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Texas, 1935

Newark, New Jersey, October 31, 1931

World News for this month

World News for this month

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.

Economic Recovery in Sweden, France, Italy and Britain

In 1931 in Sweden, wages had been falling and unemployment had been rising. Communist agitation had also been rising, and that year labor unrest and the use of strikebreakers resulted in bloodshed. Sweden's moderately conservative government was, however, pursuing a policy of maintaining the nation's money supply - at least at higher levels than was the United States.

Sweden's industrial production fell no more than 10 percent from its peak in 1929. And its unemployment rose no higher than 12 percent. Nevertheless, the relatively hard times in Sweden resulted in a loss of power for the incumbent conservatives. In September 1932 the Social Democrats were elected to power. During the following winter the crisis in agriculture deepened, and unemployment rose. The Social Democrats entered an alliance with Sweden's Farmer's Party, giving the government as broad a representation as possible. Then Sweden's economy hit bottom - a few months later than it did in the United States.

But Sweden would recover faster. This was the result of both a liberal monetary policy and public spending. A reduction in taxes for the average wage earner gave him more money to spend. A raised minimum wage increased the ability of low-income people to spend money. The government increased investments in public works. Federal money was pumped into unemployment insurance, medical care and old age pensions. The government willingly created a deficit, believing that it was emergency spending that would be paid back after the recovery. And with recovery being rapid and revenues increasing as a result of the rising economy, the deficits were quickly overcome.

Government participation in the economic life of Sweden had increased. The government supported farm prices and protective tariffs for farm products, and giving aid to the unemployed in farming areas helped to slow migration from the countryside into the cities. The Social Democrats gave labor the right to strike, but Sweden had a board that settled worker-management grievances, a board in which labor and management had confidence. And peace between labor and management benefited the economy.

Sweden's industrialists were disgruntled over higher taxes on their personal incomes, but they did not feel threatened to the extent that they withdrew from participating in the economic recovery. Manufacturing was to remain over 90 percent in the hands of capitalists, and business profits were left untaxed in order to stimulate rapid reinvestment. By 1936, industrial production in Sweden was 50 percent above what it had been in 1929 and unemployment had returned to 5 percent.

France

The depression reached France later than it did some other nations, France remaining prosperous through 1931. Then, in 1932, a drop in tourists, a fall in exports of perfumes, wine, food and other items, and falling prices for what exports it could sell, hurt the French economy.

Although arriving late, the economic decline in France hit bottom in 1932, with unemployment at 15 percent and industrial production off 25 percent from its 1929 level. [note]  A new French government was elected in 1932, led by André Tardieu, whose campaign issue was the threat of Communism. His government was a coalition of conservatives and rightists defending against demands from leftists for spending on the unemployed and other benefits for the poor. Tardieu's government was determined to maintain low taxation, a balanced budget and no inflation. It sought economic recovery in the expansion of France's trade with its colonies and in public belt tightening. France refused to join Britain, the U.S. and Germany in going off of the gold standard. This kept its currency overvalued, hurting French exports. Some people in France expected that their currency would eventually be devalued, and they hurt France's economy by converting their money and sending it abroad.

After its short slide to its bottom in 1932, France's economy remained stagnant. In 1935 unemployment and industrial production were still at 1932 levels. [note]  Meanwhile, defending its conservative economic policies, the government appealed to patriotism. Class warfare promoted by Marxists, it warned, was a crime against the country, and socialism, it announced, brings misery, anarchy and ruin.

Italy

Mussolini's highly praised corporate-fascist economy suffered like other economies during the Great Depression. Mussolini was erratic in making policy, his twists and turns the result of an unwillingness to surround himself with sound-thinking, independent-minded advisors. The public saw Mussolini's contradictory moves as genius, while the economy did benefit from government involvement in industry, cooperative industrialists, a docile labor force, and increased welfare benefits. Italy's economy emerged from its economic slump in 1934. But Italy's share in world manufacturing was down then to around 2.8 percent - the lowest of Europe's big players in international affairs. [note]

Britain

The Depression brought only a minor decline in Great Britain's economy, the British economy having already been stagnant in 1929. The world's economic depression caught the Labour Party running the government, and some folks in Britain blamed Labour Party politicians for their economy's poor performance. Their vote helped to send more Conservatives to parliament, and a new government of national unity was formed - a coalition of Labour and Conservatives. The socialist Ramsey MacDonald remained Prime Minister, and the conservative Stanley Baldwin became the dominant figure in the cabinet, dominant also over MacDonald.

