photorandy2023 Our Economy

Our Economy: The Good, The Bad, and The Ugly–Chapter Five–Great Depression and World War II: 1929–1945

Pre-war industry, commerce, and agriculture

Despite the Great Depression and World War II, the middle decades of the 20th century were among the highest for productivity growth. The research developed through informal cooperation between U.S. industry and academia grew rapidly and by the late 1930s exceeded the size of that taking place in Britain (although the quality of U.S. research was not yet on par with British and German research at the time).

Manufacturing

Productivity growth in manufacturing slowed from the electrification era of the early century, but remained moderate. Automation of factories became widespread during the middle decades as industry invested in newly developed instruments and controls that allowed fewer workers to operate vast factories, refineries and chemical plants.

Great Depression: 1929–1941

“Broke, baby sick, and car trouble!” Dorothea Lange‘s 1937 photo of Missouri migrants living in a truck in California. Many displaced people moved to California to look for work during the Depression. John Steinbeck depicted the situation in The Grapes of Wrath.

What was the Great Depression?
The “Great Depression ” was a severe, world -wide economic disintegration symbolized in the United States by the stock market crash on “Black Thursday”, October 24, 1929 . The causes of  the Great Depression were many and varied, but the impact was visible across the country. By the time that FDR was inaugurated president on March 4, 1933, the banking system had collapsed, nearly 25% of the labor force was unemployed, and prices and productivity had fallen to 1/3 of their 1929 levels. Reduced prices and reduced output resulted in lower incomes in wages, rents, dividends, and profits throughout the economy. Factories were shut down, farms and homes were lost to foreclosure, mills and mines were abandoned, and people went hungry. The resulting lower incomes meant the further inability of the people to spend or to save their way out of the crisis, thus perpetuating the economic slowdown in a seemingly never-ending cycle.

Following the Wall Street Crash of 1929, the worldwide economy plunged into the Great Depression. The U.S. money supply began to contract by one-third. The protectionist Smoot–Hawley Tariff Act incited retaliation from Canada, Britain, Germany and other trading partners. Congress, in 1932, worried about the rapidly growing deficit and national debt, and raised income tax rates. Economists generally agree that these measures deepened an already serious crisis. By 1932, the unemployment rate was 25%. Conditions were worse in heavy industry, lumbering, export agriculture (cotton, wheat, tobacco), and mining. Conditions were not quite as bad in white collar sectors and in light manufacturing.

Franklin Delano Roosevelt was elected President in 1932 without a specific program. He relied on a highly eclectic group of advisors who patched together many programs, known as the New Deal.

Spending

Government spending increased from 8.0% of GNP under Herbert Hoover in 1932 to 10.2% of GNP in 1936. Franklin D. Roosevelt balanced the “regular” budget the emergency budget was funded by debt, which increased from 33.6% of GNP in 1932 to 40.9% in 1936. Deficit spending had been recommended by some economists, most notably the Briton John Maynard Keynes. Roosevelt met Keynes but did not pay attention to his recommendations. After a meeting with Keynes, who kept drawing diagrams, Roosevelt remarked that “He must be a mathematician rather than a political economist”. John Keynes’ approach to the Great Depression could have been a solution. His method was to keep the feds spending as much as they could even on random purchases but the money had to keep moving. It is believed that if America went through with John Keynes plan the Great Depression could have been avoided entirely. The Feds started to spend more when President Roosevelt came into office as the federal government doubled income tax rates in 1932. Total government tax revenues as a percentage of GDP shot up from 10.8% in 1929 to 16.6% in 1933. Higher tax rates tended to reduce consumption and aggregate demand. Spending would go up and America would get out of the great depression when World War II happened after Japan’s attack on American forces in Pearl Harbor in December 1941 led to much sharper increases in government purchases, and the economy pushed quickly into an inflationary gap.

Banking crisis

In 1929–33 the economy was destabilized by bank failures. The initial reasons were substantial losses in investment banking, followed by bank runs. Bank runs occurred when a large number of customers lost confidence in their deposits (which were not insured) and rushed to withdraw their deposits. Runs destabilized many banks to the point where they faced bankruptcy. Between 1929 and 1933 40% of all banks (9,490 out of 23,697 banks) went bankrupt. Much of the Great Depression‘s economic damage was caused directly by bank runs.

