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Great Depression
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Masters
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6
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The Great Depression in the United States Essay

The United States stock market crash of October 1929 was the major cause and certainly the catalyst for the Great Depression, the ‘Great Crash,’ ‘The Panic’ which began that month and lasted until late 1941 when the U.S. began mobilizing for WWII. This one incident was initiated by external sources and was not exclusively to blame for the most ruinous economic collapse in the nation’s history. During the more than decade long economic depression, millions of people lost their jobs, businesses, savings, homes and in many cases, hope. As a response, the Federal Government formed programs to help ease economic tensions for an entire country suffering from an unprecedented depression following the panic and was not primarily concerned from which ideological or political faction the ideas originated. President Roosevelt (FDR) along with supporters of the New Deal within the congress sought to restore the country’s economic strength had ostensibly two options. They could either develop government programs from the ground-up by federally funding welfare benefits and job creation therefore forming a social partnership with the working class including labor unions and racial minorities or the government could allow businesses the freedom to correct the economy by expansion through lower taxes and deregulation thus creating additional jobs. The money workers spent from these newly formed jobs would circulate dollars back into the economy. Both positive and negative outcomes of government policies and programs instituted to improve the situation for millions of suffering people and the dramatic steps used to address the economic meltdown continue to be debated to this day, a subject especially pertinent the past two years during a near duplication of the crisis, the ‘Great Recession.’ As history shows, some programs helped alleviate problems to varying degrees, others did little to help while others only exacerbated the frantic situation. This paper investigates the sources of the Great Depression including its effects on American citizens and the outcomes, both long-term and immediate, of the government’s response which was, now famously, known as the New Deal.

Many factors instigated the Great Depression but the fundamental causes can be narrowed to two reasons. One, the wealth of the country was distributed unevenly. A middle class, as we would be familiar with today, was non-existent. The nation was starkly and cruelly divided between the ‘haves and the have not’s,’ persons with massive wealth and power and persons struggling to pay the bills on time every month. This wide chasm of economic circumstances during the ‘Roaring Twenties’ created an unstable economy which in concert with wildly inflated speculations among the vast majority of stock market managers and their investors to send the nation down the financial tubes. “The excessive speculation in the late 1920’s kept the stock market artificially high, but eventually led to large market crashes. These market crashes, combined with the mal-distribution of wealth, caused the American economy to capsize” (Hicks, 1960 p. 110).

The 1920’s was a decade of economic prosperity for the country. In 1923, the aggregate income of the country totaled $74.3 billion. This number expanded by 17 percent to $89 billion by the end of 1929. The prosperity generated during this decade remained chiefly in the pockets of those whose incomes were in the top one-tenth of one percent of the population. “According to a study done by the Brookings Institute, in 1929 the top 0.1 percent of Americans had a combined income equal to the bottom 42 percent” (McElvaine, 1984 p. 38). At the time of the market crash, four-fifths of the nation’s citizens had no savings account but the highest earners, the 0.1 percent, had more than one-third of all savings (McElvaine, 1984 p. 38). To illustrate this discrepancy of wealth, automobile industrialist Henry Ford serves as a good example. Ford’s reported annual income was in excess of $14 million (Baughman, 1996) when the average annual income for a worker was $750. In today’s money, Ford’s annual salary would exceed $350 million (Hoffman, 1992 p. 155). The economic divide between rich and poor grew during the 1920’s mainly because the manufacturing output (production) rose by more than a third during this decade. In other words the labor of the workers made only the rich richer. (McElvaine, 1984 p. 39).

The national economy became progressively more unstable as the disparity in earnings widened. “For an economy to function properly, total demand must equal total supply. In an economy with a disparate distribution of income it is not assured that demand will always equal supply” (McElvaine, p. 48). The nation’s economy was weakened by an over-supply of products. All economies are stimulated by consumer spending. The affluent bank the greatest proportion of their income but the lower earners must spend all of their income on basic necessities such as food, clothes, housing and services. When a disproportionate part of the country’s wealth is in the pockets of the wealthy, an insufficient number of dollars are being circulated throughout every stage of commerce. This has a negative effect on businesses and the people they employ. When the workers own a larger proportion of the country’s wealth, more money is constantly being cycled back into the economy.

