22. Who Wrote the Best Closing Line of Modern Literature?
The Great Depression and the New Deal
By November 1932 the United States economy was in a deep depression. The unemployment rate was above 20 per cent, the highest it had ever been, and the production of goods and services had fallen by 28 per cent since its peak in 1929. America needed fresh ideas.
It found them in a new president. During the first hundred days of his presidency Franklin D. Roosevelt, together with a largely Democratic Congress, instituted a broad range of spending and lending programmes and various new regulations that would collectively become known as the New Deal. The range of programmes included things such as state and local public works initiatives, temporary relief for the unemployed and the payment of farm subsidies. The programmes would, over the next eight years, be continually modified. Some initiatives were cancelled soon after their establishment, others continued until the end of the broader programme but were then discontinued, and still others, such as farm subsidies, were established as permanent programmes that remain in place today. In this chapter we discuss why some of these worked and others did not.
But first let’s discuss why America was in such a deep depression in the first place. The Great Depression formally began in 1929 with the crash of the New York Stock Exchange on Wall Street. On 24 October – ‘Black Thursday’ – nervous investors began selling large volumes of shares, causing a huge fall in stock prices. Five days later, on 29 October – ‘Black Tuesday’ – another wave of panic swept the stock markets, this time with even bigger effects. By mid-November more than a third of the stock market’s value was gone. Many shares ended up being entirely worthless. Millions of people lost all their savings, and thousands of banks that had granted unsecured loans to investors collapsed.
Why did this happen in the first place? What were the reasons for the crash? Why October 1929? How did so few see it coming? To answer these questions we need to go back a decade or two, to Henry Ford and the First World War.
The outbreak of war in 1914 ended the first era of globalisation. Before the war, goods and people could move easily across borders. That allowed capital-rich countries, such as Britain, to focus on producing manufactured goods while importing food from land-abundant countries such as America and Argentina. It also allowed thousands of Europeans to move to the New World, raising their own productivity, incomes and living standards and, perhaps surprisingly, also those of the people they left behind.
Then came the Great War. Borders closed. Capital that had funded new infrastructure now had to fund the war effort. New York, rather than London, became the new centre of the world’s credit network. In 1918, after four years of war, the time was ripe for reintegrating the global economy. This was marked by a return to an era of low barriers, which were meant to buttress the shattered economies of Europe. Instead, the opposite happened. The Treaty of Versailles imposed heavy penalties on the perpetrators of the war. This in turn sank Germany into a prolonged period of stagflation. America turned inwards, raising trade tariffs and imposing barriers to immigration. The global economy of 1920 was in a far more fragile state than it had been just a decade earlier.
This was, however, not immediately obvious in the United States. After a short post-war and Spanish flu-induced recession, the American economy soared. Credit was cheap. Americans borrowed three times more than before the war, buying all kinds of expensive luxury items such as radios and refrigerators and, in particular, cars. No statistic can quite capture this age of exuberance as well as The Great Gatsby, F. Scott Fitzgerald’s iconic book first published in 1925. Fitzgerald ends The Great Gatsby with one of the most poignant lines of modern literature: ‘So we beat on, boats against the current, borne back ceaselessly into the past.’1 Even our best attempts fail to divorce us from (our) history.
It was not only demand that pushed the US economy forwards. Henry Ford’s innovations in mass production pushed car prices to new lows. Americans of all ranks could now dream of owning something that had been reserved for the rich two decades earlier. And because of cheap credit they could do so even if their salaries did not justify the extra debt. Chapter 20 noted that in 1920 one in every three American households owned a car. By the end of the decade the ratio was almost one to one. The surge in cars also boosted investments in new roads, the construction of suburban houses, and the opening of motels and diners to serve these new customers.
The Roaring Twenties would last until 1929. But even before then, the economy had shown signs that the surge in consumption was not sustainable. Americans were getting into too much debt, yet stock prices, largely because of insider trading and speculator manipulation – all legal at the time – continued to rise rapidly. Something had to give.
Black Thursday and Black Tuesday, and the further collapse of the stock market in the months that followed, devastated the American economy. A year earlier Herbert Hoover had been elected president. Hoover’s response to the crisis was denial and, once it became abundantly clear that a depression was at hand, the best he could do was to request the private sector not to cut wages. For the laissez-faire Hoover, government spending was not even an option. The president also opposed any form of government relief. Even when bread-lines appeared across the country with long queues of hungry Americans, he maintained that such a programme risked plunging America ‘into socialism and collectivism’.2
The same was true for those who ran the Federal Reserve, America’s central bank. Today we know that in times of crisis monetary intervention is necessary to ensure enough liquidity in the financial market and prevent a run on banks. But the thinking at the time, of most policymakers and economists, was that an economy in crisis should be left alone, allowing the weaker banks and firms to perish. This, these experts argued, was to punish those who had made poor decisions during the good times: why should the mismanaged companies be bailed out? A depression was seen as a way to cleanse the economy of all the unproductive investments made during the boom years.
The problem was that the American economy just would not return to ‘normal’. Those with some savings held onto them at all costs and the rest went hungry, scraping by to survive. A doctor working in a clinic remembered:
The poor got some care, could go to free dispensaries. The rich got good care because they could afford it. There was this big middle class that was not getting any care. The middle class got very much in the position of the poor people … People of that status would find it very difficult to accept charity … Every day … someone would faint on a streetcar. They’d bring him in, and they wouldn’t ask any questions … they knew what it was. Hunger. When he regained consciousness, they’d give him something to eat.3
The Great Depression had exposed a deep-rooted trend of the 1920s: America was becoming more unequal. Growth in manufacturing had increased the wages of skilled factory workers somewhat, but it especially benefited the owners, who earned large profits. Moreover, the worker in the city had to compete with increasing numbers of rural migrants. Increased mechanisation on farms and the low additional demand for food (a low income elasticity) reduced farmers’ relative incomes. In short, the small farmers could not survive and were forced to move to the city, thus reducing the wages of the unskilled by flooding the labour market and therefore widening the gap between the rich and the poor.
