell in the top income tax bracket held on to their money and did not reinvest it in the economy.
By the election of 1932, everything Hoover was trying was not working. The Depression had hit hard and did not appear to be going away quickly. His prospects for re-election were dim. By this time, the growing homeless were assembling whatever items they could for shelter. These encampments earned the nickname “Hoovervilles” in honor of the president.
Hoover was beaten in 1932 by Franklin Delano Roosevelt, the governor of New York. Roosevelt campaigned on a “New Deal for the American people,” or, as history refers to it, the New Deal. He brought a new sense of optimism along with a promise that “Happy Days Are Here Again.”
Roosevelt surrounded himself with a group of advisers known as his “Brain Trust” to advise him on how to maneuver the country out of its predicament. For many of these advisers, it was their first time in government and Roosevelt hoped they could bring new ideas. This group believed the U.S. economy needed a comprehensive plan and management from so-called apolitical “experts.” They believed the federal government needed to play a role unlike any it had played before.
The presidency of Franklin Roosevelt was a pivot point in American history. During his first inaugural address on March 4, 1933, Roosevelt uttered the famous words, “The only thing we have to fear is fear itself.” What was also included in that speech was Roosevelt’s call for far-reaching executive power to manage the “national emergency.” To do this, he needed Congress to cede control to him alone. This is basically what Congress did.
Roosevelt set out with a plan for the “first one-hundred days,” some variation of which has been uttered by presidential candidates ever since. Within a short time, Congress passed a wide-ranging group of new federal programs administered by newly created agencies.
Dozens of so-called “alphabet agencies” were created to address different sectors of the economy. To name some: Agricultural Adjustment Administration (AAA), Federal Communications Commission (FCC), Federal Housing Administration (FHA), National Labor Board (NLB), National Recovery Administration (NRA), Securities and Exchange Commission (SEC), Social Security Board (SSB), Tennessee Valley Authority (TVA), United States Housing Authority (USHA), and the Works Project Administration (WPA). Each of these agencies had its own administrators and most produced voluminous regulations.
This photograph, “Migrant Mother,” was taken as part of a marketing campaign for the Resettlement Administration, a New Deal agency. It was meant to capture the distress of the time.
The centerpiece of Roosevelt’s first term was the National Recovery Administration. Established to stabilize the prices of goods, this agency had sweeping powers to regulate businesses, both large and small. To understand the scope of its power, keep this fact in mind. This one agency produced more paper from new regulations in one year than the entire United States government had since 1789, the year the Constitution was adopted.
The Roosevelt administration did help stabilize the banking system. Early in the Depression, banks ran out of money because of deflation. This led to a script system in some places, including large parts of states like Utah. To combat this, the Banking Act of 1933 prohibited banks from underwriting or dealing in securities. Deposit insurance from the federal government calmed consumers and limited the banking panics that were common just a few years earlier.
Agricultural reform was another important element of the New Deal. The Agricultural Adjustment Administration was created in 1933 to try to stabilize farm prices. This became even more critical after a severe drought in 1934 made the soil in the Great Plains virtually unusable. The Dust Bowl, as it is called, led to the movement of approximately 2.5 million people west, mostly to California.
For many Americans, the New Deal is remembered most for one piece of legislation – Social Security. Passed through the Social Security Act of 1935, the relationship between the individual and the federal government changed. For the first time, citizens received benefits directly from the federal government.
Other notable New Deal legislation included the Wagner Act and the Utilities Act. The Wagner Act allowed labor unions to collectively bargain, while the Utilities Act aimed to bring more utilities under government, rather than private, control.
By the end of 1936, unemployment had dropped to 14% from 22% the year before. 1936 was also the first time in American history that federal spending exceeded that of the state and local levels.
But 1937 brought more distress. By this time, Congress had raised the top tax rate to 79%. Known as a “depression within a depression,” again, a spike in wages brought about by some provisions of the Wagner Act created a similar situation to what happened earlier in the decade. Employers could not keep up with wages so they laid off employees. Unemployment rose to 19% and manufacturing fell by 37%. Small businesses failed, in part, because they could not meet the new federal mandates. This would last into 1938.
By the late 1930s, many Americans accepted this version of America as the new normal. But events overseas slowly dominated the headlines. Germany and Japan set the stage for World War II.
America’s involvement in World War II ultimately ended the Great Depression. Americans, many of whom had been unemployed beforehand, enthusiastically enlisted in the military in great numbers. The entire economy was transformed to support the war.
Franklin Roosevelt died on April 12, 1945, a little over a month into his fourth term. No other American president served more than two terms. The effectiveness of the New Deal has always been subject to debate. It largely depends on who is writing the history.
Unemployment rates during the Great Depression never fell below 14% after 1930 until the start of World War II for the United States in 1941.
The modern administrative state traces its origins directly to the New Deal. Federal government power grew substantially at the expense of local and state governments. The modern presidency became more powerful because staffing these new agencies under the executive branch became an increasingly important aspect of the job. Congress gave away much of its law-making authority to the executive branch. Non-elected government employees could create laws through regulation, without those regulations being passed by Congress.
The stock market peaked on September 3, 1929, closing at 381.17. It did not reach that number again until November 23, 1954, and this was without adjusting for inflation or deflation.
Our third branch of government, the judiciary, played an important role during these years. Were all of these new agencies and the laws that created them constitutional? This is a story in itself.
Recommended Reading: The Forgotten Man by Amity Shlaes
Note: The Twenty-Second Amendment to the Constitution, limiting presidents to two terms, was ratified in February 1951.