Like France, Great Britain was suffering from an overvalued currency. The price of gold was responding to its market and rising, which pushed the British pound to a level that the new British government considered too high - an overvalued pound making the price of its exports higher and therefore diminishing foreign trade. Great Britain shocked the world by going off the gold standard, and switching to a managed currency proved beneficial. Britain was able not only to devalue its currency but also to lower lending rates, which dropped to two percent, helping to simulate building and ease depression.

Great Britain also attempted to insulate itself from the rest of Europe and the U.S. by drawing on its economic ties with its empire and the commonwealth. Needing to import two-thirds of its food, Britain went to extraordinary lengths to maintain its exports and to keep the costs of manufacturing low, including wages. This meant belt tightening for the public. And in trying to keep inflation down, Britain tried to keep spending down, which meant little or no public works projects and little of the deficit spending that was tried in Sweden. But Britain did maintain its unemployment insurance, Labour resisting pressure from conservatives for cuts in unemployment benefits. The overall result kept Britain's economy from falling as far as did the U.S. and German economies. Britain's economy hit bottom in 1932, and its recovery was slower than Sweden's. In 1935, Britain's industrial output returned to its 1929 level, and its unemployment returned to 10 percent - twice as high as Sweden's. [note]

A Slow Recovery Begins in the United States

The U.S. economy hit bottom in mid-1932. With the approach of elections in 1932, Hoover vetoed what he saw as wild, emotionally inspired pork barrel legislation that Congress had sent to him. He claimed that he favored carefully planned measures aimed at long-term development rather than "quick fixes."

Hoover lost the presidency to the Governor of New York, Franklin Roosevelt, Hoover winning 15.8 million votes to Roosevelt's 22.8 million. The Democratic Party became the majority party in the House of Representatives and in the Senate by huge margins. Despite the Depression, the Communist Party candidate, William Z. Foster, won only 0.26 percent of the vote - 102,785 votes - indicating where the Communist movement in the United States was going nowhere. The Socialist Party candidate, Norman Thomas, won nines times that amount - close to 2 percent of the vote.

Hoover left office saying there was nothing more "we can do." And when Roosevelt took office he was not sure what he would do but he was determined to do something. Roosevelt had little understanding of economics, but he grabbed some slogans that appealed to him - such as "the greatest good for the greatest number." He began by pursuing a balanced budget, as in his days as governor of New York. He cut federal salaries and veterans' aid. On the other hand, the U.S. Chamber of Commerce was demanding government action in regulating competition, and the Roosevelt administration pondered the benefits of more regulations on business and a greater partnership with business.

In his first one hundred days in office, Roosevelt was responding to crises more than he was laying plans for economic construction. First he ended the run on the banks, bringing a return of confidence in banking. In a "fireside chat" he told citizens that it was safer to put money in the bank than to keep it under one's mattress. He invoked the Trading with the Enemy Act of 1917 in order to suspend the export of gold and silver. By law, banks and individuals were now required to deliver their gold to Federal Reserve banks in return for currency. Then his advisors talked him into attempting to stimulate the economy by increasing the money supply. This included putting three billion more dollars into circulation and taking the dollar off the gold standard.

During these first one hundred days, Roosevelt decided to help the distressed farmers. Hoover had tried to help farmers by buying their surpluses, which had encouraged over-production and resulted in ruinous low prices for farmers. Instead of this and letting bankruptcies run their course, Roosevelt chose to limit the production of certain crops and to give relief to farmers who were in immediate danger of losing their homes.

