The Great Depression

The Great Depression

Of 1930.

William Cunningham

Strayer University

To my amazement the Great Depression serves as a natural debating point that "justifies" or "refutes" various economic policies. The Great Depression and the New Deal are complex topics that are open to many interpretations. The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world.

Seeing the order in which events actually occurred dispels many myths about the Great Depression. One of the greatest of these myths is that government intervention was responsible for its onset. Truly massive intervention began only under the presidency of Franklin Roosevelt in 1933, who was sworn in after the worst had already hit. Although his New Deal did not cure it, all the leading economic indicators improved during his tenure.

To understand the Great Depression, it is important to know the theories of John Maynard Keynes. Keynes is known as the "father of modern economics" because he was the first to accurately describe some of the causes and cures for recessions and depressions.

In a normal economy, Keynes said, there is a circular flow of money. My spending becomes part of your earnings, and your spending becomes part of my earnings. For various reasons, however, this circular flow can falter. People start hoarding money when times become tough; but times become tougher when everyone starts hoarding money. This breakdown results in a recession.

To get the circular flow of money started again, Keynes suggested that the central bank, the Federal Reserve System, should expand the money supply. This would put more money in people's hands (through the multiplier effect), inspire consumer confidence, and compel them to start spending again.

A depression, Keynes believed, is an especially severe recession in which people hoard money no matter how much the central bank tries to expand the money supply. In that case, he suggested that government should do what the people were not: start spending money. He called this "priming the pump" of the economy. I think that most economists believe that only massive U.S. defense spending in preparation for World War II cured the Great Depression.

After the success of Keyne's economic beliefs were proven, almost all free governments around the world became Keynesian. These policies have dramatically reduced the severity of recessions since then, and appear to have completely eliminated the depression from those who follow such economic beliefs throughout the world.

Events of the 1920s

The Roaring Twenties were an era dominated by Republican presidents: Warren Harding (1920-1923), Calvin Coolidge (1923-1929) and Herbert Hoover (1929-1933). Under their conservative economic philosophy of laissez-faire ("leave it alone"), markets were allowed to operate without government interference. Taxes and regulation were slashed dramatically, monopolies were allowed to form, and inequality of wealth and income reached record levels. The country was on the preferred gold standard, and the Federal Reserve was not allowed to significantly change the money supply. Many try to blame the worsening of the Depression on Hoover, for supposedly betraying the laissez-

faire beliefs.

As this time line will show, almost all of Hoover's government action occurred during his last year in office, long after the worst of the Depression had hit. In fact, he was voted out of office for doing "too little too late." The only notable exception to his earlier idleness was the Smoot-Hawley tariff

of 1930.

But much more important, the economy was clearly turning downward even before Hoover took office in 1929. Entire sectors of the economy were depressed throughout the decade, such as: agriculture, energy and mining. Even the two industries with the most spectacular growth - construction and automobile manufacturing - were contracting in the year before the stock market crash of 1929. About 600 banks a year were failing. Half the American people lived at or below the minimum subsistence level. By the time the stock market crashed, there

was a excessive amount of goods on the market, and inventories were three times their normal size. The fact that all this occurred even before the first act of government intervention is a major refutation of laissez-faire ideology.

TIMELINE OF GENERAL EVENTS

1920s

*During World War I, federal spending grows three times larger than tax

collections. When the government cuts back spending to balance the budget in 1920, a severe recession results. However, the war economy invested heavily in the manufacturing sector, and the next decade will see an explosion of productivity... although only for certain sectors of the economy.

*An average of 600 banks fail each year.

*Agricultural, energy and coal mining sectors are continually depressed. Textiles, shoes, shipbuilding and railroads continually decline.

*The value of farmland falls 30 to 40 percent between 1920 and 1929.

*Organized labor declines throughout the decade. The United Mine Workers Union will see its membership fall from 500,000 in 1920 to 75,000 in 1928. The American Federation of Labor would fall from 5.1 million in 1920 to 3.4 million

in 1929.

*"Structural unemployment" enters the nation's vocabulary; as many as 200,000 workers a year are replaced by automatic or semi-automatic machinery.

*Over the decade, about 1,200 mergers will swallow up more than 6,000 previously independent companies; by 1929, only 200 corporations will control over half of all American industry.

*By the end of the decade, the bottom 80 percent of all income-earners will be removed from the tax rolls completely. Taxes on the rich will fall throughout the decade.

*By 1929, the richest 1 percent will own

...