Then and Now

Usually on these weekly posts, I wax on about how awful it's going to get. But I read the following piece, and this week I figured I'd wax off.

Read this.

Great Depression in the United States
I. Introduction

Great Depression in the United States, worst and longest economic collapse in the history of the modern industrial world, lasting from the end of 1929 until the early 1940s. Beginning in the United States, the depression spread to most of the world’s industrial countries, which in the 20th century had become economically dependent on one another. The Great Depression saw rapid declines in the production and sale of goods and a sudden, severe rise in unemployment. Businesses and banks closed their doors, people lost their jobs, homes, and savings, and many depended on charity to survive. In 1933, at the worst point in the depression, more than 15 million Americans—one-quarter of the nation’s workforce—were unemployed.

The depression was caused by a number of serious weaknesses in the economy. Although the 1920s appeared on the surface to be a prosperous time, income was unevenly distributed. The wealthy made large profits, but more and more Americans spent more than they earned, and farmers faced low prices and heavy debt. The lingering effects of World War I (1914-1918) caused economic problems in many countries, as Europe struggled to pay war debts and reparations. These problems contributed to the crisis that began the Great Depression: the disastrous U.S. stock market crash of 1929, which ruined thousands of investors and destroyed confidence in the economy. Continuing throughout the 1930s, the depression ended in the United States only when massive spending for World War II began.

The depression produced lasting effects on the United States that are still apparent more than half a century after it ended. It led to the election of President Franklin Delano Roosevelt, who created the programs known as the New Deal to overcome the effects of the Great Depression. These programs expanded government intervention into new areas of social and economic concerns and created social-assistance measures on the national level. The Great Depression fundamentally changed the relationship between the government and the people, who came to expect and accept a larger federal role in their lives and the economy.

The programs of the New Deal also brought together a new, liberal political alliance in the United States. Roosevelt’s policies won the support of labor unions, blacks, people who received government relief, ethnic and religious minorities, intellectuals, and some farmers, forming a coalition that would be the backbone of the Democratic Party for decades to come.

On a personal level, the hardships suffered during the depression affected many Americans’ attitudes toward life, work, and their community. Many people who survived the depression wanted to protect themselves from ever again going hungry or lacking necessities. Some developed habits of frugality and careful saving for the rest of their lives, and many focused on accumulating material possessions to create a comfortable life, one far different from that which they experienced in the depression years.

The depression also played a major role in world events. In Germany, the economic collapse opened the way for dictator Adolf Hitler to come to power, which in turn led to World War II.

II. Causes of the Depression

It is a common misconception that the stock market crash of October 1929 was the cause of the Great Depression. The two events were closely related, but both were the results of deep problems in the modern economy that were building up through the “prosperity decade” of the 1920s.

As is typical of post-war periods, Americans in the Roaring Twenties turned inward, away from international issues and social concerns and toward greater individualism. The emphasis was on getting rich and enjoying new fads, new inventions, and new ideas. The traditional values of rural America were being challenged by the city-oriented Jazz Age, symbolized by what many considered the shocking behavior of young women who wore short skirts and makeup, smoked, and drank.

The self-centered attitudes of the 1920s seemed to fit nicely with the needs of the economy. Modern industry had the capacity to produce vast quantities of consumer goods, but this created a fundamental problem: Prosperity could continue only if demand was made to grow as rapidly as supply. Accordingly, people had to be persuaded to abandon such traditional values as saving, postponing pleasures and purchases, and buying only what they needed. “The key to economic prosperity,” a General Motors executive declared in 1929, “is the organized creation of dissatisfaction.” Advertising methods that had been developed to build support for World War I were used to persuade people to buy such relatively new products as automobiles and such completely new ones as radios and household appliances. The resulting mass consumption kept the economy going through most of the 1920s.

But there was an underlying economic problem. Income was distributed very unevenly, and the portion going to the wealthiest Americans grew larger as the decade proceeded. This was due largely to two factors: While businesses showed remarkable gains in productivity during the 1920s, workers got a relatively small share of the wealth this produced. At the same time, huge cuts were made in the top income-tax rates. Between 1923 and 1929, manufacturing output per person-hour increased by 32 percent, but workers’ wages grew by only 8 percent. Corporate profits shot up by 65 percent in the same period, and the government let the wealthy keep more of those profits. The Revenue Act of 1926 cut the taxes of those making $1 million or more by more than two-thirds.