The country’s economic condition was completely at the mercy of the rich who were spending lavishly during the better part of the 1920’s but began to scale back on spending and investing as well due to the economic outlook’s continued decline the last part of the decade. Because there were somewhat few individuals of great wealth, only a few of leaders of industry losing confidence in the economy’s overall health caused a financial ‘domino effect’ to take place. Another problem was that just two types of industry were financially robust during this time, Ford’s automotive business and the radio industry. The greatest profit margin comes from higher-end products therefore when the wealthy slow their high-end spending, industries lose capital and are forced to lay-off workers. Substantial lay-offs produce a panic among the blue-collar working class so they curb or discontinue altogether buying items on credit fearing the possible loss of employment which hurts businesses further. (McElvaine, p. 48).

With all of the aforementioned dynamics in place, the stock market continued on a slow descent in 1929 until it crashed in October and again just two months later. The Herbert Hoover administration, in an effort to safeguard the interest of American businesses, put protectionist measures in place. The Hawley-Smoot Tariff of 1930 imposed higher import taxes on goods. Conservative Republicans controlled both the White House and Congress, each bowing to industry and business interests by enacting this legislation. The tariff raised the amount of import fees to an unreasonable level, a move the nation’s leading economists strongly opposed. The consequence of this poorly conceived overreaction to the crisis was the final factor causing the Great Depression. It turned what was a severe economic recession an economic disaster of historic proportions. “Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 1932. The country spiraled quickly into catastrophe” (Hicks, 229).

The negative effects of the Great Depression were numerous and extensive. Banks were not mandated by federal law to insure customer’s deposits as they are today. Consequently, when banks suddenly failed millions of people lost everything, their entire life savings gone without warning. Following the hundreds of bank failures, numerous factories were forced to stop operating and all sizes and types of businesses closed leaving many people without employment or funds available in the bank. More than 5,000 financial institutions and 32,000 businesses failed. The companies that remained open were hardly making enough to stay operational. The tax base suddenly fell which affected city and state governments. Many cities had to cut services severely. (Gusmorino, 1996). The value of farm products fell greatly and a mass number of family farm foreclosures followed soon after causing bloody conflicts between the bank representatives the farmers. For those persons who kept their farms, wide-ranging droughts forced many more to move away from their family farm during this time. One year following the crash more than four million had lost their job. One year later, the end of 1931, four million more lost theirs. “Wretched men, including veterans, looked for work, hawked apples on sidewalks, dined in soup kitchens, passed the time in shantytowns dubbed ‘Hoovervilles,’ and some moved between them in railroad boxcars. It was a desperate time for families, starvation stalked the land, and a great drought ruined numerous farms, forcing mass migration” (Avery, 2007).

Much as the federal and city, state governments were not in a position to offer aid to depression victims, short as they were for revenues. Early on in the crisis, the response of the federal government, or lack was too far too little and much too late. President Hoover and his advisers were convinced that “prosperity is just around the corner” (Perlo, 2004). President Franklin Roosevelt took office in 1933 and as he frequently claimed, restored optimism after the American people had descended into despair due to the Depression and that the New Deal policies ‘saved capitalism’ (Yantek, 2007). Contrary to what some at that time and some even today think, the nation was not moving on a path toward socialism. The New Deal represented the existing capitalist cultural structure, for example, its policy sustained the division between what people generally consider the ‘worthy poor’, typically widows and their children and the ‘unworthy poor’, which included almost everyone else, who were ignored by New Deal legislation. The economic circumstances at that time required that the solutions encouraged working relations between working class and the capitalist class, each of whom had contrasting interests (Baker, 2003). The New Deal, while helping to save capitalism principally by altering structures within the government was augmented by domestic reform programs. Many of these programs survive to this day.