Eager to fight what they perceived to be economic crisis, Democrats in Congress proposed a "share the work" bill designed to create a thirty-hour work-week and to inspire employers to hire more workers. Manufacturers opposed the bill, and Roosevelt joined in the opposition. Then, consulting with big business, Roosevelt created the National Industrial Recovery Act (the NRA) - a move intended to get more money into the hands of average working people. Industrialists supported the idea of high wages, believing that high wages encouraged people to stay on the job longer and to improve their job skills. The National Industrial Recovery Act enacted into law fixed minimum wages and maximum hours and the abolition of child labor in many industries. It gave labor unions the right of representatives of their choice in bargaining with employers, and it obliged businesses to open their books to government inspectors.

In May 1933, a government agency called the Tennessee Valley Authority (TVA) was created to oversee development in a depressed 640,000 square-mile area in the Tennessee Valley. There, sharecroppers and tenant farmers were malnourished; and soils were exhausted, eroded and polluted with chemical wastes. Trees had been cut and vegetation destroyed. Many in the area could not afford electrical power. The TVA planned to provide the area with electrical power that was publicly owned. Republicans in Congress took up the fight of two power companies in the area, describing their position as a fight for free enterprise against socialism. The Republicans were out-voted, and the TVA project proceeded as planned, its electrical power to uplift the area, to improve flood control and to reduce soil erosion. The TVA provided phosphate fertilizers that were to revive soil in the Tennessee Valley.

The appearance that something more was being done produced more confidence, and in the three months of Roosevelt's administration - between the first of April and the end of June - the price of stocks almost doubled. Wages also rose. Big business and the Democrats favored lower tariffs, and this helped move the world toward higher levels of trade.

In December 1933, the Roosevelt Administration repealed Prohibition. But now came the dust storms across the Dakotas, Oklahoma, Kansas and nearby states, blowing away topsoil. From decades before, these lands had been broken up by plowing. In the place of prairie grasses, wheat had been grown. With the economic depression, the demand for wheat had dropped, and the price that farmers were getting for their wheat had fallen to about one-fourth what it had been. At that price farmers could not afford to grow wheat. Their fields dried up and were left unused, and winds began blowing away topsoil. Whole houses were buried in dust, and ruined small farmers began migrating to California, lured by growers there who were in search of cheap labor for harvesting their crops.

The U.S. economy was recovering, but slowly. Roosevelt's strategy of increasing wages had created a disincentive to hire more workers, especially by smaller businesses. People in small businesses were complaining that the National Industrial Recovery Act favored big business. Growers in California, meanwhile, remained ungoverned by minimum wage laws, and, with an abundant supply of labor bidding down wages, they were paying their migrant work force as little as fifty cents a day.

Meanwhile, some conservatives were complaining that Roosevelt was taking the U.S. down the road to Communism, while American Communists were opposing reform in favor of revolution and charging that Roosevelt was taking the nation toward fascism.

By 1935, unemployment in the United States had fallen from its high around 25 percent down to around 17 percent, more than three times Sweden's and still a long way from its 1929 level of 3.2 percent. While Sweden's industrial production had risen 50 percent above its 1929 level, industrial production in the United States was 25 percent lower than its 1929 level.

In 2008, the U.S. author Amity Shlaes would write about the Great Depression from a conservative/libertairan perspective and would describe Roosevelt's National Recovery Administration codes as "forcing businesses to pay an above-market minimum wage." She would write that the greater power that was given to labor unions would contribute to higher wages that would "hurt corporate profits and therefore hiring" and keep unemployment higher into the late 1930s. [note] 

The greater power to labor unions came on July 5,1935 with the signing into law of the Wagner-Connery Act. It established a federal agency, the National Labor Relations Board (NLRB), which had the power to investigate and decide unfair labor practice issues and to conduct elections in which workers could decide whether they wanted union representation. It would be the view of liberal economists that workers would benefit not only from better working conditions but also that higher wages would improve the economy by creating greater purchasing power.

In 1935, Roosevelt, meanwhile, was still pursuing fiscal conservatism. There was nothing in the U.S. like the big emergency spending in Sweden and the quick recovery that brought revenues to pay back the deficit. Eventually economic recovery would come to the United States with government purchases for war production, and the end to high unemployment would come with another form of government spending - payment for the widespread induction of men into military service.

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