The depression of the 1930s was a worldwide event. In most economically advanced countries the fall in output and employment was the deepest and the most protracted in recorded history. In many of these countries the economic disaster also had profound political consequences, most prominently the rise to power of the Nazi Party in Germany, but also the ascendency of right-wing nationalists and fascists who soon enough made up the core of the Vichy regime in wartime France and likewise encouraged Britain’s flirtation with organized fascism. America—along with Germany one of the two countries hit hardest by the economic collapse—was no exception in this regard, although here political developments took a different course.
Nearly eight decades later, debate continues over the relative importance of the forces that combined to make what would otherwise have been an ordinary business downturn so deep and long-lasting. In the US most economists today assign the highest importance to systematic mistakes by policymakers at the Federal Reserve System—whose managers were still learning their way following the institution’s creation in 1913—together with the collapse of the banking system both here and abroad. If the Federal Reserve had eased monetary policy earlier and made funds more readily available to banks, the outcome would presumably have been different. Other foolish policies contributed as well—like raising tariffs to record levels, and raising tax rates to try to balance the government’s budget despite the economic decline. So too did the absence of deposit insurance, which allowed many families’ savings to be wiped out. Most economists see the stock market crash itself as more a symptom of the larger crisis than a cause.
Debate is even more intense on the broader questions of what the depression proved about the US economy and society, and what implications therefore follow for public policy. The chief economic lesson drawn at the time was to reject the long-standing presumption that competitive private markets would naturally and promptly right the economy after any departure from stable expansion. Instead, it became clear that downturns, if left unchecked, might persist over long periods and inflict widespread losses of output, profits, and jobs. (How long would it have taken to achieve a full recovery if World War II had not occurred?) In a world in which more and more people worked for wages, often in large companies, rather than running their own businesses or conducting independent trades, a significant part of the citizenry was plainly unable to protect themselves against losses and hardships resulting from problems in the economy at large for which they bore no individual responsibility. Hence the presumption that a man’s material success in life would reflect his moral worth—the core belief underpinning what Max Weber had identified as the “Protestant ethic”—likewise came into question.
With many citizens neither personally responsible for their economic hardships nor able to defend themselves individually, the depression naturally raised the further question of what governments could do to undertake that task for them. In most advanced Western countries the answer by the time the depression ended was that government intervention was necessary, and the consequences have been enormous. In the United States the direct legacies of the depression and the government’s reaction to it include Social Security, unemployment insurance, deposit insurance, securities market regulation, and disaster relief, to name just a few. But the real story was the change in American attitudes: a new and different sense of who was responsible for what. The resulting boundaries between public and private have been aggressively contested ever since.
Part of what initially made the depression seem so dramatic to some Americans was the contrast with the vigorous economic expansion of the late 1920s—with a stock market boom that became legendary in its own time, free-flowing whiskey and gin (notwithstanding Prohibition), and the “flapper” culture that accompanied both. In fact, however, the economic record since World War I ended had been decidedly mixed. A business recession had begun some months before the Armistice was signed, and it lasted into the spring of 1919. A new recession, this time deeper and more pervasive, began early the next year and lasted for a year and a half, until midsummer 1921. Two more downturns, each lasting somewhat more than a year, occurred in 1923–1924 and 1926–1927. In all, for fifty-two of the 132 months between August 1918 and August 1929 the US economy was contracting.
But the downturn that began in the summer of 1929 was different. Total economic production was nearly 9 percent lower in 1930 than in 1929—already a steeper drop than in any complete US business downturn on record—and the next three years saw successive further declines of 6, then 13, and finally another 1 percent. Industrial production, typically more volatile than service businesses, fell by more than half overall, and in some key industries far more. Steel production fell from 62 million tons to 15 million; iron ore extraction from 74 million tons to 10 million.
With fewer goods being made and sold, businesses needed (and could afford to pay) far fewer workers. Unemployment rose from less than 3 percent of the labor force in 1929 to nearly 23 percent in 1932. Without the income from the wages they missed, ordinary families could no longer afford to spend. Purchases of new automobiles, for example, fell from 4.5 million in 1929 to 1.1 million in 1933. Millions of families also faced either eviction for failing to pay their rents or foreclosure for defaulting on their mortgages. “Hoovervilles”—makeshift ramshackle villages thrown together for shelter by the homeless—became a familiar sight in urban parks and on the outskirts of most American cities. Overall, income per capita fell back to where it had stood fully thirty years before.
Even more troubling for the economy’s future, the sharp decline in the volume of goods most businesses were making and selling also meant that they had less reason to invest; and they had meager if any profits to finance whatever investment they needed. Investment in new factories and machinery fell from $11 billion in 1929 to $3 billion (in 1929 dollars) in 1933. Similarly, Americans in 1929 began construction on more than a half-million new houses; in 1933 the total was just 93,000.
