The Depression Essay, Research Paper
Depression of the 1930s
Depression of the 1930s
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 percent and 25 percent of the labor force. The great
industrial slump continued throughout the 1930s, shaking the foundations of Western
capitalism and the society based upon it.
The “roaring twenties” was an era when our country prospered tremendously. The
nation’s total realized income rose from $74.3 billion in 1923 to $89 billion in 1929.
However, the rewards of the “Coolidge Prosperity” of the 1920’s were not shared evenly
among all Americans. According to a study done by the Brookings Institute, in 1929 the
top 0.1% of Americans had a combined income equal to the bottom 42%. That same top
0.1% of Americans in 1929 controlled 34% of all savings, while 80% of Americans had no
savings at all. Automotive industry mogul Henry Ford provides a striking example of the
unequal distribution of wealth between the rich and the middle-class. Henry Ford reported
a personal income of $14 million in the same year that the average personal income was
$750. By present day standards, where the average yearly income in the U.S. is around
$18,500, Mr. Ford would be earning over $345 million a year! This maldistribution of
income between the rich and the middle class grew throughout the 1920’s. While the
disposable income per capita rose 9% from 1920 to 1929, those with income within the
top 1% enjoyed a stupendous 75% increase in per capita disposable income.
A major reason for this large and growing gap between the rich and the
working-class people was the increased manufacturing output throughout this period.
From 1923-1929 the average output per worker increased 32% in manufacturing. During
that same period of time average wages for manufacturing jobs increased only 8%. Thus
wages increased at a rate one fourth as fast as productivity increased. As production costs
fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the
increased productivity went into corporate profits. In fact, from 1923-1929 corporate
profits rose 62% and dividends rose 65%.
The federal government also contributed to the growing gap between the rich and
middle-class. Calvin Coolidge’s administration (and the conservative-controlled
government) favored business, and as a result the wealthy who invested in these
businesses. An example of legislation to this purpose is the Revenue Act of 1926, signed
by President Coolidge on February 26, 1926, which reduced federal income and
inheritance taxes dramatically. Andrew Mellon, Coolidge’s Secretary of the Treasury, was
the main force behind these and other tax cuts throughout the 1920’s. In effect, he was
able to lower federal taxes such that a man with a million-dollar annual income had his
federal taxes reduced from $600,000 to $200,000. Even the Supreme Court played a role
in expanding the gap between the socioeconomic classes. In the 1923 case Adkins v.
Children’s Hospital, the Supreme Court ruled minimum-wage legislation unconstitutional.
The large and growing disparity of wealth between the well-to-do and the
middle-income citizens made the U.S. economy unstable. For an economy to function
properly, total demand must equal total supply. In an economy with such disparate
distribution of income it is not assured that demand will always equal supply. Essentially
what happened in the 1920’s was that there was an oversupply of goods. It was not that
the surplus products of industrialized society were not wanted, but rather that those whose
needs were not satiated could not afford more, whereas the wealthy were satiated by
spending only a small portion of their income. A 1932 article in Current History articulates
the problems of this maldistribution of wealth.
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 per 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 U. S. stock market
crash 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.
The enormous amount of unsecured consumer debt created by this speculation left
the stock market essentially off-balance. Many investors, caught up in the race to make a
killing, invested their life savings, mortgaged their homes, and cashed in safer investments
such as treasury bonds and bank accounts. As the prices continued to rise, some economic
analysts began to warn of an impending correction, but they were largely ignored by the
leading pundits. Many banks, eager to increase their profits, began
speculating dangerously with their investments as well. Finally, in October 1929, the
buying craze began to dwindle, and was followed by an even wilder selling craze.
On Thursday, October 24, 1929, the bottom began to fall out. Prices dropped
precipitously as more and more investors tried to sell their holdings. By the end of the day,
the New York Stock Exchange had lost four billion dollars, and it took exchange clerks
until five o’clock am the next day to clear all the transactions. By the following Monday,
the realization of what had happened began to sink in, and a full-blown panic ensued.
Thousands of investors–many of them ordinary working people, not serious players–were
financially ruined. By the end of the year, stock values had dropped by fifteen billion
Many of the banks which had speculated heavily with their deposits were wiped
out by the falling prices, and these bank failures sparked a run on the banking system.
Each failed bank factory business and investor contributed to the downward spiral that
would drag the world into the Great Depression.
By 1930, the slump was apparent, but few people expected it to continue; 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 of people 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 depression brought a deflation not only of incomes but of hope. In his first
inaugural address (March 1933), President Franklin D. 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 in every industry. 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 Schecter 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
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 Wilkkie, 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 and
unemployment allowances. What bothered him and other opponents of the New Deal,
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 in the United States and elsewhere.
Bernstein, Irving, A Caring Society: The New Deal, the Worker and the Great Depression
Boardman, Fon W., Jr., The Thirties: America and the Great Depression (1967).
Davis, Joseph S., The World Between the Wars, 1919-39: An Economist’s View (1974).
Kindleberger, Charles P., The World in Depression, 1929-1939 (1975; repr. 1983).
Markowitz, Gerald, and Rosner, David, eds., Slaves of the Depression (1987).
Wecter, Dixon, Age of the Great Depression, 1929-1941 (1971).