Background and Causes of the Great Depression

The 1920s "boom" enriched only a fraction of the American people. Earnings for farmers and industrial workers stagnated or fell. While this represented lower production costs for companies, it also precluded growth in consumer demand. Thus, by the mid 1920s the ability of most Americans to purchase new automobiles, new houses and other durable goods was beginning to weaken. This weakening demand was masked, however, by the "great bull market" in stocks on the New York Stock Exchange. The ever-growing price for stocks was, in part, the result of greater wealth concentration within the investor class. Eventually the Wall Street stock exchange began to take on a dangerous aura of invincibility, leading investors to ignore less optimistic indicators in the economy. Over-investment and speculating (gambling) in stocks further inflated their prices, contributing to the illusion of a robust economy. The crucial point came in the 1920s when banks began to loan money to stock-buyers since stocks were the hottest commodity in the marketplace. Banks allowed Wall Street investors to use the stocks themselves as collateral. If the stocks dropped in value, and investors could not repay the banks, the banks would be left holding near-worthless collateral. Banks would then go broke, pulling productive businesses down with them as they called in loans and foreclosed mortgages in a desperate attempt to stay afloat. But that doomsday scenario was laughed off by analysts and politicians who argued the U.S. stock market had entered a "New Era" where stock values and prices would always go up. That, of course, did not happen. Stock prices were seriously over-priced (when measured in the actual productivity of the companies they represented) making a market "correction" inevitable. In October 1929 the New York Stock Exchange's house of cards collapsed in the greatest market crash seen up to that time. Students are often surprised to learn that the stock market crash itself did not cause the rest of the economy to collapse. But, because American banks had loaned so heavily for stock purchases, falling stock prices began endangering local banks whose stock-buying borrowers began defaulting on their loans.

Bank Failures Turn the Stock Market Crisis into an Economy-wide Crisis
Banks are the pumping stations or hearts of the capitalist organism. Not only do banks circulate money, they create new money through the making of loans. Bank-created credit represents the most elastic element in the supply of money. As hundreds then thousands of banks failed between 1929 and 1933, the economy's credit (and, thus, money) supply began to dry up. Also, as banks went down, they often took local businesses with them as they called in business loans in a desperate effort to stay afloat. All of this rippled outward in ever-widening circles of bankruptcies, job lay-offs and curtailed consumption.

During the worst years of the Depression, 1933-34, the overall jobless rate was twenty-five percent with another twenty-five percent of breadwinners having their wages and hours cut. Effectively, then, almost one out of every two U.S. households directly experienced unemployment or underemployment. For workers' families already facing hard times, the Depression's unemployment woes wreaked unprecedented, catastrophic havoc.

The Government's Response: Hoover

President Herbert Hoover resisted calls for government intervention on behalf of individuals. He reiterated his belief that if left alone the economy would right itself and argued that direct government assistance to individuals would weaken the moral fiber of the American people. Hoover further believed that during hard times the government should adopt austerity measures, that is, cut spending even further. Forced by Congress to intervene, Hoover did so reluctantly, concerned about both unbalancing the federal budget, and, even more importantly, violating his laissez-faire principles. Hoover's efforts consisted of spending to stabilize the business community, believing that returning prosperity would eventually "trickle down" to the poor majority. The poor majority proved unwilling to wait. Branded by his many detractors as cold and uncaring, Hoover was easily defeated in the presidential election of 1932 by Democrat Franklin D. Roosevelt. The Government's Response: Roosevelt

Roosevelt remained vague on the campaign trail, promising only that under his presidency government would act decisively to end the Depression. Once in office, FDR said yes to almost every plan put forward by advisors and the Congress said yes to almost every program proposed by the president. In the frantically-paced first few months of his administration, Congress passed scores of new legislation at the president's request. Historians tend to categorize these efforts as either measures for "relief" (short-term programs designed to alleviate immediate suffering), "recovery" (long-term programs to strengthen the economy back to its pre-crash level), or, "reform" (permanent structures meant to prevent future depressions). Another way of understanding FDR's Depression-fighting efforts is to analyze the politics of the New Deal. Generally speaking, the overall aim of the New Deal was essentially conservative. The New Deal sought to save capitalism and the fundamental institutions of American society from the disaster of the Great Depression. Within that framework, however, significant differences between New Deal programs existed. The "first" New Deal (1933-35) tended toward a continuation of "trickle down" policies, albeit better-funded and executed more creatively. Even in the early first New Deal, exceptional programs pointed toward the "second" New Deal's tendency toward "Keynesian" economic policies of revitalizing a mass-consumption based economy by revitalizing the masses ability to consume.

