Great Depression - History of Business in the U.S.
The Event: Major, global economic downturn
Place: United States
Significance: The most pervasive and sustained event ever to affect American business, the Great Depression brought about the end of the laissezfaire approach that had characterized the American business world from the nineteenth century through the 1920’s and paved the way for government intervention in business and finance.
The Great Depression is generally seen as having lasted fromthe stock market crash of October, 1929, until the entry of the United States into World War II in December, 1941. However, it is a mistake to conclude that the stock market crash itself caused the Depression. An economic depression as deep and sustained as that of the 1930’s can be attributed only to a complex of causes that converge to create a business environment poised for disaster. The stock market crash did indeed contribute to the economic instability that marked the Depression, but many other factors were responsible for the Depression, which continued for almost a decade after the stock market reached its bottom and began its slow recovery in June, 1932.
The U.S. economy suffered a number of economic declines and even a few outright panics between the founding of the republic during the late eighteenth century and 1929. The major difference between earlier panics and the one that brought about the Great Depression was that previous panics, like those in 1837 and 1857, played out in approximately one year, after which the economy began to recover and revitalize. It was unprecedented in American history to have an economic panic last for over a decade with little measurable relief.
The Crisis in Farming
Although the Depression that affected America’s business sector began full-fledged in 1929, American farmers had endured an agricultural depression through much of the 1920’s. Prices for farm goods increased early in the decade, causing many farmers to invest in more land to raise the crops that commanded favorable prices. Much of what farmers owned was bought on credit, so when overproduction led to a steep decline in the price of agricultural products, many farmers found themselves overextended and unable to pay their debts. Some were able to hang on, renting land that enabled them to continue farming on a more marginal basis. Others gravitated to cities to live with relatives and, they hoped, to find enough work to keep them solvent.
After World War I, American society had completed its swing from an agricultural to an industrial economy. It still depended, however, on farmers to produce the food people needed to survive. During the 1920’s, farming became more mechanized. This mechanization allowed farmers to produce more food, and the excellent growing conditions of the early 1930’s resulted in even more agricultural production. As a consequence of the resulting overproduction, prices were driven down, and farmers were unable to earn enough to sustain themselves. Many defaulted on their mortgages and were driven from their land. Between 1929 and 1932, farm prices declined by 53 percent, largely because of an oversupply of food. Droughts in much of the Midwest and Southwest in 1934 and 1936 drastically reduced this oversupply, but they also created dust bowls. Fertile topsoil was reduced to dust and blown away with every strong wind, leaving once-productive land impossible to cultivate.
Looming Economic Problems
Although many sectors of the economy flourished during the 1920’s, some industries were as depressed as farming during that decade. The textile industry suffered serious declines, and mining was also becoming an unprofitable enterprise. Between 1920 and 1929, bank failures occurred at the rate of six hundred each year. An estimated twenty thousand other businesses were forced to close annually because of the deteriorating financial situation. As banks failed, more people became distrustful of them and withdrew their savings, creating severe liquidity problems even for strong financial institutions.
The 1920’s witnessed significant growth in some sectors of the business world, as people rushed to buy such consumer goods as radios, automobiles, and a variety of electrical appliances being introduced onto the market. A majority of consumers paid for their purchases by signing installment contracts that required a small down payment and regular subsequent payments until the item they bought was fully paid for.
Automobile registration increased from 9 million during the early 1920’s to more than 27 million in 1930. Americans went into debt to buy cars and appliances such as refrigerators and washing machines, both of which were novelties during the 1920’s. As the job market began to contract, people saddled with installment payments were frequently unable to make their payments, and the banks that had financed their installment purchases suffered huge losses. Between 1929 and 1932, 44 percent of U.S. banks (more than 11,000 institutions) failed.
Panicky depositors in banks rushed to withdraw their savings, creating severe liquidity problems for financial institutions that often could accommodate their clients’ withdrawals only by selling off their assets at severely depressed prices. Once these assets were exhausted, many banks had no recourse but to close their doors.
Herbert Hoover, president of the United States from 1929 until 1933, believed that the government should not intervene in matters that laissez-faire economists considered the responsibility of bankers and financiers. Under Hoover, the Federal Reserve was powerless to help resolve the banks’ liquidity crises. Because the United States maintained a fixed exchange rate, the Federal Reserve could not increase the amount of money in circulation. During Hoover’s administration, higher interest rates reduced consumer spending, which, in turn, led to increases in unemployment among those who produced consumer goods. The unemployment rate increased from 9 percent in 1930 to a staggering 25 percent in 1933.
The Smoot-Hawley Tariff Act of 1930 imposed high tariffs on imported goods and led to retaliation by other countries, which raised their tariffs on imports from the United States, causing another economic crisis. In this period of widespread unemployment, many youths from middle America left home to seek work in the West, hitching rides on freight trains. Hobo villages grew up along many railroad tracks, populated by young men desperate for work who lived by begging for food or seeking shelter and sustenance from charitable organizations.