As a result of these trends, in 1929 the top 0.1 percent of American families had a total income equal to that of the bottom 42 percent. This meant that many people who were willing to listen to the advertisers and purchase new products did not have enough money to do so. To get around this difficulty, the 1920s produced another innovation—“credit,” an attractive name for consumer debt. People were allowed to “buy now, pay later.” But this only put off the day when consumers accumulated so much debt that they could not keep buying up all the products coming off assembly lines. That day came in 1929.

American farmers—who represented one-quarter of the economy—were already in an economic depression during the 1920s, which made it difficult for them to take part in the consumer buying spree. Farmers had expanded their output during World War I, when demand for farm goods was high and production in Europe was cut sharply. But after the war, farmers found themselves competing in an over-supplied international market. Prices fell, and farmers were often unable to sell their products for a profit.

International problems also weakened the economy. After World War I the United States became the world’s chief creditor as European countries struggled to pay war debts and reparations. Many American bankers were not ready for this new role. They lent heavily and unwisely to borrowers in Europe, especially Germany, who would have difficulty repaying the loans, particularly if there was a serious economic downturn. These huge debts made the international banking structure extremely unstable by the late 1920s.

In addition, the United States maintained high tariffs on goods imported from other countries, at the same time that it was making foreign loans and trying to export products. This combination could not be sustained: If other nations could not sell their goods in the United States, they could not make enough money to buy American products or repay American loans. All major industrial countries pursued similar policies of trying to advance their own interests without regard to the international economic consequences.

The rising incomes of the wealthiest Americans fueled rapid growth in the stock market (see Stock Exchange), especially between 1927 and 1929. Soon the prices of stocks were rising far beyond the worth of the shares of the companies they represented. People were willing to pay inflated prices because they believed the stock prices would continue to rise and they could soon sell their stocks at a profit.

The widespread belief that anyone could get rich led many less affluent Americans into the market as well. Investors bought millions of shares of stock “on margin,” a risky practice similar to buying products on credit. They paid only a small part of the price and borrowed the rest, gambling that they could sell the stock at a high enough price to repay the loan and make a profit.

For a time this was true: In 1928 the price of stock in the Radio Corporation of America (RCA) multiplied by nearly five times. The Dow Jones industrial average industrial average—an index that tracks the stock prices of key industrial companies—doubled in value in less than two years. But the stock boom could not last. The great bull market of the late 1920s was a classic example of a speculative “bubble” scheme, so called because it expands until it bursts. In the fall of 1929 confidence that prices would keep rising faltered, then failed. Starting in late October the market plummeted as investors began selling stocks. On October 29, known as Black Tuesday, the worst day of the panic, stocks lost $10 billion to $15 billion in value. By mid-November almost all of the gains of the previous two years had been wiped out, with losses estimated at $30 billion.

The stock market crash announced the beginning of the Great Depression, but the deep economic problems of the 1920s had already converged a few months earlier to start the downward spiral. The credit of a large portion of the nation’s consumers had been exhausted, and they were spending much of their current income to pay for past, rather than new, purchases. Unsold inventories had begun to pile up in warehouses during the summer of 1929.

The crash affected the economy the way exposure to cold affects the human body, lowering the body’s resistance to infectious agents that are already present. The crash reduced the ability of the economy to fight off the underlying sicknesses of unevenly distributed wealth, agricultural depression, and banking problems.

III. Economic Collapse (1929-1933)

The stock market crash was just the first dramatic phase of a prolonged economic collapse. Conditions continued to worsen for the next three years, as the confident, optimistic attitudes of the 1920s gave way to a sense of defeat and despair. Stock prices continued to decline. By late 1932 they were only about 20 percent of what they had been before the crash. With little consumer demand for products, hundreds of factories and mills closed, and the output of American manufacturing plants was cut almost in half from 1929 to 1932.

Unemployment in those three years soared from 3.2 percent to 24.9 percent, leaving more than 15 million Americans out of work. Some remained unemployed for years; those who had jobs faced major wage cuts, and many people could find only part-time work. Jobless men sold apples and shined shoes to earn a little money.

Many banks had made loans to businesses and people who now could not repay them, and some banks had also lost money by investing in the stock market. When depositors hit by the depression needed to withdraw their savings, the banks often did not have the money to give them. This caused other depositors to panic and demand their cash, ruining the banks. By the winter of 1932 to 1933, the banking system reached the point of nearly complete collapse; more than 5,000 banks failed by March 1933, wiping out the savings of millions of people.

As people lost their jobs and savings, mortgages on many homes and farms were foreclosed. Homeless people built shacks out of old crates and formed shantytowns, which were called “Hoovervilles” out of bitterness toward President Herbert Hoover, who refused to provide government aid to the unemployed.

