The causes of the Great Depression remain a topic of discussion and debate nearly a century after the crushing economic downturn reshaped economies and governments around the globe. World War I – the war to end all wars - had drained economies around the world, but with the end of hostilities, investors looked hopefully toward the future. Automation primed the industrial pump as the transformation of America’s economy shifted away from its agricultural roots. The Roaring Twenties were a decade of unprecedented economic growth and consumption. All good things come to an end and the “boom and bust” cycle of America’s economy began an expected slowdown in 1929.[1]
Between 1921 and 1929 the U.S. economy grew at a rate of 5.9%, nearly twice what was typical of the era. The central bank was promoting that growth through providing ready credit throughout the decade, so there was every reason to anticipate that the boom would continue. The reality was that stocks were highly overvalued in 1929 and the growth of the last ten years could not be sustained.[2] However, the stock market crash of 1929 did not cause the Great Depression, but was simply a symptom of an unbalanced economy. Only about 2.5% of Americans owned stock in 1928, so the majority of the wealth from the boom of the twenties was highly concentrated. Additionally, by March 1930 stocks had rebounded to within 25% of their December levels. However, during the calamitous crash, fortunes were lost. Investors were understandably concerned about the future and stockholders had less to inject into the economy.[3]
Despite forays into the economy by the U.S. government like the Wagner Act that boosted labor protections, there was relatively little government interference in the economy. The federal government preferred to regulate the economy through gold. During the war, runaway inflation had ravaged the economies of nations that were not on the gold standard. Because the U.S. had remained on the gold standard it was considered a safe haven for gold reserves after the war. The supply and distribution of gold was the cord that tied the international economy together and dampened inflation. As gold flowed to the U.S. and France, their governments raised interest rates to dampen investments. As other countries initiated their own deflationary policies at the end of the 1920s, the economic downturn snowballed into a full-on depression because outdated monetary policy prevented effective government action.[4]
The gold standard also complicated the process of international aid. The United States and France held 60% of the world stock of gold but transferring gold to a country on the gold standard would impact the value of its money. The cord that tied the international economy together also bound the hands of central banks. As a result, each nation was left to deal with the economic crisis on their own. Protectionists tariffs, such as Hoover’s Smoot-Hawley Act, further isolated the U.S. economy and prompted other nations to respond in kind. With domestic demand for goods and services dried up by trepidatious investors and high unemployment, competing tariffs chocked foreign trade. When the federal government tried to balance the value of the dollar by increasing interest rates it caused more banks to collapse and businesses to close. By 1932 most of the global economy had ground to a standstill.[5]
The election of Franklin Roosevelt in 1932 saw the initiation of new, if not immediately effective, economic programs. That year Chief Justice of the Supreme Court Brandeis said, “The people of the United States are now confronted with an emergency more serious than war. Misery is widespread, not in a time of scarcity, but in a time of overabundance.”[6] This reflected the president’s believe that excessive competition had caused overproduction in America. As part of his New Deal, Roosevelt created the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA) to shrink the economy. By reducing the supply of goods, it was reasoned that the price of what remained would go up. While the AAA set about slaughtering pigs and paying farmers to plow their crops under, the NRA seized control of industry and set standards for production and costs. Government control of business hampered their ability to raise funds to take advantage of opportunities that arose as the economy rebounded.[7]
Government control stifled business’ ability to hire and use employees as they saw fit. Fear of expanded government control depressed business confidence in the future. That concern was not unfounded as government intervention in the private sector expanded more during the decade of the 1930s than it had in the previous century and a half. A recovery began in 1935 but fizzled out two years later when business and government fell back on pre-depression practices and policies. The Great Depression came to a real end when America joined the fighting in World War II. The war put 8,590,000 people back to work as sailors, soldiers, and marines. Millions more went to work building the war materiel needed for the fight. Though wages and savings rose during the war, the civilian economy did not reap the benefits of the economic jump start the conflict provided until the war ended.[8]
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