Groups of farmers whose property had been foreclosed on congregated in the seedier parts of many cities, where they erected flimsy shelters made largely from cardboard and packing crates. These villages, where whole families often lived for months at a time, were dubbed “Hoovervilles” to direct attention to the president who, in the eyes of those who were dispossessed, made the shantytowns necessary. Despite such conditions, the Hoover administration continued to believe that it was not the government’s role to intervene.
Roosevelt and the New Deal
The laissez-faire attitudes that long had characterized Republican policies were well entrenched. Between 1860 and 1932, the United States had elected just two presidents who were not Republicans. However, with the economic troubles gripping the nation during the early 1930’s, it was clear that ingrained attitudes of the past were not adequate to deal with the looming problems of the Great Depression. In 1932, Franklin D. Roosevelt, a Democrat, was elected president of the United States.
After his inauguration in March, 1933, Roosevelt’s first official act was to declare a bank holiday that would remain in effect for two weeks. The governors of many states had declared similar bank holidays in their states in the immediate past, but Roosevelt realized that despite the Republican obsession with states’ rights, the growing economic meltdown called for drastic measures. He could not allow the run on banks to continue without jeopardizing every financial institution in the country. Unlike Hoover, Roosevelt considered it the responsibility of government to take positive and decisive action to control the spread of what had developed into a major worldwide depression.
The most immediate need was to provide relief for those in dire straits. The president called Congress into a special session, later called the Hundred Days, to deal urgently with the economic crisis. He urged Congress to devise means of employing vast numbers of the unemployed. In 1933, Congress created numerous government agencies to put the economy back on track. The FederalEmergency Relief Administration funneled government funds directly to individual states to provide assistance to the needy and to subsidize organized charities within those states.
To employ the thousands of young men unable to find work, Congress established the Civilian Conservation Corps, which employed—and often housed and fed—young workers who needed assistance. The Public Works Administration provided funds for projects related to building and maintaining the nation’s infrastructure, focusing on bridges and dams. In 1935, the Works Progress Administration, later renamed the Works Projects Administration, was established to facilitate such projects as building or expanding airports, building roads, and constructing hospitals and schools. Even though such agencies provided employment for millions, they could not accommodate everyone who needed work. Millions remained unemployed throughout the 1930’s.
Among the many regulatory agencies created during the decade, none had a more lasting effect on the American economy than the Federal Deposit Insurance Corporation, an agency that insures commercial bank deposits up to a specified maximum. This insurance gives bank depositors confidence that the money they deposit in their bank accounts will be safe even if the bank holding their money fails.
World War II erupted in Europe in 1939. With the Japanese bombing of Pearl Harbor on December 7, 1941, the United States was drawn into this conflict. As many of the nation’s young men were conscripted into military service, many of the jobs they vacated in the private sector became available. The need to produce war supplies kept American industries working twenty-four hours a day, seven days a week. Women, who, during the Depression, had been discouraged from working, were in great demand to work in defense industries. Many impoverished African Americans fromthe South, who had experienced great difficulty in finding work, were drawn to northern cities where there was more than enough work to sustain them.
The war helped focus the attention of Americans on unifying a country that had been severely tested by the frustrations of the long depression that beset it. President Roosevelt worked miracles in establishing the New Deal, but it took World War II to bring a decisive end to the worst economic disaster the United States had ever experienced.
Himmelberg, Robert F. The Great Depression and the New Deal. Westport, Conn.: Greenwood Press, 2001. Himmelberg’s evaluation of the New Deal, to which Chapter 6 is devoted, is particularly relevant. The author considers the political, economic, and social implications of the Depression.
Meltzer, Milton. Driven from the Land: The Story of the Dust Bowl. New York: Marshall Cavendish, 2000. Relates anecdotally how sustained droughts and the ensuing dust bowls wreaked havoc on farmers throughout much of the southwestern United States.
Neal, Steve. Happy Days Are Here Again: The 1932 Democratic Convention, the Emergence of FDR, and How America Was Changed Forever. New York: William Morrow, 2004. Written for general audiences, this account of Franklin D. Roosevelt’s rise to the presidency and of his response to the Depression is particularly strong in explaining in detail the New Deal that Roosevelt instituted. An essential resource.
Nishi, Dennis. Life During the Great Depression. San Diego, Calif.: Lucent Books, 1998. Presents vivid accounts of how the Depression uprooted and altered the lives of those caught in its grips.
Olson, James S., ed. Historical Dictionary of the Great Depression, 1929-1940. Westport, Conn.: Greenwood Press, 2001. Thorough resource that makes salient information about the Depression easily available to readers and researchers.
Wheeler, Mark, ed. The Economics of the Great Depression. Kalamazoo, Mich.: W. E. Upjohn Institute for Employment Research, 1998. Collects six essays dealing with the most significant aspects of the Great Depression.
See also: Depression of 1784; Depression of 1808-1809; financial crisis of 2008; New Deal programs; Panic of 1819; Panic of 1837; Panic of 1857; Panic of 1873; Panic of 1893; Panic of 1907; Recession of 1937-1938; stock market crash of 1929; stock markets.