Great Depression in the United States (1929-1939)

The Great Depression in the United States was the most severe economic collapse in the nation’s history. Beginning after the stock market crash of October 1929 and lasting through most of the 1930s, it saw output fall by about a quarter, thousands of banks fail and unemployment reach about 25 per cent by 1933. Its human cost, in hunger, homelessness and broken lives, reshaped American politics, society and the role of the federal government.

Background: the 1920s boom

The 1920s were years of prosperity for many Americans. Car ownership, electricity, radios and consumer credit spread rapidly, and the stock market rose to record heights. But there were weaknesses beneath the surface. Farmers had struggled with low prices since the end of the First World War, income was unevenly distributed, and much of the buying of shares and goods depended on borrowed money.

The Wall Street Crash of 1929 ended the boom. Prices collapsed on 24 October (“Black Thursday”) and 29 October (“Black Tuesday”), and by July 1932 the Dow Jones Industrial Average had lost about 89 per cent of its September 1929 peak. The crash wiped out paper fortunes and shook confidence, but on its own it does not explain the depth of what followed.

How the crisis deepened (1930-1933)

In 1930 a recession turned into a depression. Consumers and businesses cut spending, factories laid off workers and prices began to fall. The Smoot-Hawley Tariff Act of June 1930 raised duties on imports, and other countries retaliated, adding to a collapse in world trade.

The decisive blow came from the banking system. The United States had thousands of small, independent banks and no federal deposit insurance. Waves of panic in late 1930, in 1931 and in the winter of 1932-1933 caused depositors to rush to withdraw their money. The failure of the Bank of United States in New York in December 1930 was one of the largest. Altogether about 9,000 banks failed or suspended operations between 1930 and 1933.

As banks failed, the money supply shrank by about a third. The Federal Reserve, bound by the rules of the gold standard and divided over policy, did little to stop the contraction, and in October 1931 it raised interest rates to defend the dollar after Britain left gold. Falling prices increased the real burden of debts, leading to more bankruptcies and foreclosures, a vicious spiral that the economist Irving Fisher called “debt deflation”.

The human cost

By 1933 roughly 12 to 13 million Americans, about a quarter of the workforce, were unemployed, and many others worked part-time. There was no national unemployment insurance, and private charities and local governments were overwhelmed. Long breadlines and soup kitchens appeared in every major city.

Families who lost homes or could not pay rent built shacks from scrap wood, tin and cardboard on vacant land. These shantytowns were nicknamed “Hoovervilles” after President Herbert Hoover. Hundreds of thousands of people, including many teenagers, rode freight trains across the country looking for work.

Farmers suffered terribly. Farm prices fell by more than half between 1929 and 1932, and many lost their land to foreclosure. From the early 1930s drought and dust storms on the southern Great Plains created the Dust Bowl, driving many families west to California. Birth and marriage rates fell, and health and schooling suffered in poor areas.

The Depression also shaped American culture. Photographers working for the federal government, such as Dorothea Lange and Walker Evans, documented rural poverty, and John Steinbeck’s novel The Grapes of Wrath (1939) told the story of an Oklahoma family driven to California. Folk singers such as Woody Guthrie turned the experiences of migrants into songs.

Minorities were often hit hardest. African Americans were frequently “last hired, first fired”, and hundreds of thousands of Mexicans and Mexican Americans, including US citizens, were deported or pressured to leave for Mexico during the early 1930s.

A global crisis

The Depression was not only an American event. The United States had been the world’s largest lender in the 1920s, and when American loans dried up after 1928 and imports fell, the crisis spread to Germany, Latin America and much of the world. In June 1931 Hoover proposed a one-year moratorium on war debts and German reparations, but it could not halt a European banking crisis that began with the failure of Austria’s Creditanstalt in May 1931. Falling world trade in turn hurt American exporters and farmers.

Government response

Hoover’s response (1929-1933)

Herbert Hoover, president from 1929 to 1933, was not idle, but he believed recovery should come mainly through voluntary cooperation by business, local relief and balanced budgets. He urged employers to keep wages up and expanded public works. In January 1932 he created the Reconstruction Finance Corporation to lend money to banks, railways and other businesses.