Keynes' theory
English economist John Maynard Keynes sought both to explain why depressions occurred and what might be done to prevent them. Simply put, he thought government should use its massive financial

power (taxing and spending) as a sort of ballast to stabilize the economy. Depressions, then, should be attacked with increased government spending at the bottom of the income pyramid. This position is the opposite of "trickle down." Keynesian economists call this "counter-cyclical demand management," believing that the government's massive financial impact can be used as a counterweight to current market forces. For a more detailed explanation of Keynesian theory, visit this well-written British site. Yet, as your text points out, Roosevelt never fully subscribed to Keynes' counterintuitive argument that government's should spend more during hard times. Roosevelt was a faint-hearted Keynesian, at best.

The "Two" New Deals, 1933-1940s:

The "First" New Deal (1933-35) aimed at restoring the economy from the top down The Agricultural Adjustment Act (AAA), passed in 1933, accepted the long-held premise that low farm prices resulted from overproduction. Thus, the government sought to stimulate increased farm prices by paying farmers to produce less. While the original AAA was declared unconstitutional by the Supreme Court, a new act correcting for the Court's concerns was passed in 1935. Critics pointed out the irony of reducing food production in a society where children already went hungry. Of course, those children's hunger did not represent demand in the marketplace. Indeed there were agricultural surpluses; as usual, the problem of the American farm was demand and distribution, not supply. "Acreage allotment" (the backbone of the crop reduction program) helped the largest and best capitalized farmers. It did little for smaller farmers and led to the eviction and homelessness of tenants and sharecroppers whose landlords hardly needed their services under a system that paid them to grow less. Further, it failed to address the fundamental problem of the Depression: weak consumer demand due to falling wages and unemployment. In the long run the effect of the AAA was beneficial to moderate to large operators. The 1933 National Industrial Recovery Act (NIRA) set up the New Deal's fundamental strategy of centralized planning as a means of combating the Depression. Industrial sectors were encouraged to avoid "cutthroat competition" (selling below cost to attract dwindling customers and drive weaker competitors out of business) which may have been good for individual businesses in the short-run, but resulted in increased unemployment and an even smaller customer pool in the long-run. The government temporarily suspended enforcement of anti-monopoly laws and sponsored what amounted to price-fixing as an emergency measure. Similar efforts were made to stabilize wages within industries as well. Again, the basic problem left unanswered was overall weak consumer demand. The NIRA did address this in a limited way with the Public Works Administration which funded various public employment schemes; however, the number of jobs created by the PWA were miniscule compared to the number of jobless workers. The "First" New Deal's Tennessee Valley Authority (TVA) reflected the future liberal methods of the "Second" New Deal. The TVA (1933) provided millions of dollars to transform the economies of seven depressed, rural Southern states along the Tennessee River. The program included dam-building, electric power-generation, flood and erosion control. It provided relatively high-wage jobs in construction in a region the president called "the nation's number one economic problem." Critics saw creeping socialism in this venture; liberals saw it as a successful example of government solving social and economic problems.

The Politics of Right and Left push and pull FDR toward the Left The right-wing of American politics convinced Roosevelt he had nothing to lose on that end of the spectrum. Chief among his critics on the right was the Liberty League, a speaker's bureau funded by the Du Pont family and other business interests. The League leadership sought to fuse a partnership between the segregationist governor of Georgia Eugene Talmadge and other conservative leaders to create a grassroots opposition to the New Deal. Liberty League speakers toured the country accusing Roosevelt of instituting creeping socialism.

