Great Depression in the United States

Examining the causes of the Great Depression raises multiple 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.[6]

Many rural banks began to fail in October 1930 when farmers defaulted on loans. There was no federal deposit insurance during that time as bank failures were considered a normal part of economic life. Worried depositors started to withdraw savings, so the money multiplier worked in reverse. Banks were forced to liquidate assets (such as calling in loans rather than creating new loans).[7] This caused the money supply to shrink and the economy to contract (the Great Contraction), resulting in a significant decline in aggregate investment. The decreased money supply further aggravated price deflation, putting more pressure on already struggling businesses.

A $10 US gold certificate. The U.S. used the gold standard until 1934 and controlled nearly half of the global gold supply during the inter-war period.

The U.S. 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 U.S. 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. One of the only things the U.S. could do to get back into equilibrium was increase interest rates.

In the late 20th century, Winner of the Swedish Central Bank Nobel Memorial Prize in Economic Sciences economist Milton Friedman and his fellow monetarist Anna Schwartz argued that the Federal Reserve could have stemmed the severity of the Depression, but failed to exercise its role of managing the monetary system and ameliorating banking panics, resulting in a Great Contraction of the economy from 1929 until the New Deal began in 1933.[8] This view was endorsed by Fed Governor Ben Bernanke who in 2002 said in a speech honoring Friedman and Schwartz:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again.[9][8]
— Ben S. Bernanke

The Wall Street Crash of 1929 is often cited as the beginning of the Great Depression. It began on October 24, 1929, and kept going down until March 1933. It was the longest and most devastating stock market crash in the history of the United States. Much of the stock market crash can be attributed to exuberance and false expectations. In the years leading up to 1929, the rising stock market prices had created vast sums of wealth in relation to amounts invested, in turn encouraging borrowing to buy more stock. However, on October 24 (Black Thursday), share prices began to fall and panic selling caused prices to fall sharply. On October 29 (Black Tuesday), share prices fell by $14 billion in a single day, more than $30 billion in the week.[10] The value that evaporated that week was ten times more than the entire federal budget and more than all of what the U.S. had spent on World War I. By 1930 the value of shares had fallen by 90%.[11]

Since many banks had also invested their clients' savings in the stock market, these banks were forced to close when the stock market crashed. After the stock market crash and the bank closures, people were afraid of losing more money. Because of their fears of further economic challenge, individuals from all classes stopped purchasing and consuming. Thousands of individual investors who believed they could get rich by investing on margin lost everything they had. The stock market crash severely impacted the American economy.

A large contribution was the closure and suspension of thousands of banks across the country. Financial institutions failed for several reasons, including unregulated lending procedures, confidence in the gold standard, consumer confidence in future economics, and agricultural defaults on outstanding loans. With these compounding issues the banking system struggled to keep up with the public's increasing demand for cash withdrawals. This overall decreased the money supply and forced the banks to resort to short or liquidate existing loans.[7] In the race to liquidate assets the banking system began to fail on a wide scale. In November 1930 the first major banking crisis began with over 800 banks closing their doors by January 1931. By October 1931 over 2100 banks were suspended with the highest suspension rate recorded in the St. Louis Federal Reserve District, with 2 out of every 5 banks suspended.[12] The economy as a whole experienced a massive reduction in banking footholds across the country amounting to more than nine thousand closed banks by 1933.

People outside a closed bank after 1929 stock market crash.

The closures resulted in a massive withdrawal of deposits by millions of Americans estimated at near $6.8 billion ($121 billion in 2021 dollars). During this time the Federal Deposit Insurance Corporation (FDIC) was not in place resulting in a loss of roughly $1.36 billion (or 20%) of the total $6.8 billion accounted for within the failed banks. These losses came directly from everyday individuals' savings, investments and bank accounts. As a result, GDP fell from the high seven-hundreds in 1929 to the low to mid six-hundreds in 1933 before seeing any recovery for the first time in nearly 4 years.[13] Federal leadership intervention is highly debated on its effectiveness and overall participation. The Federal Reserve Act could not effectively tackle the banking crisis as state bank and trust companies were not compelled to be a member, paper eligible discount member banks heavily restricted access to the Federal Reserve, power between the twelve Federal Reserve banks was decentralized and federal level leadership was ineffective, inexperienced, and weak.

