| The dismal science|
|The Worldly Philosophers|
The Great Depression of 1929 to the late 1930s was the largest economic downturn in the history of the modern world. Although market's boom and bust cycle has been producing a bust roughly every few decades or so since the early 19th century, this was the worst.
The Roaring Twenties come to a close
The atmosphere of the late '20s (financially speaking at least) can be summed up in the following (likely apocryphal) anecdote. In the winter of 1928, Joe Kennedy decided to stop to have his shoes shined before he started his day's work at the office. When the boy finished, he offered Kennedy a stock tip: "Buy Hindenburg." Kennedy soon sold off his stocks, thinking:
“”You know it's time to sell when shoeshine boys give you stock tips. This bull market is over.[note 1]
A timely move considering that the stock market would soon resemble the fate of the airship Hindenburg itself.
Like most historical events, the Great Depression was multi-causal. We all know about the stock market crash, but whether the crash was a cause or a symptom of underlying weaknesses in the economy is a subject of much debate. For non-wonk purposes, it's usually treated as a proximate cause. The following factors are widely accepted as playing a role in the decline:
- Tight monetary policy.
- Corruption in the banking system, a.k.a. innovation in finance that made speculation easier.
- Bank failures.
- Adherence to the gold standard. The big problem with gold is that during a run on the bank, everyone trades in their paper money for gold. You can't go to the convenience store and buy a quart of milk with gold bricks (in many places, at least), so this has a huge deflationary effect.
- Debt. This hit farmers especially hard. After World War I, the global demand for foodstuffs declined, creating a glut as farmers overproduced. The agricultural sector went into massive debt during the '20s to stay afloat. Also, everyone who had their money in stocks was completely screwed, obviously.
- Income inequality. Lots of it. The income gap grew sharply during the Roaring Twenties (yeah, it wasn't "roaring" for everyone). With a smaller market for consumer goods, the economy produced more than was necessary and created a general glut. The stock market became the "in" thing for rich people instead. They rode a wave of speculation until it exploded on them.
- Leverage. Many investors were using margin to increase exposure in stocks, even going as high as 10:1. When stocks began to drop, investors were forced to deliver more money to cover the margin call, or were forced to sell, causing stocks to drop even more.
- Trade imbalance. Demand for European exports had fallen, while demand for American goods had risen. This led to the US exporting more than it was importing. Countries that bought American products would borrow from American banks to pay for them, and when the banks called in their loans...
Hoover digs himself deeper
Wherever Herbert Hoover intervened, he either didn't intervene enough or got it backwards:
- Continued bank failures. The Fed and the RFC simply didn't make enough loans. The ones they did make just sat in the banks as reserves, doing nothing to curb deflation.
- Setting off a trade war with the Smoot-Hawley tariffs. Conventional wisdom at the time was to implement protectionist policy to spur domestic business. This didn't work out too well.
- Maintaining a pro-cyclical policy of fiscal conservatism, keeping budgets balanced.
- International markets and the collapse of the international money-go-round. Here's how it worked. Germany owed reparations to the British and the French. The British and the French owed war debts to the US. The US loaned to Germany. When the stock market tanked in 1929, the financial contagion quickly spread out to the global market. Germany was hit extremely hard as US investors pulled out. From 1929 on, US lenders also began to put the squeeze on Germany. In addition, German Chancellor Heinrich Bruning continuously attempted to buck payment of reparations. Hoover called a moratorium on Germany's reparations. With US credit withdrawing from Germany and German reparations payments no longer going to Britain and France, the flow of cash stopped. This only compounded the collapse of international trade, and voila.
The New Deal
The economy continued to nosedive heading toward the 1932 election. Everything bottomed out around 1932-1933, but many expected things to (somehow) keep getting worse. The banking system had not completely stabilized. Not only had Hoover become wildly unpopular because of the Depression, the tide began to turn against him on Prohibition as well. Not to mention the Bonus Army of veterans that marched on Washington, who he turned away. Hoover's platform basically consisted of "It's gonna get better, promise!" Franklin Roosevelt ran as a fiscal conservative in some places and touted a "New Deal" in others. He wasn't very specific about what would be in it, though, he mostly talked about "reform."
Although FDR, then governor of New York, was still seen as a political lightweight at the time, he easily trounced Hoover and the Democrats took the majority in Congress. The election of 1932 was a significant political realignment. The Republican Party was in shambles; not only had Hoover ruined their reputation, the rift between the conservative wing ("Taft Republicans") and the progressive wing (think Teddy Roosevelt) was blown wide open. Hoover's racial gaffes allowed FDR to pick up the black vote. He also picked up the youth vote, the immigrant vote, the labor vote (labor had actually gone mostly Republican up until this point) and the old white guy vote. This was known as the "New Deal Coalition."