Right-wing radio personality Father Charles Coughlin denounced recipients of government assistance and claimed the New Deal led the country toward a Communist dictatorship. He suggested Nazi Germany would prove to be America's correct model and blamed the Depression on a Jewish conspiracy. At the height of his popularity millions of Americans listened to his radio sermons each week. The Liberty League convinced Roosevelt that he had lost any hope of support from the business right and Coughlin's popularity convinced him that people must be suffering indeed to listen to such rhetoric. In a sense, both the Liberty League and Coughlin (for different reasons) pushed FDR further to the left. Roosevelt was pulled toward the left by both the traditional Left (The Socialist Party of America) and the unconventional left (Dr. Francis Townshend and Sen. Huey P. Long of Louisiana). In 1932 the Socialists' presidential candidate Norman Thomas had tripled his 1928 showing as hard times rejuvenated the Socialist critique of the system. Nobody thought Thomas posed an electoral threat to FDR; the president was sensitive, however, to the Socialists' rising popularity.

Dr. Francis Townsend, a California physician, argued in favor of a federally-funded old-age pension as a means of ending the Depression. He argued that turning the nation's elderly population into robust consumers would solve the underlying problem of weak demand. Dr. Townsend's clubs began springing up across the country as his message of care for the elderly meshed with people's desire for a rapid end to the Depression. Note the "Townsend Clubs of America" banner in the photograph.

The colorful senator from Louisiana, Huey P. Long, joined Roosevelt's critics on the left with his "Share Our Wealth" plan. Long proposed a guaranteed household income for each American family paid for by high taxes on the wealthiest Americans. Long's rising popularity (before his assassination in 1935) further demonstrated to FDR the discontent of the people. Convinced that Americans were suffering more than he had realized and believing he had already forfeited the support of the business right, FDR headed left in the "second" New Deal.

The "second" New Deal (1935-40s) aimed at restoring the economy from the bottom up The "second" New Deal attempted to end the Depression by spending at the bottom of the economy where government funds attempted to turn non-consumers into consumers again. Many of the programs lasted only until World War II while others became permanent fixtures in American life. Here are three to illustrate the central thrust of the second New Deal. The Works Progress Administration was a huge federal jobs program that sought to hire unemployed breadwinners for the purpose strengthening their family's well-being as well as boosting consumer demand. The jobs varied but consisted of mainly of construction of public roads, buildings and parks. Over the course of its life (1935-43) over eight million Americans worked on WPA projects. This was "counter-cyclical demand management" on a huge scale. Responding in part to "Townsendites," the 1935 Social Security Act set up a modest worker-funded but federally-guaranteed pension system. Not on the princely scale Townsend had advocated, nevertheless, Social Security did act as a safety net for older workers, promote increased consumer demand and earned a place as a fixture on the American political and social landscape. Finally, another significant component of the "second" New Deal was the National Labor Relations Act of 1935. Usually called the Wagner Act after its sponsor, Senator Robert Wagner of New York, this law attempted to prevent employers' use of intimidation and coercion in breaking up unions. It set up the National Labor Relations Board to guarantee the right of collective bargaining for American workers. The results were immediately discernable: the formation of the Congress of Industrial Organizations whose auto worker and coal miner units soon saw their wages increase significantly. Again, higher wages among the masses of the working class is an example of the "second" New Deal's attempt to restore the economy from the bottom up. World War II ended both the temporary New Deal programs and the Depression they were attempting to cure. Keep in mind that many facets of the New Deal--Social Security, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission to name only three--have remained features of American life from the 1930s until the present. War ended the Depression simply because of increased government spending, an intensified version of what Roosevelt was already doing with the WPA and similar programs.. Responding to the external threats posed by the Axis Powers (Germany, Japan and Italy) Roosevelt and the Congress threw fiscal caution to the wind and spent what was necessary to win the war. In so doing, they also achieved preDepression levels of employment and prosperity. What then is the legacy of the New Deal as a whole? Would it have ended the Depression? The best answer to that is that it went a long way toward alleviating the worst suffering of the Depression while still being captive to the conventional thinking (political, fiscal, racial) of the day. We cannot answer that question of whether it could have ended the Depression based on historical facts. World War II interrupted the process. What are the other long-term consequences of the Depression and New Deal? The rise of the "Roosevelt Coalition" of farmers, union members, working class people, Northern blacks and liberals made the Democratic Party the nation's dominant party for almost sixty years. Further, the political consensus that developed after World War II held that never again should the government allow another depression to

take hold. Thus, there followed an unprecedented level of federal economic intervention. This huge expansion in the role, size and power of government in American social and economic life is aptly summed up in Republican President Richard Nixon's famous 1971 remark, "We're all Keynesians now."