Throughout the early 1900s banking regulations were extremely lax if not non-existent. The Currency Act of 1900 lowered the required capital of investors from 50,000 to 25,000 to create a national bank. As a result of this change nearly two thirds of the banks formed over the next ten years were quite small, averaging just above the 25,000 in required capital.[14] The number of banks would nearly double (number of banks divided by Real GDP) from 1890 to 1920 due to the lack of oversight and qualification when banking charters were being issued in the first two decades of the 1900s.[15]

The unregulated growth of small rural banking institutions can be partially attributed to the rising cost of agriculture especially in the Corn Belt and Cotton Belt. Throughout the corn and cotton belts real estate increases drove the demand for more local funding to continue to supply rising agricultural economics. The rural banking structures would supply the needed capital to meet the farm commodity market, however, this came with a price of reliability and low risk lending. Economic growth was promising from 1887 to 1920 with an average of 6 percent growth in GDP. In particular, the participation in World War I drove a booming agricultural market that drove optimism at the consumer and lending level which, in turn, resulted in a more lax approach in the lending process. Over banked conditions existed which pressured struggling banks to increase their services (specifically to the agricultural customers) without any additional regulatory oversight or qualifications. This dilemma introduced several high-risk and marginal business returns to the banking market.[16] Banking growth would continue through the first two decades well outside of previous trends disregarding the current economic and population standards. Banking profitability and loan standards begin to deteriorate as early as 1900 as a result.

Approaching dust storm near Stratford, Texas. April 18, 1935.

Crop failures beginning in 1921 began to impact this poorly regulated system, the expansion areas of corn and cotton suffered the largest due to the dust bowl era resulting in real estate value reductions. In addition, the year 1921 was the peak for banking expansion with roughly 31,000 banks in activity, however, with the failures at the agricultural level 505 banks would close between 1921 and 1930 marking the largest banking system failure on record. Regulatory questions began to hit the debating table around banking qualifications as a result; discussions would continue into the Great Depression as not only were banks failing but some would disappear altogether with no rhyme or reason.[17] The panic of financial crisis would increase in the Great Depression due to the lack of confidence in the regulatory and recovery displayed during the 1920s, this ultimately drove a nation of doubts, uneasiness, and lack of consumer confidence in the banking system.

With a lack of consumer confidence in the economic direction given by the federal government panic started to spread across the country shortly after the Wall Street Crash of 1929. President Hoover retained the Gold Standard as the country's currency gauge throughout the following years. As a result, the American shareholders with the majority of the gold reserves began to grow wary of the value of gold in the near future. Europe's decision to move away from the Gold Standard caused individuals to start to withdraw gold shares and move the investments out of the country or began to hoard gold for future investment. The market continued to suffer due to these reactions, and as a result caused several of the everyday individuals to speculate on the economy in the coming months. Rumors of market stability and banking conditions began to spread, consumer confidence continued to drop and panic began to set in. Contagion spread like wildfire pushing Americans all over the country to withdraw their deposits en masse. This idea would continue from 1929 to 1933 causing the greatest financial crisis ever seen at the banking level pushing the economic recovery efforts further from resolution. An increase in the currency-deposit ratio and a money stock determinant forced money stock to fall and income to decline. This panic-induced banking failure took a mild recession to a major recession.[18]

Whether this caused the Great Depression is still heavily debated due to many other attributing factors. However, it is evident that the banking system suffered massive reductions across the country due to the lack of consumer confidence. As withdraw requests would exceed cash availability banks began conducting steed discount sales such as fire sales and short sales. Due to the inability to immediately determine current value worth these fire sales and short sales would result in massive losses when recuperating any possible revenue for outstanding and defaulted loans. This would allow healthy banks to take advantage of the struggling units forcing additional losses resulting in banks not being able to deliver on depositor demands and creating a failing cycle that would become widespread.[19] Investment would continue to stay low through the next half-decade as the private sector would hoard savings due to uncertainty of the future. The federal government would run additional policy changes such as the Check tax, monetary restrictions (including reduction of money supply by burning), High Wage Policy, and the New Deal through the Hoover and Roosevelt administration.