The depression not only exposed but also exacerbated these fissures. Again, novelists can put into words what numbers often cannot. John Steinbeck, in The Grapes of Wrath, reflects on these inequalities:
And the great owners, who must lose their land in an upheaval, the great owners with access to history, with eyes to read history and to know the great fact: when property accumulates in too few hands it is taken away. And that companion fact: when a majority of the people are hungry and cold they will take by force what they need. And the little screaming fact that sounds through all history: repression works only to strengthen and knit the repressed. The great owners ignored the three cries of history. The land fell into fewer hands, the number of the dispossessed increased, and every effort of the great owners was directed at repression. The money was spent for arms, for gas to protect the great holdings, and spies were sent to catch the murmuring of revolt so that it might be stamped out. The changing economy was ignored, plans for the change ignored; and only means to destroy revolt were considered, while the causes of revolt went on.4
It is clear that in early 1933, when the depression was at its deepest, Americans were desperate for something different.
The first major relief programme that Franklin D. Roosevelt introduced after his election was the Federal Emergency Relief Administration, which provided immediate and direct government-funded income relief to households. Roosevelt also introduced massive public works programmes that funded things such as highway construction and flood control and hired workers for these projects at market wages. This funding was not evenly distributed. Political considerations were important to Roosevelt; more funds were allocated to districts that were more likely to swing towards voting for him. Other policies, such as the Agricultural Adjustment Act (AAA), which ‘sought to raise farm prices by paying farmers to take land out of production for several types of goods, including cotton, tobacco, corn and wheat’, did not benefit everyone equally.5 While farmers gained from AAA payments, farm workers did not. In districts with more AAA spending, farm workers and the number of sharecroppers declined, and were replaced by machines. This then caused a decline in incomes and a rise in infant mortality rates.6
Despite these concerns, the New Deal largely stabilised a collapsing economy and turned it round. Between 1933 and 1937 the US economy grew at 7 per cent per year. As Eric Rauchway notes: ‘This impressive rate of recovery reminds us how far the United Stated had to go to recover from the Hoover era.’7 Economists who had believed that such policies were just one step away from socialism or, worse, communism suddenly needed to revise their models. It was John Maynard Keynes in 1935 who provided the intellectual rigour, in his book The General Theory of Employment, Interest and Money, that would justify government stimulus to revive a depressed economy.
Although the Great Depression was associated with severe poverty, a situation that Roosevelt’s New Deal began to improve, it had exactly the opposite effect on levels of inequality. Wage inequality declined significantly between 1929 and 1933 as the middle classes joined the ranks of the poor, but by 1935 it had recovered to the same level as that before the Great Depression.8 This mirrors the experience of many countries that see rapid poverty reduction. Not everyone grows out of poverty at an equal pace. While poverty declines, inequality may increase. It would be short-sighted to use only inequality as the barometer of policy success.
The New Deal did not end the American poverty created by the Great Depression: that would only happen when America joined the Second World War and ramped up military production. But a fundamental shift in the US economy had occurred. From a laissez-faire economy with limited government spending of less than 3 per cent of GDP, the New Deal transformed the role that government played to stabilise and grow the economy. By 1939, the year that the Second World War began, US government spending was 8 per cent of its GDP. Although it briefly returned to lower levels during the war, it began a process of rising government transfers. By the 2010s just the operating expenses of the government were above 22 per cent of GDP.9 In 2020, during the Covid-19 pandemic, the US government announced several fiscal programmes to support vulnerable households and businesses, pushing the ratio of operating expenses to GDP beyond 33 per cent and on course for its largest ever share in the US economy.
F.S. Fitzgerald, The Great Gatsby, Penguin, 1974 (1926), page 188.↩︎
J. H. Wilson, Herbert Hoover: Forgotten Progressive (Long Grove: Waveland Press, 1992), 151.↩︎
S. Terkel, Hard Times: An Oral History of the Great Depression (New York: The New Press, 2000), 145.↩︎
J. Steinbeck, The Grapes of Wrath (New York: Viking Press, 1939), 238.↩︎
P. Fishback, The newest on the New Deal, Essays in Economic and Business History, 36, 2018, 1–22, at 5.↩︎
B. Depew, P. V. Fishback and P. W. Rhode, New Deal or no deal in the Cotton South: The effect of the AAA on the agricultural labor structure, Explorations in Economic History, 50 (4), 2013, 466–86.↩︎
E. Rauchway, The Great Depression and the New Deal: A Very Short Introduction (Oxford: Oxford University Press, 2008), 5–6.↩︎
F. Benguria, C. Vickers and N. L. Ziebarth, Labor earnings inequality in manufacturing during the Great Depression, Journal of Economic History, 80 (2), 2020, 531–63.↩︎
Here I use the World Development Indicator series of ‘Expense (% of GDP)’. It captures all cash payments for operating activities of the US government in providing goods and services. It includes compensation of employees (such as wages and salaries), interest and subsidies, grants, social benefits, and other expenses such as rent and dividends.↩︎