The First New Deal (1933 to1934) unquestionably orientated governmental policies to favor big business. The Second New Deal which started in 1935 was not as pro-business from a policy standpoint but in practical way continued to sustain a top-down economic pattern. Later during this phase of reform, the government increased its attention on stronger regulations for businesses and antitrust enforcement but ultimately, big business retained influence over crucial decisions concerning production, pricing and investment. Additionally, the government helped business by limiting competition. Rather than trying to regulate businesses, New Deal supporters wanted to vastly increase the control and size of the government so that it could work as a counterbalance for public concerns and private sector businesses. (Yantek, 2007). Before Roosevelt became President; the government was comparatively simple in design with functions principally limited to administrative necessities. Following Roosevelt, the government was and still is a multifaceted organization controlling business and intruding into its citizen’s autonomy. “It is no exaggeration to say that he took the government when it was a small racket and made a large racket out of it” (Ebeling 15). Harry Truman, who followed Roosevelt, attempted to complete this mission by implementing the Third New Deal subsequent to World War Two naming it the ‘Fair Deal’ (Yantek, 2007).

Some historians maintain that Roosevelt intended that the government’s participation in the economy to be fairly limited. Roosevelt’s objective for the New Deal was not to oblige Americans into communal venture which communist and socialist employed in Europe. He wanted neither big business nor the rapidly growing labor unions to become controlled by the federal government or vice-versa. (Yantek, 2007). The New Deal philosophy attempted to maintain both personal economic security and industrial rights, both perceived as indispensable components of American citizenship. Just as contradictions are present within all matters this was definitely the case of the inner and outside influences surrounding the Roosevelt administration. Historical inconsistencies that continue even today regarding the objective of the New Deal are understandable by examining the differing dynamics of the era. New Deal promoters and labor unions thought the citizen’s access to health care and the right to social security was a subject of class equality, but the two factions didn’t always agree. “While labor unions lobbied for employers’ liability laws, social reformers worked for maximum hours for women workers, minimum wages, factory inspections, child-labor laws, and anti-sweatshop laws” (Baker, 2003). Roosevelt administration brought together these two types of groups hoping that by unifying their common goals, their voice would be stronger thereby making a reality of the social changes he wanted. The National Health Conference was held in 1938. More than 150 activists groups attended including social workers, women’s and medical organizations, labor unions and farmers.

Following WW2, the associations between social security, government policy and business relations, a crucial element of the New Deal, became increasingly separated. As business owners sought to hinder the increasing influence of labor unions, it was continually frustrated by the escalating involvement of the federal government into labor affairs. Corporations viewed this as ‘politicized bargaining’ from the labor unions who had been advocating their own version of the New Deal in Washington D.C. for several years. Throughout the 1950’s, business leaders evened the balance of power between themselves, labor and the government. “In the 1950’s, business interests were able to alter the role of the state in industrial relations politics, and in fact to use it to sustain an increasingly insular, private, firm-centered definition of security” (Klein, 2004). Though effectively redirecting the balance of power back toward big business, it never again gained the dominance of political power and economic control it held prior to the Depression.

When the New Deal failed to bolster the economy Roosevelt, the spokesman for industry wellbeing and capitalism, developed a new policy. Apparently, Roosevelt and his congressional supporters followed the ‘path of least resistance’ by succumbing to the unrelenting demands of the big business lobbyists. Ominous world events were happening outside the U.S. while the New Deal was trying to resolve economic problems within the nation. Japan and Germany were attempting to test America’s hold on world economic domination and Wall Street applied pressure on Roosevelt to counteract this challenge. “Roosevelt, ever the opportunist, saw a way out of the crisis and Wall Street’s mission became his own” (Novack, 1940). The war policy under Roosevelt showed how, under the capitalist system, the interests and goals of big business push themselves through all bureaucratic and social barriers until they become governmental programs. In the U.S. the twentieth century’s principal theory was that of a ‘rational capitalism.’ “In the wake of the greatest set of horrors the world had ever seen, accompanied also by the rise of an alternative, contending system in the Soviet Union, it was necessary for capitalism following the Second World War to reestablish itself ideologically as well as materially” (Foster, 2005).