• Europe as a whole was badly hit, in both rural and industrial areas. Democracy was discredited was ended in most countries.[38]
• As the Great Depression in the United Kingdom worsened, there were no programs in Britain comparable to the New Deal.
• In France, the "Popular Front" government of Socialists with some Communist support, was in power 1936–1938. It briefly tried major programs favoring labor and the working class, but engendered stiff opposition.
• Germany during the Weimar Republic (1919–1933) fully recovered and was prosperous in the late 1920s. The Great Depression hit in 1929 and was severe. The political system descended into violence and the Nazi Party led by Adolf Hitler came to power through a series of elections in the early 1930s. Economic recovery was pursued through autarky, pressure on economic partners, wage controls, price controls, and spending programs such as public works and, especially, military spending.
• Spain was a poor rural nation that saw mounting political crises that led in 1936–1939 to the Spanish Civil War. Damage was great. 1939 saw the takeover of the country by Francisco Franco's Nationalist faction.
• In Benito Mussolini's Italy, the economic controls of his corporate state were tightened. The economy was never prosperous.

• In Canada, Between 1929 and 1939, the gross national product dropped 40%, compared to 37% in the U.S. Unemployment reached 28% at the depth of the Depression in 1929 and 1930,[39] while wages bottomed out in 1933.[40] Many businesses closed, as corporate profits of Can$396 million in 1929 turned into losses of $98 million in 1933. Exports shrank by 50% from 1929 to 1933. The worst hit were areas dependent on primary industries such as farming, mining and logging, as prices fell and there were few alternative jobs. Some families saw most or all of their assets disappear and their debts became heavier as prices fell. Local and provincial government set up relief programs but there was no nationwide New Deal-like program.
• The Conservative government of Prime Minister R. B. Bennett retaliated against the American high tariff act of 1930. It raised tariffs on U.S. goods and lowered them on British Empire goods. Nevertheless, the Canadian economy suffered. In 1935, Bennett proposed a series of programs that resembled the New Deal; but was defeated in the elections of that year and no such programs were passed.[41]

• Cuba and the Caribbean saw their greatest unemployment during the 1930s because of a decline in exports to the U.S., and a fall in export prices.

• Japan's economy expanded at the rate of 5% of GDP per year after the years of modernization. Manufacturing and mining came to account for more than 30% of GDP, more than twice the value for the agricultural sector. Most industrial growth, however, was geared toward expanding the nation's military power. Beginning in 1937 much of Japan's energy was focused on a large-scale war and occupation of China.
• China's severe depression was worsened by the Second Sino-Japanese War during most of the 1930s, in addition to internal struggles between Chiang Kai-shek's Kuomintang and Mao Zedong's Communist Party.

• In Australia, 1930s conservative and Labor-led governments concentrated on cutting spending and reducing the national debt.
• In New Zealand, a series of economic and social policies similar to the New Deal were adopted after the election of its First Labor Government in the 1935 general election.[42]

Between the 1920s and 1930s, The United States began to try the tight money policy to promote economic growth. In terms of the fiscal policy, the US government failed to reach a consensus on the fiscal issue. President Hoover began to expand federal spending, setting up the Reconstruction Finance Corporation to provide emergency assistance to banks and financial institutions that were on the verge of bankruptcy. Hoover's fiscal policy had accelerated the recession. In December 1929, as means of showing government confidence in the economy, Hoover reduced all income tax rates by 1% in 1929 due to the continuing budget surplus. By 1930, the surplus had turned into a fast-growing deficit of economic contraction. In 1931, the US federal fiscal revenue and expenditure changed from the financial surplus to a deficit for the first time (the deficit was less than 2.8% of GDP).

By the end of 1931, Hoover had decided to recommend a large increase in taxes to balance the budget; in addition, Congress approved the tax increase in 1932, a substantial reduction in personal immunity to increase the number of taxpayers, and the interest rates had risen sharply, the lowest marginal rate rose from 25% on taxable income in excess of $100,000 to 63% on taxable income in excess of $1 million as the rates were made much more progressive.