The plight of farmers, who had been in a depression since 1920, worsened. Already low prices for their goods fell by 50 percent between 1929 and 1932. While many people went hungry, surplus crops couldn’t be sold for a profit.

Natural forces inflicted another blow on farmers. Beginning in Arkansas in 1930, a severe drought spread across the Great Plains through the middle of the decade. Once-productive topsoil turned to dust that was carried away by strong winds, piling up in drifts against houses and barns. Parts of Kansas, Oklahoma, Texas, New Mexico, and Colorado became known as the Dust Bowl, as the drought destroyed the livelihood of hundreds of thousands of small farmers. Packing up their families and meager possessions, many of these farmers migrated to California in search of work. Author John Steinbeck created an unforgettable fictional portrait of their fate in the novel The Grapes of Wrath (1939).

IV. Initial Response to the Depression

The initial government response to the Great Depression was ineffective, as President Hoover insisted that the economy was sound and that prosperity would soon return. Hoover believed the basic need was to restore public confidence so businesses would begin to invest and expand production, providing jobs and income to restore the economy to health. But business owners saw no reason to increase production while unsold goods clogged their shelves. By 1932 investment had dropped to less than 5 percent of its 1929 level.

Convinced that a balanced federal budget was essential to restoring business confidence, Hoover sought to cut government spending and raise taxes. But in the face of a collapsing economy, this served only to reduce demand further. As conditions worsened, Hoover’s administration eventually provided emergency loans to banks and industry, expanded public works, and helped states offer relief. But it was too little, too late.

The epitome of a “self-made man,” Hoover believed in individualism and self-reliance. As more and more Americans lost jobs and faced hunger, Hoover asserted that “mutual self-help through voluntary giving” was the way to meet people’s needs. Private giving increased greatly, reaching a record high in 1932, but charitable organizations were overwhelmed by the enormous number of people in need. To many, government assistance seemed the only answer, but Hoover was convinced that giving federal relief payments would undermine recipients’ self-reliance, and he resisted this step throughout his term.

The tension between citizens seeking government action and Hoover’s administration came to a head in June 1932. More than 20,000 World War I veterans marched on Washington, D.C., to ask for early payment of government bonuses they had been promised. But the government refused, and when some members of the so-called Bonus Army didn’t leave the capital, federal troops used tear gas and bayonets to evict the men and their families (see Bonus March).

Hoover and most of his Republican Party firmly supported protective tariffs to block imports and stimulate the American economy by increasing sales of American-made products. In 1930 they enacted the Hawley-Smoot Tariff, which established the highest average tariff in American history. This was a crushing blow to European economies, which were already sinking into depression. Other nations retaliated by raising their own tariffs. This action helped to worsen and spread the depression by choking off international trade. Between 1929 and 1932 the total value of world trade had declined by more than half.

V. International Effects of the Depression

Like Hoover, leaders of other nations around the world were determined to balance their budgets by raising taxes and slashing government spending. Germany, struggling to pay reparations imposed by the peace settlements after World War I, suffered to a larger extent than any other major industrial nation. Nearly 40 percent of the German workforce was unemployed by 1932. In these desperate economic circumstances, large numbers of Germans began to listen to the tirades of Hitler, who blamed the depression on Jews and Communists and promised to restore Germany to economic and military strength. After his Nazi (National Socialist) Party became the strongest political force in Germany, Hitler was named chancellor in January 1933. He soon seized absolute control of the German government.

In Britain the effects of the depression were not as dramatic because the nation had been suffering from high unemployment through much of the 1920s. Unlike the United States, Britain already had unemployment insurance and government welfare payments to ease the burden on the jobless. The depression took longer to hit hard in France because it was less industrialized than the United States, Germany, and Britain. Also, because so many French men had died in World War I, the workforce was very small, and it took a severe economic decline before the demand for workers fell below the small supply.

VI. Roosevelt and the New Deal

By the election year of 1932, the depression had made Hoover so unpopular that the election of the Democratic presidential candidate Franklin Delano Roosevelt was all but assured. Confidence—Hoover’s elusive goal—was Roosevelt’s most abundant quality. Declaring in his inaugural speech that “the only thing we have to fear is fear itself,” Roosevelt quickly lifted the nation’s spirits with the rapid and unprecedented actions of the New Deal.

Within days of his inauguration Roosevelt called Congress into a special session, during which many pieces of emergency legislation were passed. Following the example of many states, Roosevelt proclaimed a nationwide bank holiday, closing all banks to stop panicky depositors from withdrawing their money. A few days later he broadcast the first of many fireside chats on the radio, reassuring Americans that all banks that were allowed to reopen would be safe.

