The GREAT DEPRESSION to 1935

The Great Depression, to 1935

Texas, 1935

Newark, New Jersey, October 31, 1931

The U.S. Economy Hits Bottom, 1930-32

Between January and April in the year 1930, the value of stocks rose 13 percent. Then at the end of April the price of stocks began to decline again. The economy was declining, and President Herbert Hoover opposed the view among bankers that the economy should be allowed to deflate. Hoover urged action. He approved a program in which the federal government had a few buildings built, and he urged state and local governments to accelerate their spending. From railroad and utility companies he acquired promises of investments. He called conferences of industrial and labor leaders and obtained from them pledges to maintain employment and production levels and to avoid strikes. But the economy continued to slide. Businesses felt compelled to respond to markets -- including the labor market -- and they cut production and wages. Some financiers saw reduced wages as a blessing that would improve discipline and character, while others called for more government spending.

People of wealth were pulling their money out of the economy. Unemployment was rising, and consumers had less money to spend, adding to the downward spiral. Bankruptcies were more numerous. Bank loans were not being re-paid. There was no federally guaranteed depositors insurance to inspire depositor confidence. In 1929 there had been 659 bank failures. That number in 1930 rose to 1,352. In November 1930 a run on banks started in Nashville, Tennessee, and swept through the South.

In the congressional elections of November 1930, the Republican majority in the House of Representatives was reduced to six, and their majority in the Senate was reduced to one. At the end of the year, calls for more government action increased. Congress passed a law allocating a mere 116 million dollars for public works and 45 million for drought relief. Fundamentally the government was aiming at a balanced budget, while Hoover spoke of the public works project as a "new experiment in our economic life" and an "advance in economic thought and a service to our people."

By the end of 1930 the value of stocks was down forty percent from its April, 1930, high. On New Years' day, 1931, predictions were made that the depression would be over by the end of the year. Instead, through the year, stock prices in the U.S. continued to decline. In June 1931, Hoover addressed the growing problem of international debt, and he electrified the world by proposing a one-year moratorium on all payments on reparations and other intergovernmental debts. He rejected calls from the U.S. Chamber of Commerce and the National Civic Federation for restoring economic order through compulsory, private cartels. And he opposed a bill that would allow veterans to borrow against a pension fund, Hoover calling the bill a "breach of fundamental principle."

During 1931, world trade and Europe's credit structure collapsed, deepening economic depressions in Austria, Germany and Scandinavia. Europeans began withdrawing loans and gold and other investments from the United States, adding to the decline in the United States. In the fall of 1931, in hopes of ending more withdrawal of funds and gold by Europeans, the Federal Reserve Board raised interest rates, making borrowing more difficult -- a move that normally cools overheated economies but does not mend depressed economies.

The money supply had been falling with the rest of the economy, and hoarding money rather than spending it was damaging the economy. Hoarding money reduced the effective supply of money. The world was on the gold standard, and the Federal Reserve had an abundance of gold reserves. The amount of money circulating in the economy was dependent on the amount of gold available. The Federal Reserve could have but did nothing to increase the money supply.

(At any rate, John Maynard Keynes, reports Paul Krugman, believed, as does Krugman himself, that monetary policy had little impact on what Krugman calls "depression-type conditions" -- which is not to say that it is insignificant regarding inflation.)

Taxes could have been reduced, leaving more money for buying. And the federal government could have pumped more money into the economy through relief to the unemployed. But none of these was done. There was fear that cheapening money (by increasing the money supply) would further weaken the economy. Also, Congress and President Hoover were opposed to creating an unbalanced budget. They believed that unbalanced budgets and rising government debt retarded business recovery and that unbalanced budgets were a threat to the credit of the federal government.

Many banks experiencing shortages of cash were forced to liquidate assets at fallen price levels and were thus driven to insolvency. The federal government was not offering bailouts, believing that in every case it would be throwing good money after bad. Those banks that were sound enough to have benefitted everyone from a bailout were allowed to fail. Depositors lost confidence in the financial system. They didn't know which banks were sounder than others and pulled their money out of all banks, good and bad, indiscriminately. People across the nation were putting their money into safe deposit boxes or stuffing it into mattresses. In 1931, 2,294 banks in the U.S. failed.

In Washington D.C., 3,000 Communists staged a "hunger march." In rural America farmers were joining together to prevent insurance companies from foreclosing their neighbors' farms. In the spring of 1932, 15 to 20,000 unemployed veterans camped out in a park in Washington D.C. demanding full payment of the bonus promised them for serving in World War I, and they were dispersed by the U.S. army.

Meanwhile various explanations for the Depression were voiced. Some in the U.S. blamed the Soviet Union for dumping goods on the world market. Henry Ford, who considered himself an expert on just about everything, blamed the Depression on what he called an era of laziness. Many blamed the Depression on high tariffs having caused a decline in world trade. President Hoover saw the Depression as caused by attitude -- which had somehow gone awry. And, of course, a few in the United States saw the Depression as the fulfillment of Biblical prophecy.

In Europe, on the other hand, many were blaming the Depression on the United States. They blamed the collapse in Europe on the U.S. withdrawing loans even to sound enterprises. And people blamed the United States for cutting back on imports and for failing as the world's leading creditor nation.

Marxists had their own analysis of what was causing the economic crisis. In 1928 the Communist International (Comintern) claimed that capitalism was entering its third stage since the Great War: stage-one being the crises just after the war; stage-two the recovery that followed in the mid-twenties; and stage-three being a crisis created by the old problem of production out-racing consumption. By 1932, rank and file Communists were impressed by the Comintern's analysis. With Karl Marx having predicted the fall of capitalism, they saw capitalism as having entered its final crisis. The failure of capitalism, they believed, would bring the discontented masses falling in behind Communist Party leadership and then they would be able to overthrow the capitalist system -- matching economic inevitability with human activity.

Decades after the Depression, "bourgeois" economists would argue that the Depression was more than just production out-racing consumption. Monetary stability after World War I had not returned to what it had been before the war. Before World War I, Great Britain had been the world's creditor nation, the world's lender of last resort and the world's champion of free trade. This had been destroyed by the war, and, according some economists, the United States had not adequately taken Britain's place as the world's leader in finance.

As the United States economy was sinking deeper into depression, many believed that a sound recovery would come only by government leaving the economy alone. They believed in a natural process of liquidation -- the ruination of the weak and the survival of the efficient. And, indeed, the U.S. economy bottomed in 1932. Things could only get so bad in a society not engaged in a civil or international war or not suffering from some great catastrophe such as plague, widespread draught or the kind of catastrophe the dinosaurs had suffered.

In the United States, hitting bottom meant that manufacturing was down 48 percent from what it had been in 1929, and that the prices farmers received for their products was down 44 percent. The stock market was down 80 percent from what it had been in 1929, and 25 percent of the work force was still unemployed. Recovery started around the same time that it did in other countries. With the interconnectedness of economies in the world, it was more than a coincidence that economies in Europe also bottomed in 1932. And with economies having hit bottom, the issue became the speed of recovery -- a matter affected by government policy.

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