Hoover changed his approach to fighting the Depression. He justified his call for more federal assistance by noting that "We used such emergency powers to win the war; we can use them to fight the Depression, the misery, and suffering from which are equally great." This new approach embraced a number of initiatives. Unfortunately for the President, none proved especially effective. Just as important, with the presidential election approaching, the political heat generated by the Great Depression and the failure of Hoover's policies grew only more withering.[44]

In terms of the financial reform, since the recession, Hoover had been trying to repair the economy. He founded government agencies to encourage labor harmony and support local public works aid which promoted cooperation of government and business, stabilize prices, and strive to balance the budget. His work focused on indirect relief from state governments and the private sector, which was reflected in the letter emphasizing "more effective supporting for each national committee" and volunteer service -" appealing for funding" from outside the government.[45]

The commitment to maintain the gold standard system prevented the Federal Reserve expanded its money supply operations in 1930 and 1931, and it promoted Hoover's destructive balancing budgetary action to avoid the gold standard system overwhelming the dollar. As the Great Depression became worse, the call raised for increasing in federal intervention and spending. But Hoover refused to allow the federal government to force fixed prices, control the value of the business or manipulate the currency, in contrast, he started to control the dollar price. For official dollar prices, he expanded the credit base through free market operations in federal reserve system to ensure the domestic value of the dollar. He also tended to provide indirect aid to banks or local public works projects, refused to use federal funds to give aid to citizens directly, which he believed would lower public morale. Instead, he focused on volunteer fundraising to raise money for relief of the needy.[45]

Even though Hoover was a philanthropist before becoming president, his opponents regarded him as unconcerned about the plight of impoverished citizens. During the administration of Hoover, the US economic policies had moved to activism and interventionism. In his re-election campaign, Hoover tried to persuade Americans that direct monetary relief from the federal government would be devastating to the economy in the long run. However, this message was highly unpopular, and consequently Hoover was defeated by Franklin Roosevelt in the presidential election of 1932.

At the beginning of 1933, during the last few weeks of Hoover's term, the American financial system was paralyzed. The Great Depression had been extended by the interventionist policy for four years. The bank crisis caused serious deflationary pressures. In fact, the worst period of 1932 – the Great Depression had passed, but the recovery was slow and weak. Roosevelt understood that traditional political and financial policy was not an adequate response to the crisis, and his administration chose to pursue the more radical measures of the New Deal.

During the financial crisis of 1933 culminating in the banking holiday of March 1933, gold had flowed out from the Fed in large quantities, to individuals and companies in the United States worried about bank failures, and to foreign entities worried about the depreciation of the dollar.[46]

In the spring and summer of 1933, the Roosevelt administration and the Congress took several actions that effectively suspended the gold standard. Roosevelt took office on March 4, 1933, and thirty-six hours later, he declared a nationwide bank moratorium in order to prevent a run on the banks by consumers lacking confidence in the economy. He also forbade banks to pay out gold or to export it.

On March 9, Congress passed the Emergency Banking Act, giving the President the power to control international and domestic gold exports. It also gave the treasury secretary the power to surrender of gold coins and certificates.

On April 5, Roosevelt ordered all gold coins and gold certificates in denominations of more than $100 turned in for other money. It required all persons to deliver all gold coin, gold bullion and gold certificates owned by them to the Federal Reserve by May 1 for the set price of $20.67 per ounce. By May 10, the government had taken in $300 million of gold coin and $470 million of gold certificates.

On April 20, President Roosevelt issued a formal proclamation prohibiting gold exports and prohibiting the conversion of money and deposits into gold coins and ingots.

On May 12, the United States weakened the monetary connection with gold further when FDR signed the Agricultural Adjustment Act. Title III of this act, also known as the Thomas amendment, gave the President power to reduce the dollar's gold content by as much as 50%. President Roosevelt also used the silver standard instead of gold to exchange dollars, it determined by the price of the bank.[46]

On June 5, Congress enacted a joint resolution nullifying the clauses in many public and private obligations that permitted creditors to demand repayment in gold.

In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the gold on the Federal Reserve's balance sheets by 69 percent. This increase in assets allowed the Federal Reserve to further inflate the money supply. The abandonment of the gold standard made the Wall Street stock prices quickly increase; Wall Street's stock trading was exceptionally active.