Some stuff that happened in FDR's first term:
- FDR bombarded Congress with a flurry of New Deal legislation in his first 100 days. Despite FDR being remembered as ultra-liberal today, the New Deal lacked a real driving ideology behind it besides "throw stuff at the wall and see what sticks." Most of the programs were expansions of Hoover's policies, adaptations of relief programs Governor Al Smith had implemented in New York before FDR took over, and a mix of ideas from the Brains Trust. (See the New Deal page.)
- Bank holidays and the end of the gold standard brought stability to the banking system.
- Economic recovery began.
- The Pecora Commission investigated financial fraud.
- Droughts and erosion brought on the Dust Bowl. Farmers, many of whom were already deep in debt, got screwed even harder.
- Rising Democratic Party star Huey Long was assassinated.
- The Business Plot was uncovered. Retired General Smedley Butler accused a number of businessmen of planning a coup against FDR and installing him as a puppet president. Only a few low-level lackeys confessed and the depth and seriousness of this plot is still in contention.
- Repeal of Prohibition.
- Good Neighbor Policy toward Latin America.
- The strengthening of New Deal Coalition.
FDR's second term
Alf Landon ran against FDR in 1936 on a platform of "I can do the New Deal, but better." He lost in a landslide, despite the increasing radicalization of wingnuts like Father Coughlin and the conservative wing of the Republican Party. FDR was demonized as a communist, fascist, etc. FDR's response? "I welcome their hatred!"
In any case, FDR took the advice of the conservatives in his cabinet and tightened the belt on spending. (See the page on the Roosevelt Recession.) While most of Europe was coming out of the Depression, the US sank into a recession within the Depression. FDR's court-packing plan was also an unpopular move. Technically constitutional but still a fairly naked power grab.
The Roosevelt Recession
The Roosevelt Recession, also known as The Recession of 1937-1938, was a recession within a depression.
By 1936, GDP had climbed back to pre-1929 levels but unemployment was still a problem. In 1937, FDR's cabinet proposed reverting to a policy of fiscal conservatism. FDR had actually run as a fiscal conservative in 1932 and completely switched gears because of a pragmatic approach to politics as well as hijacking the programs Herbert Hoover had instituted and mixing them with ideas former New York Governor Al Smith had used in his home state. In addition to this, he hoped to throw a bone to some of his advisors and the Republicans calling for austerity measures (Sound familiar?). Taxes were raised, FDR attempted to balance the budget, and the Federal Reserve ran a contractionary policy. The huge gains made in 1936 and most of 1937 were lost and the economy reversed itself.
FDR blasted trusts and monopolies for causing the downturn, but they in fact had little to do with it. Keynesians blame it on the balanced budget policy, cutting spending and increasing taxes at an inappropriate time. The WPA and PWA payrolls were severely cut. Monetarists blame it on the Fed's tight credit policy. Similarly, the Hangover Theory basically says the hangover starts when you stop drinking and is worse the longer one has been drinking. Either way, both actions had the same effect: Taking money out of the economy. In reality, it was probably a double-whammy coming from the monetary and fiscal sides.
John Maynard Keynes was in correspondence with FDR and warned against such policies. In 1938, he sent a letter outlining what should be done to fix this new recession. FDR turned back on his newfound fiscal conservatism and reimplemented New Deal policies. Workfare programs were greatly expanded once again. This is sometimes referred to as the "Third New Deal." The Fed reversed its policy as well and eased credit. While FDR had lost the political capital to fully implement another set of stimulative policies on the order of the first two New Deals, the economy began to climb back to its previous position. By the end of 1941, as America mobilized for war, the economy had regained what it lost during the Roosevelt Recession and then some. New Deal critics often dispute this, pointing out that government spending had decreased on the whole in 1938. This is irrelevant. Stimulative policy is supposed to add money to the economy through deficits, not merely increased spending. Spending money that is taxed out of the economy is just shuffling it around; only deficits create monetary expansion and the deficit did indeed increase. Outlays on the whole also increased every year after 1938 and, of course, deficits and outlays exploded during World War II.
FDR's return to increased spending made him increasingly unpopular among the wingnuts. Hoover blasted FDR for taking the nation toward socialism in the '36 election. Various wingnuts like Father Coughlin accused FDR of being a commie/fascist/tool of the Jewish bankers/insert conspiracy theory here. (Sound familiar?). His court-packing plan in 1937 didn't help matters any.[note 2] Ironically, the Supreme Court had gotten into the habit of scrapping what are now considered to be his worst programs like the National Industrial Recovery Act (NIRA) and Agricultural Adjustment Act (AAA) and leaving the rest alone for the most part.
