Main article: Great Depression in the United States

Early response

Secretary of the Treasury Andrew Mellon advised President Hoover that shock treatment would be the best response: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... That will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."^[23] Hoover rejected this advice, not believing government should directly aid the people, but insisted instead on "voluntary cooperation" between business and government.

The New Deal

Main article: New Deal

Shortly after President Roosevelt was inaugurated in 1933, drought and erosion combined to cause the Dust Bowl, shifting hundreds of thousands of displaced persons off of their farms in the midwest. From his inauguration onward, Roosevelt argued a restructuring of the economy would be needed to prevent another or avoid prolonging the current depression. New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending, by:

• Reforming the financial system, especially the banks and Wall Street. The Securities Act of 1933 comprehensively regulated the securities industry. This was followed by the Securities Exchange Act of 1934 which created the Securities and Exchange Commission. (Though amended, the key provisions of both Acts are still in force as of 2008). Federal insurance of bank deposits was provided by the FDIC (still operating as of 2008), and the Glass-Steagal Act (which remained in effect for 50 years). The institution of the National Recovery Administration remains a controversial act to this day. Although it only lasted until 1935, it made a number of sweeping changes to the American economy until it was declared unconstitutional by the Supreme Court.

• Instituting regulations which ended what was called "cut-throat competition," which kept forcing down prices for everyone (done by the NRA).
• Setting minimum prices and wages and competitive conditions in all industries (done by the NRA).
• Encouraging unions that would raise wages, to increase the purchasing power of the working class (done by the NRA).
• Cutting farm production so as to raise prices and make it possible to earn a living in farming (done by the AAA and successor farm programs).
• Forcing businesses to work with government to set price codes (done by the NRA).
• Creating the NRA board to set labor codes and standards (done by the NRA).

These reforms (together with relief and recovery measures) are called by historians the First New Deal. It was centered around the use of an alphabet soup of agencies set up in 1933 and 1934, along with the use of previous agencies such as the Reconstruction Finance Corporation, to highly regulate and stimulate the economy but the two concepts were incompatible, as the economy continued to stagnate. By 1935, the "Second New Deal" added Social Security, a national relief agency (the Works Progress Administration, WPA) and, through the National Labor Relations Board, a strong stimulus to the growth of labor unions. Unemployment fell by two-thirds in Roosevelt's first term (from 25% to 14.3%, 1933 to 1937), but faster than the economic upturn came 1938's "recession within a depression" and unemployment zoomed to 19% and only until the draft to fight World War II, and then post-war 1946's vast decontrol of the (wartime) command economy that included a sharp reduction of taxes and regulations finally allowed consumer goods to be created, and unemployment finally fell to normal levels.

In 1929, federal expenditures constituted only 3% of the GDP. Between 1933 and 1939, they tripled, funded primarily by a growth in the national debt. The debt as proportion of GNP rose under Hoover from 20% to 40%. Roosevelt kept it at 40% until the war began, when it soared to 128%. After the Recession of 1937, conservatives were able to form a bipartisan conservative coalition to stop further expansion of the New Deal and, by 1943, had abolished all of the relief programs.

Recession of 1937

Main article: Recession of 1937

In 1937, the American economy took an unexpected nosedive, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. The Roosevelt administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the depression, and appointing Thurman Arnold to act; Arnold's effectiveness ended once World War II began and corporate energies had to be directed to winning the war.

The administration's other response to the 1937 deepening of the Great Depression had more tangible results. Ignoring the pleas of the Treasury Department, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power. Business-oriented observers explained the recession and recovery in very different terms from the Keynesians. They argued the New Deal had been very hostile to business expansion in 1935–37, had encouraged massive strikes which had a negative impact on major industries such as automobiles, and had threatened massive antitrust legal attacks on big corporations. All those threats diminished sharply after 1938. For example, the antitrust efforts fizzled out without major cases. The CIO and AFL unions started battling each other more than corporations, and tax policy became more favorable to long-term growth.

On the other hand, according to economist Robert Higgs, when looking only at the supply of consumer goods, significant GDP growth resumed only in 1946 (Higgs does not estimate the value to consumers of collective, intangible goods like victory in war). To Keynesians, the war economy showed just how large the fiscal stimulus required to end the downturn of the Depression was, and it led, at the time, to fears that as soon as America demobilized, it would return to Depression conditions and industrial output would fall to its pre-war levels. That incorrect Keynesian prediction that a new depression would start after the war failed to take into account massive savings and pent-up consumer demand along with the decontrolling of the restrictive wartime regulations in most consumer industries and cutting the high-tax rates starting in 1946.

Keynesian models

In the early 1930s, before John Maynard Keynes wrote The General Theory, he was advocating public works programs and deficits as a way to get the British economy out of the Depression. Although Keynes never mentions fiscal policy in The General Theory, and instead advocates the need to socialize investments, Keynes ushered in more of a theoretical revolution than a policy one. His basic idea was simple: to keep people fully employed, governments have to run deficits when the economy is slowing because the private sector will not invest enough to increase production and reverse the recession.