According to some historians, the New Deal succeeded only in creating a new economic dilemma instead of bringing its advertized prosperity. Despite exceptional fundamental reforms and the many changes the new Deal brought about, the economy had not established the levels of production present prior to the market crash. The working class was extremely discontented because their standard of living had progressively declined. The average income in 1929 was actually higher than it was in 1938. Unemployment was increasing and with the economy and drought, farmers were facing a dual crisis of their own. When the initial stages of the New Deal were implemented, the tendency to receive differing points of view and opposing forces was apparent within the Roosevelt administration. However, the internal disagreements and external pressures during the formation of the New Deal only served to counteract the intended development of the massive economic and social experiment. Two arenas of thought were linked by the interest of a different social force. One, the reformists duplicated the influence the working class and their cohorts had on labor unions. Two, oppressive techniques adopted by big business and the New Deal ideology were not simply different ways to address the working class’ uprising to gain social justice. According to some, they were both techniques for preparing the nation for war. (Novack, 1940).

After failures of the New Deal became apparent, an inclination for militarist conquests emerged by industrialists who sought to resolve the economic catastrophe threatening the American capitalist way of life by manipulating external forces thus extending the capacity of its economic dominion over other nations of the world. The militarist faction of the country represented the interests and outlook of big business, which was definitively shown to be the real leaders of the country under the pretext of social reforms by the New Deal. (Novack, 1940). The advocates for imperialistic military actions contend that World War Two brought the country out of the Great Depression. This same mindset has continued at the highest levels of government since that time as evidenced by the various unnecessary and ill-conceived U.S. military actions in foreign countries from then until now. However, the simplistic connection is not necessarily true. The nation’s economy began making a steady comeback in 1938, three full years prior to the U.S. entering the war in late 1941. Furthermore, this period of economic expansion ended before the war ended thereby debunking the argument.

Today, earnings are again becoming progressively more disproportionate. Again, the rich own the larger share of the country’s wealth while the working class is progressively becoming the working poor. This in combination with a growing National Debt and unsound economic strategies at the federal level over the past 30 years recently threatened to send America into another Great Depression possibly worse than the disaster of the 1930’s. Controversial policies enacted by both Bush (TARP) and Obama (Stimulus) administrations kept the economy from plunging immediately from a recession into a depression but the same dynamics remain in place that caused the Great Depression. Though the Obama administration placed some of the regulations back on financial institutions that were instituted in the 1930’s but inexplicably removed in the 1990’s, the signs still point to another looming collapse unless our leaders quickly display a knowledge of history.

Works Cited

Avery, Steve. “Social Issues The Great Depression 1929-1942.” Online Highways Florence, OR (April 13, 2007). March 25, 2011

Baker, Dorie. “Yale Professor Writes Book on American ‘Security’ System.” Yale News Release. Yale University. (July 25 2003).

Baughman, Judith S. “American Decades 1920-1929. Detroit: Gale Research, Inc. (1996).

Ebeling, Richard M. Ebeling. “Monetary Central Planning and the State, Part XIV: The New Deal and Its Critics.” Freedom Daily. (February 1998).

Foster, John Bellamy. “The End of Rational Capitalism.” Monthly Review. V. 56, N. 10. (2005).

Gusmorino, Paul A., III. “Main Causes of the Great Depression.” Gusmorino World (May 13, 1996). March 25, 2011

Hicks, John D. “Republican Ascendancy, 1929-1933.” New York: Harper & Row. (1960).

Hoffman, Mark S. ed. “The World Almanac.” New York: Pharos Books, 1992.

Klein, Jennifer. “The Politics of Economic Security: Employee Benefits and the Privatization of New Deal Liberalism.” The Journal of Policy History. Vol. 16, N. 1. (2004).

McElvaine, Robert S. “The Great Depression.” New York Times Books. (1984).

Novack, George. “Autopsy of the New Deal.” Fourth International. Vol. 1, N. 1. (May 1940, pp. 10-13.)

Perlo, Art. “Prosperity just around the corner?” People’s Weekly World (August 28, 2004). March 25, 2011

Yantek, Tom. “The New Deal: Capitalism Loses its Hat.” Kent State University. (2007).

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The Great Depression in the United States. (January 16, 2021).
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