New Deal opponents
New Deal critics often like to gloss over FDR's policy reversal in 1937 to paint the New Deal as a failure in its entirety. The Roosevelt Recession was a setback and without it, it's entirely plausible that the US would have been out of the Depression entirely before World War II. The US actually took longer to get out of the Depression than most other nations - the evil Swedes, for example, ran a very hardcore stimulative policy and was back to pre-crash levels by the early '30s. The fact is, 100% of the time during the Great Depression, the economy was improving when FDR ran deficits and faltering when he practiced fiscal conservatism. Occasionally, critics will point to "increased regulations" or "poor business confidence" as a result of these regulations as causes of the recession. This is bullshit for multiple reasons. One, they rarely if ever point to anything specific, making this explanation extremely weasely. Occasionally, they will point to the Wagner Act passed in 1935, which...(gasp!) protected workers' right to unionize. And it wasn't even heavily enforced at that point. Two, the most harshly regulatory of FDR's policies, the NRA, was ruled unconstitutional in 1935. And even under the NRA, the economy was still growing quite speedily.
End of the Depression
By 1939, the US was recovering again and FDR became more involved in foreign affairs, specifically the whole Adolf Hitler thing. Heavy re-armament of US forces continued to help the nation recover, but the recovery was not complete until the US entered World War II. FDR beat Wendell Willkie in the 1940 election, but by a much slimmer margin than his previous elections.
The Great Depression was an ideal occasion for the brief rise of a number of personalities and movements (both wingnut and moonbat), promoting woo as a purported ticket out of the Depression, including:
- The aforementioned Father Coughlin - a ranting "radio priest"
- The Townsend Plan - a mathematically unsound old-age pension proposal
- John R. Brinkley - a quack doctor promoting goat testicle transplants as a cure for impotence, who twice almost got elected as an independent candidate for governor of Kansas
- Gerald Winrod - the "Jayhawk Nazi," a right-wing preacher from Kansas
- Gerald L.K. Smith - another preacher, originally a Huey Long supporter, later turned anti-Semitic demagogue
- Social Credit - an economic ideology based on consumer power in the marketplace directing production
- E.P.I.C. (End Poverty In California) - socialist Upton Sinclair's plan for California, promoted during his 1934 run for governor
- Edward R. Dewey and Ralph N. Elliot both claiming to identify cycles the economy runs in to explain the Depression (their two cycles mutually contradictory, of course).
- Technocracy movement - replace representative government with government by engineers and scientists, and replace money with the "erg," a unit of energy
- Chemurgy movement - better living through
- And of course, the Communist Party
Sinclair Lewis' chilling novel about the rise of fascism in the U.S., It Can't Happen Here, featured Buzz Windrip (probably an amalgamation of some combination of these three: anti-Semitic preacher Gerald Winrod, Louisiana's dictatorial governor Huey Long, and the repressive colonial-era military governor of Puerto Rico, Blanton Winship) rising to power with the support of Bishop Prang (modeled after Father Coughlin).
Economic hardship during the Depression displaced a lot of people. A large number of teenagers were forced to leave home to look for work because their parents could no longer support them, and dustbowl conditions led to a mass migration from the midwest, especially Oklahoma and Arkansas, to California. A popular culture grew up around such displaced people with the most popular including Woody Guthrie's folk music, John Steinbecks 1939 novel The Grapes of Wrath and the 1940 film adaptation, the songs "Big Rock Candy Mountain" (Harry McClintock) and "Brother Can You Spare A Dime" (E. Y. "Yip" Harburg and Jay Gorney), and King Vidor's 1934 film Our Daily Bread. Novels and films from that era tended to run in two opposing directions: the realism school of fiction portrayed the hardships of the working class while sometimes also romanticising them, while others went in the other direction of escapism and portrayed the lifestyles of the wealthy. The period was rife with moral panic with a lot of drug scare movies like Reefer Madness, but conversely was also an era in which open inquiry and freethought flourished, typified by the popularity of Haldeman-Julius Publishing's Little Blue Books.
This influence on popular culture has continued to echo in influence in the U.S. The folk music scene typified by Woody Guthrie and the romanticisation of migratory people in general were both influential on the late 1960s hippie movement, while occasional popular films continue to play to the realism school of Depression-era fiction, examples being 1967's Bonnie and Clyde, 1973's Emperor of the North, and the more recent Seabiscuit and O Brother, Where Art Thou? The Civilian Conservation Corps, a Depression-era jobs program for young men, likewise continues to be cited as a model for programs today like Americorps, and is often romanticized as a golden age of construction due to the CCC's having built many buidings and trails in today's national and state parks.
- Freedom From Fear by David M. Kennedy (Full text)
- The Great Depression by Robert S. McElvaine
- The Great Depression and the New Deal: A Very Short Introduction by Eric Rauchway
- More embellished version here
- Technically, this move was constitutional though a fairly naked power grab.