March 1933 marked the bottom. Total production rose 11 percent in 1934, 9 percent in 1935, and then 13 percent in 1936—just enough to regain the level reached in 1929. But by then businesses in many industries had learned to make do with less labor, even if they now produced just as much. In 1936 the number of Americans with jobs in nonfarm businesses remained just 30 million, compared to nearly 33 million seven years earlier. Even with nearly 4 million citizens now on the roll as federal “emergency” workers, unemployment remained at 10 percent.
Output increased by a further 5 percent in 1937 as a whole, but the economy began to slip again by midyear and output was 3 percent lower in 1938. (Most economists attribute the decline to a premature tightening of fiscal and especially monetary policy; today’s image of Keynes’s influence notwithstanding, the US government was not yet committed to the idea of deficit spending, and Federal Reserve policymakers were still learning how the various instruments of monetary policy worked.) Despite fears that the depression had returned in earnest, this new downturn ended by mid-1938 and the resumed expansion was again rapid: 8 percent in 1939 and 9 percent in 1940. But job growth continued to lag and it was not until 1942, America’s first full year in World War II, that unemployment finally returned to the low level of 1929.
Meanwhile, the Roosevelt administration had transformed large parts of the American economy. Jobs programs like the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA) directly provided work for eight million people. At one point or another, one American in five received some form of direct federal assistance through programs like the Federal Emergency Relief Administration. (Strikingly, despite all the joblessness and loss of income, the US infant mortality rate declined during the 1930s.) The Homeowners Loan Corporation and the Farm Credit Administration refinanced one fifth of all home mortgages and farm mortgages, respectively. The US Housing Authority provided low-income housing. The Agricultural Adjustment Administration provided farm price support. The Tennessee Valley Authority (TVA) brought electricity to large sections of the American South. And in one industry after another regulatory bodies set new constraints on how private business was to be run.
Amity Shlaes, in The Forgotten Man, tells the story of the depression and the government policy response it elicited in splendid detail, rich with events and personalities. She gives detailed accounts of Herbert Hoover’s experience in the mining industry before he entered politics, Franklin Roosevelt’s relations with the various members of his “brain trust,” and the debates among Roosevelt’s advisers over going off the gold standard. She recounts the spectacle of American towns printing their own money in an attempt to make up for the shortage of official US currency, the government’s inane lawsuit against Brooklyn’s Schechter brothers—kosher butchers—for selling two “sick chickens” (which went to the Supreme Court and ended with the Court declaring, in 1935, that the National Recovery Administration was unconstitutional), and the protracted struggles over rural electrification both among the TVA’s three directors and between them and Wendell Willkie’s electric utility company, Commonwealth and Southern. Lesser figures of the era like Rexford Tugwell, the agricultural economist and New Deal adviser, David Lilienthal, who directed the TVA, and Paul Douglas, an economist at the University of Chicago who later became a US senator, come across as colorful personalities. Many of Shlaes’s descriptions make genuinely delightful reading.
How to assess Roosevelt’s actions beginning in March 1933—and, in parallel, Hoover’s policies during the nearly four years of the downturn—has long posed a challenge to economists and historians hostile to government action. From that viewpoint, Hoover’s reluctance to undertake government initiatives should be seen as admirable. But didn’t it allow the downturn to become the depression? The economy recovered under Roosevelt; but the legacy of large-scale government remains anathema, both for the interference in the workings of private business and for the assumption of public responsibility for citizens’ personal welfare, whether in housing or old-age pensions.
Shlaes, a columnist for Bloomberg News and a former member of the editorial board of The Wall Street Journal, follows what has become standard conservative thinking in denying that Roosevelt’s programs had anything to do with the recovery. (The title, The Forgotten Man, was used in an essay by the nineteenth-century sociologist William Graham Sumner—in which he attacked progressives for, in Shlaes’s words, coercing “unwitting average citizens into funding dubious social projects”—but then used again by Roosevelt, with an altogether different meaning, during the depression.) Indeed, focusing on unemployment and the stock market rather than production and incomes, she mostly writes as if no recovery occurred at all. Her view of Hoover is more unusual (although it too owes something to earlier treatments). In her account, Hoover as president was an activist, to be lumped together with Roosevelt. His policies made the depression worse, but for the same reason that Roosevelt’s impeded the subsequent recovery: “From 1929 to 1940, from Hoover to Roosevelt, government intervention helped to make the Depression Great.” Both men stand equally condemned for their policies, and both are seen as having morally unattractive personalities.