In July 1932 he also signed the Federal Home Loan Bank Act, intended to support mortgage lending, and the Emergency Relief and Construction Act, which allowed the Reconstruction Finance Corporation to lend up to 300 million dollars to the states for relief. These measures were larger than any previous peacetime federal intervention, but they came late and were modest compared with the scale of the collapse.

Hoover opposed direct federal relief payments to individuals, fearing they would undermine self-reliance, and he signed a large tax increase in 1932 to balance the budget. His reputation suffered badly, especially after the army forcibly evicted the Bonus Army of unemployed veterans from Washington in July 1932. In November 1932 he lost the presidential election in a landslide to Franklin D. Roosevelt.

Roosevelt and partial recovery (1933-1939)

By the time Roosevelt took office on 4 March 1933, banks in many states had closed. In his inaugural address he declared that “the only thing we have to fear is fear itself”. He declared a national bank holiday, and Congress passed the Emergency Banking Act on 9 March, followed by a burst of legislation known as the New Deal.

Federal deposit insurance ended bank runs, the dollar was taken off the gold standard and devalued, and relief and public works programmes gave jobs to millions. The economy grew rapidly from 1933 to 1937, and unemployment fell to about 14 per cent. However, cuts in federal spending and tighter monetary policy contributed to a sharp recession in 1937-1938, when unemployment rose again to about 19 per cent. Full employment returned only with rearmament and the Second World War.

By the numbers

Key people

• Herbert Hoover (1874-1964), president 1929-1933, whose cautious response was widely blamed for the crisis.
• Franklin D. Roosevelt (1882-1945), president from 1933, architect of the New Deal.
• Andrew Mellon (1855-1937), Treasury Secretary 1921-1932, associated with the view that the economy should be left to correct itself.
• Dorothea Lange (1895-1965), photographer whose images of migrant workers, including “Migrant Mother” (1936), became symbols of the era.

Causes: the historians’ debate

Economists still debate why the downturn was so deep. Milton Friedman and Anna Schwartz argued in 1963 that the Federal Reserve turned a recession into a “Great Contraction” by allowing the money supply to collapse. Followers of John Maynard Keynes emphasise a collapse in spending and investment that markets could not correct on their own. Barry Eichengreen and others stress the gold standard, which spread the crisis across countries and tied governments’ hands, while Ben Bernanke highlighted how bank failures disrupted credit to households and businesses.

Most scholars now see these explanations as complementary. Countries that left the gold standard earlier generally recovered sooner, which helps explain the timing of the American recovery after 1933.

Myths and facts

• Myth: the 1929 crash alone caused the Depression. The crash was a trigger, but the banking panics and monetary contraction of 1930-1933 did most of the damage.
• Myth: ruined investors leapt from windows in large numbers. There were some well-publicised suicides, but stories of mass leaps on Wall Street in October 1929 are greatly exaggerated.
• Myth: the New Deal quickly ended the Depression. It brought substantial recovery, but unemployment stayed high throughout the 1930s.

Timeline

• 1929, 24 and 29 October: Black Thursday and Black Tuesday on Wall Street.
• 1930, 17 June: Hoover signs the Smoot-Hawley Tariff Act.
• 1930, 11 December: The Bank of United States in New York fails.
• 1931, September-October: Britain leaves the gold standard; the Fed raises interest rates.
• 1932, 22 January: The Reconstruction Finance Corporation is created.
• 1932, 8 July: The Dow Jones index reaches its lowest point of the Depression.
• 1932, 8 November: Roosevelt defeats Hoover in the presidential election.
• 1933, 4-9 March: Roosevelt takes office, declares a bank holiday and signs the Emergency Banking Act.
• 1937-1938: A sharp recession interrupts the recovery.

Why it matters

The Great Depression changed what Americans expected of their government. It produced deposit insurance, Social Security, securities regulation and a lasting belief that Washington should act to prevent mass unemployment. It also shaped economic thinking worldwide and, through its political consequences abroad, helped set the stage for the Second World War.