As the Depression wore on, Roosevelt tried public works, farm subsidies, and other devices to restart the economy, but never completely gave up trying to balance the budget. According to the Keynesians, he had to spend much more money; they were unable to say how much more. With fiscal policy, however, government could provide the needed Keynesian spending by decreasing taxes, increasing government spending, increasing individuals' incomes. As incomes increased, they would spend more. As they spent more, the multiplier effect would take over and expand the effect on the initial spending. The Keynesians did not estimate what the size of the multiplier was. Keynesian economists assumed poor people would spend new incomes; in reality they saved much of the new money; that is, they paid back debts owed to landlords, grocers and family. Keynesian ideas of the consumption function have been challenged, most notably in the 1950s by Milton Friedman and Franco Modigliani.

Neoclassical approach

Recent work from a neoclassical perspective focuses on the decline in productivity that caused the initial decline in output and a prolonged recovery due to policies that affected the labor market. This work, collected by Kehoe and Prescott,^[24] decomposes the economic decline into a decline in the labor force, capital stock, and the productivity with which these inputs are used. This study suggests that theories of the Great Depression have to explain an initial severe decline but rapid recovery in productivity, relatively little change in the capital stock, and a prolonged depression in the labor force. This analysis rejects theories that focus on the role of savings and posit a decline in the capital stock.

Gold standard

Great Britain departed from the gold standard in September 1931, allowing the pound sterling to float internationally. The value of the pound then dropped significantly and British exports became cheaper. In April 1933, Roosevelt issued Executive Order 6102 prohibiting citizens of the U.S. from owning other-than-token amounts of gold and from using gold as money. Citizens were forced to sell all gold holdings (apart from jewelry and "coins of special collector value") to the federal government at a price of $20.67 per ounce. In January 1934, Roosevelt raised the official price of gold to $35 per ounce, thereby devaluing the U.S. dollar by 41%.

Private gold reserves held outside the country (for instance in Swiss banks) were largely undetected and thus unaffected. Rich people who knew or suspected the move was coming or simply did not trust FDR's government therefore made large profits.

Rearmament and recovery

The massive rearmament policies to counter the threat from Nazi Germany helped stimulate the economies in Europe in 1937-39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of manpower following the outbreak of war in 1939 finally ended unemployment.

In the United States, the massive war spending doubled the GNP, masking the effects of the Depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts. Most people worked overtime and gave up leisure activities to make money after so many hard years. People accepted rationing and price controls for the first time as a way of expressing their support for the war effort. Cost-plus pricing in munitions contracts guaranteed businesses a profit no matter how many mediocre workers they employed or how inefficient the techniques they used. The demand was for a vast quantity of war supplies as soon as possible, regardless of cost. Businesses hired every person in sight, even driving sound trucks up and down city streets begging people to apply for jobs. New workers were needed to replace the 11 million working-age men serving in the military. These events magnified the role of the federal government in the national economy. In 1929, federal expenditures accounted for only 3% of GNP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state.^{[citation needed]} However, spending on the New Deal was far smaller than on the war effort.

Political consequences

The crisis had many political consequences, among which was the abandonment of classic economic liberal approaches, which Roosevelt replaced in the United States with Keynesian policies. It was a main factor in the implementation of social democracy and planned economies in European countries after the war. Although Austrian economists had challenged Keynesianism since the 1920s, it was not until 1974, when the Nobel Prize in Economic Sciences was awarded to Friedrich Hayek notably for being "one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929" [1], and the beginning of monetarism, that the Keynesian approach was politically questioned, leading the way to neoliberalism.^{[citation needed]}

Other Great Depressions

The Great Depression was not unique in magnitude or duration. Several Latin American countries faced similar events in the 1980s. Finnish economists refer to the Finnish economic decline around the breakup of the Soviet Union (1989-1994) as a great depression. Kehoe and Prescott define a great depression to be a period of diminished economic output with at least one year where output is 20% below the trend. By this definition Argentina, Brazil, Chile, and Mexico experienced great depressions in the 1980s, and Argentina experienced another in 1998-2002. This definition also includes the economic performance of New Zealand from 1974-1992 and Switzerland from 1973-present, although this designation for Switzerland has been controversial.^[25][26]

See also

Notes

References

Further reading

External links

• Great Depressions of the Twentieth Century, edited by T. J. Kehoe and E. C. Prescott
• Theories of the Great Depression, R. L. Norman, Jr.
• America in the 1930s. Very large multi-mediated project on America in the Great Depression
• Recession? Depression? What's the difference? (About.com)
• An Overview of the Great Depression from EH.NET by Randall Parker.
• Great Myths of the Great Depression by Lawrence Reed
• Franklin D. Roosevelt Library & Museum for copyright-free photos of the period
• Economic Depressions: Their Cause and Cure by Murray Rothbard (1969)
• The Impact of the Great Depression in NI, on the Second World War online resource for NI
• Great Depression in the Deep South

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