Herbert Hoover

The Hoover Administration attempted to correct the economic situation quickly, but was unsuccessful. Throughout Hoover's presidency, businesses were encouraged to keep wage rates high.[47] President Hoover and many academics believed that high wage rates would maintain a steady level of purchasing power, keeping the economy turning. In December 1929, after the beginning phases of the depression had begun, President Hoover continued to promote high wages. It wasn't until 1931 that business owners began reducing wages in order to stay afloat. Later that year, The Hoover Administration created the Check Tax[48] to generate extra government funding. The tax added a two-cent tax to the purchase of all bank checks, directly affecting the common man. This additional cost pushed people away from using checks, so instead, the majority of the population increased their usage of cash. Banks had already closed due to cash shortage, but this reaction to the Check Tax rapidly increased the pace.

In the "First New Deal" of 1933–34, a wide variety of programs were targeted toward the depression and agriculture in rural areas, in the banking industry, and for the economy as a whole. Relief programs were set up for the long-term unemployed who are routinely passed over whenever new jobs did open up.[49][50] The most popular program was the Civilian Conservation Corps that put young men to work in construction jobs, especially in rural areas. Prohibition was repealed, fulfilling a campaign pledge and generating new tax revenues for local and state governments. A series of relief programs were designed to provide jobs, in cooperation with local governments.

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 that ended what was called "cut-throat competition," believed to be responsible for forcing down prices and profits nationwide.[51] Several Hoover agencies were continued, most notably the Reconstruction Finance Corporation, which provided large-scale financial aid to banks, railroads, and other agencies.[52] Reforms that had never been enacted in the 1920s now took center stage, such as the Tennessee Valley Authority (TVA) designed to electrify and modernize a very poor, mountainous region in Appalachia.

Top left: the Tennessee Valley Authority, part of the New Deal, being signed into law in 1933.
Top right: Franklin Delano Roosevelt, who was responsible for initiatives and programs are collectively known as the New Deal.
Bottom: a public mural from one of the artists employed by the New Deal.

In 1934–36 came the much more controversial "Second New Deal." It featured Social Security; the Works Progress Administration (WPA), a very large relief agency for the unemployed run by the federal government; and the National Labor Relations Board, which operated as a strong stimulus to the growth of labor unions. Unemployment fell by ⅔ in Roosevelt's first term (from 25% to 9%, 1933–1937). The second set of reforms launched by the Roosevelt Administration during the same period included the Social Security Act of 1935. Insurance and poor relief ("public assistance" or "welfare") are constituent parts of the legislation, which provided pensions to the aged, benefit payments to dependent mothers, crippled children and blind people, and unemployment insurance.[53] The Social Security Act still plays a significant role of the American health and human service system so far. Much of the economy had recovered by 1936, but persistent, long-term unemployment lasted until rearmament began for World War II in 1940.[54]

The New Deal was, and still is, sharply debated.[55] The business community, with considerable support from such conservative Democrats as Al Smith, launched a crusade against the New Deal, warning that a dangerous man had seized control of the economy and threatened America's conservative traditions.[56] Scholars remain divided as well. When asked whether "as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression," 74% of American university professors specializing in economic history disagreed, 21% agreed with provisos, and 6% fully agreed. Among respondents who taught or studied economic theory, 51% disagreed, 22% agreed with provisos, and 22% fully agreed.[57]

• Cargill, Thomas F., and Thomas Mayer. “The Great Depression and History Textbooks.” History Teacher 31#4 (1998), pp. 441–458. online, discusses causation
• Parker, Randall E., ed. Reflections on the Great Depression (2002) interviews with 11 leading economists
• Romasco, Albert U. "Hoover-Roosevelt and the Great Depression: A Historiographic Inquiry into a Perennial Comparison." In John Braeman, Robert H. Bremner and David Brody, eds. The New Deal: The National Level (1973) v 1 pp. 3–26.
• Szostak, Rick. "Evaluating the historiography of the Great Depression: explanation or single‐theory driven?." Journal of Economic Methodology 12.1 (2005): 35–61.

• Cantril, Hadley and Mildred Strunk, eds.; Public Opinion, 1935–1946 (1951), massive compilation of many public opinion polls online
• Lowitt, Richard and Beardsley Maurice, eds. One Third of a Nation: Lorena Hickock Reports on the Great Depression (1981)
• Lynd, Robert S. and Helen M. Lynd. Middletown in Transition. 1937. sociological study of Muncie, Indiana
• Mott, Frank Luther, ed. Headlining America (1937) reprints best newspaper stories of 1935–136. online
• Terkel, Studs. Hard Times: An Oral History of the Great Depression (1970)

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