The New Deal produced a wide variety of programs to reduce unemployment, assist businesses and agriculture, regulate banking and the stock market, and provide security for the needy, elderly, and disabled. The basic idea of early New Deal programs was to lower the supply of goods to the current, depressed level of consumption. Under the Agricultural Adjustment Act of 1933, the government sought to raise farm prices by paying farmers not to grow surplus crops. Parts of the National Industrial Recovery Act created codes for many industries that regulated competition while guaranteeing minimum wages and maximum hours for workers.

The New Deal also tried to increase demand, pumping large amounts of money into the economy through public works programs and relief measures. Public works projects not only provided jobs but built schools, dams, and roads; the innovative Tennessee Valley Authority provided electric power and improved living conditions in an area of the southeast United States.

However, Roosevelt never embraced the new ideas of British economist John Maynard Keynes, who argued that intentionally unbalancing the budget to a significant degree would boost demand to the point where recovery would take place. The U.S. gross public debt increased from $22.5 billion in 1933 to $40.44 billion in 1939, but Roosevelt was reluctant to accept any more deficit spending than seemed absolutely necessary to prevent mass suffering. He did not create an unbalanced budget on the scale Keynes advocated until World War II forced it upon him. Once the government started spending at the levels Keynes had suggested, the depression ended.

The New Deal helped people to survive the depression, but acted as a painkiller rather than a cure for the nation’s economic ills. Unemployment was reduced, but remained high through the 1930s. Farm income rose from a low of $1.9 billion in 1932 to $4.2 billion in 1940. The demands of the depression led the United States to institute social-security programs and accept labor unions, measures that had been taken decades earlier in many European nations.

VII. Life During the Depression

The Great Depression had a substantial and varied impact on the lives of Americans. Physically and psychologically, it was devastating to many people, who not only lacked adequate food, shelter, and clothing but felt they were to blame for their desperate state.

Although few people died from starvation, many did not have enough to eat. Some people searched garbage dumps for food or ate weeds. Malnutrition took a toll: A study conducted in eight American cities found that families that had a member working full time experienced 66 percent less illness than those in which everyone was unemployed.

The psychological impact was equally damaging. During the prosperity of the 1920s, many Americans believed success went to those who deserved it. Given that attitude, the unemployment brought by the depression was a crushing blow. If the economic system really distributed rewards on the basis of merit, those who lost their jobs had to conclude that it was their own fault. Self-blame and self-doubt became epidemic. These attitudes declined after the New Deal began, however. The establishment of government programs to counteract the depression indicated to many of the unemployed that the crisis was a large social problem, not a matter of personal failing. Still, having to ask for assistance was humiliating for many men who had thought of themselves as self-sufficient and breadwinners for their families.

Because society expected a man to provide for his family, the psychological trauma of the Great Depression was often more severe for men than women. Many men argued that women, especially married women, should not be hired while men were unemployed. Yet the percentage of women in the workforce actually increased slightly during the depression, as women took jobs to replace their husbands’ lost pay checks or to supplement spouses’ reduced wages. Women had been excluded from most of the manufacturing jobs that were hardest hit by the depression, which meant they were less likely than men to be thrown out of work. Some fields that had been defined as women’s work, such as clerical, teaching, and social-service jobs, actually grew during the New Deal.

The effects of the depression on children were often radically different from the impact on their parents. During the depression many children took on greater responsibilities at an earlier age than later generations would. Some teenagers found jobs when their parents could not, reversing the normal roles of provider and dependent. Sometimes children had to comfort their despairing parents. A 12-year-old boy in Chicago, for example, wrote to President and Mrs. Roosevelt in 1936 to seek help for his father, who was always “crying because he can’t find work [and] I feel sorry for him.” The depression that weakened the self-reliance of many adult men strengthened that quality in many children.

The depression’s impact was less dramatic, but ultimately more damaging, for minorities in America than for whites. Since they were “born in depression,” many blacks scarcely noticed a change at the beginning of the 1930s. Over time, however, blacks suffered to an even greater extent than whites, since they were usually the last hired and first fired. By 1932 about 50 percent of the nation’s black workers were unemployed. Blacks were frequently forced out of jobs in order to give them to unemployed whites.

Yet the depression decade was one of important positive change for blacks. First lady Eleanor Roosevelt and several leading New Deal figures were active champions of black rights, and most New Deal programs prohibited racial discrimination. These rules were often ignored in the South, but the fact that they were included at all was a major step forward. Blacks were sufficiently impressed with the New Deal to cause a large majority of black voters to switch their allegiance from the Republican to the Democratic Party during the depression years. See also African American History.

Other minority populations had experiences similar to those of blacks during the depression. Native Americans were even less likely than blacks to notice a downturn when the depression began; they already fared poorly by virtually every social or economic indicator. But Native Americans, like blacks, were brought into New Deal relief programs that in theory did not discriminate, and an attempt was made, through the Indian Reorganization Act, to enable tribes to reestablish their identities and cultural practices. In industrial cities such as Detroit, Gary, and Los Angeles and in agricultural regions such as California’s San Joaquin Valley, Mexican Americans were seen as holding jobs that should go to whites. Repatriation (meaning deportation) programs were instituted to persuade Chicanos to return to Mexico, often through intimidation.

Groups of white Americans also faced discrimination during this era. Poor farmers evicted from their land or fleeing the Dust Bowl were often despised and abused when they arrived in California and other western states. They were commonly labeled “Okies,” whether they came from Oklahoma or other states.

VIII. End of the Depression

Although economic conditions improved by the late 1930s, unemployment in 1939 was still about 15 percent. However, with the outbreak of World War II in Europe in September 1939, the U.S. government began expanding the national defense system, spending large amounts of money to produce ships, aircraft, weapons, and other war material. This stimulated industrial growth, and unemployment declined rapidly. After the United States entered the war in December 1941, all sectors of the economy were mobilized to support the war effort. Industry greatly expanded, and unemployment was replaced by a shortage of workers.

IX. Legacy of the Depression

The impact of the Great Depression and the programs of the New Deal dramatically altered the relationship between the American people and their government. The federal government expanded its role in many social and economic areas, becoming larger and more powerful. Americans came to accept government involvement and responsibility in caring for society’s most needy members and regulating many aspects of the economy.

The New Deal’s social programs reflected a shift in American values created by the shared hardships of the depression era. The depression experience discredited the extreme individualism and pursuit of self-interest that characterized the 1920s, and revived an emphasis on community, cooperation, and compassion. These values were reflected in the popular culture of the day and in political and labor movements that developed and expanded during the 1930s.

One of the most far-reaching New Deal measures, the Social Security Act of 1935, guaranteed government help to citizens who were unemployed or disabled, to older Americans, and to mothers and children. The National Labor Relations Act (1935) provided protection for union activity, which contributed to the rise of labor unions in mass-production industries such as steel and automobile manufacturing. Unions and racial minorities, who had benefited from the New Deal, were among the groups who became staunch supporters of the Democratic Party, changing American politics for decades to come.

The literature, films, and art of the depression era demonstrated the desire for a more cooperative, less fiercely competitive way of life. Many celebrated the common people, who were contrasted with greedy, powerful interests. Examples included films such as Mr. Smith Goes to Washington (1939), directed by Frank Capra, and Stagecoach (1939), by John Ford; paintings by Norman Rockwell; songs by folk singer Woody Guthrie; and novels by such writers as John Steinbeck.

While many conservatives believed the New Deal was turning the United States toward socialism, other Americans felt it did not go far enough and sought more revolutionary change. Political movements to the left of the New Deal enjoyed considerable support during the 1930s. Among them were the Minnesota Farmer-Labor Party, which offered radical proposals challenging the capitalist system, and the unsuccessful campaign by novelist Upton Sinclair to be governor of California in 1934, proposing essentially socialist programs to “End Poverty in California.” By alleviating some of the worst effects of the depression, the New Deal helped defuse tensions and preserve a democratic, capitalist system at a time when other nations turned to fascism or socialism.

The return of prosperity during and after World War II revived some of the forces that divided society and promoted self-interest in the 1920s. But the experience of the Great Depression left a lasting mark on the United States in the forms of a much greater role for the federal government, a new political alignment in which Democrats would retain the support of a majority for most of the next half century, and a general feeling that the free market must be regulated in order to avoid another such economic catastrophe.

Contributed By:
Robert S. McElvaine, B.A., M.A., Ph.D.
Elizabeth Chisholm Professor of Arts and Letters and Chair of the Department of History, Millsaps College, Mississippi. Author of The Great Depression: America, 1929-1941.
"Great Depression in the United States," Microsoft® Encarta® Online Encyclopedia 2008
http://encarta.msn.com © 1997-2008 Microsoft Corporation. All Rights Reserved.
© 1993-2008 Microsoft Corporation. All Rights Reserved.

OK, at what point does this thing get a little eerie? OK, I'll agree it's not a carbon-copy of today. But it's Close. The Past is Prologue, folks. Get ready.