Hoover had already considered a bank holiday to prevent further bank runs, but rejected the idea because he was afraid to trip a panic. Roosevelt acted as soon as he took office; he closed all the banks in the country and kept them all closed until he could pass new legislation. On March 9, Roosevelt sent to Congress the Emergency Banking Act, drafted in large part by Hoover’s top advisors. The act was passed and signed into law the same day. It provided for a system of reopening sound banks under Treasury supervision, with federal loans available if needed. Three-quarters of the banks in the Federal Reserve System reopened within the next three days. Billions of dollars in hoarded currency and gold flowed back into them within a month, thus stabilizing the banking system. By the end of 1933, 4,004 small local banks were permanently closed and merged into larger banks. Their deposits totaled $3.6 billion; depositors lost a total of $540 million, and eventually received on average 85 cents on the dollar of their deposits; it is a common myth that they received nothing back. The Glass–Steagall Act limited commercial bank securities activities and affiliations between commercial banks and securities firms to regulate speculations. It also established the Federal Deposit Insurance Corporation (FDIC), which insured deposits for up to $250,000, ending the risk of runs on banks.

Unemployment

Unemployment reached 25 percent in the worst days of 1932–33, but it was unevenly distributed. Job losses were less severe among women than men, among workers in nondurable industries (such as food and clothing), in services and sales, and in government jobs. The least skilled inner city men had much higher unemployment rates, as did young people who had a hard time getting their first job, and men over the age of 45 who if they lost their job would seldom find another one because employers had their choice of younger men. Millions were hired in the Great Depression, but men with weaker credentials were never hired, and fell into a long-term unemployment trap. The migration that brought millions of farmers and townspeople to the bigger cities in the 1920s suddenly reversed itself, as unemployment made the cities unattractive, and the network of kinfolk and more ample food supplies made it wise for many to go back.

The displacement of the American work force and farming communities caused families to split up or to migrate from their homes in search of work. “Hoovervilles,” or shantytowns built of packing crates, abandoned cars, and other scraps, sprung up across the nation. Residents of the Great Plains area, where the effects of the Depression were intensified by drought and dust storms, simply abandoned their farms and headed for California in hopes of finding the “land of milk and honey.” Gangs of unemployed youth, whose families could no longer support them, rode the rails as hobos in search of work. America ‘s unemployed citizens were on the move, but there was no place to go that offered relief from the Great Depression.

City governments in 1930–31 tried to meet the depression by expanding public works projects, as President Herbert Hoover strongly encouraged. However, tax revenues were plunging, and the cities, as well as private relief agencies, were totally overwhelmed by 1931. Men were unable to provide significant additional relief. They fell back on the cheapest possible relief, soup kitchens, which provided free meals for anyone who showed up. After 1933 new sales taxes and infusions of federal money helped relieve the fiscal distress of the cities, but the budgets did not fully recover until 1941.

The federal programs launched by Hoover and greatly expanded by president Roosevelt’s New Deal used massive construction projects to try to jump start the economy and solve the unemployment crisis. The alphabet agencies ERA, CCC, FERA, WPA and PWA built and repaired the public infrastructure in dramatic fashion, but did little to foster the recovery of the private sector. FERA, CCC, and especially WPA focused on providing unskilled jobs for long-term unemployed men.

Relief

What was FDR’s program to end the Great Depression?
With the country sinking deeper into Depression, the American public looked for active assistance from the federal government and grew increasingly dissatisfied with the economic policies of President Herbert Hoover.

In his speech accepting the Democratic Party nomination in 1932, Franklin Delano Roosevelt pledged “a New Deal for the American people” if elected. Following his inauguration as President of the United States on March 4, 1933, FDR put his New Deal into action: an active, diverse, and innovative program of economic recovery. In the First Hundred Days of his new administration, FDR pushed through Congress a package of legislation designed to lift the nation out of the Depression. FDR declared a “banking holiday” to end the runs on the banks and created new federal programs administered by so-called “alphabet agencies” For example, the AAA (Agricultural Adjustment Administration) stabilized farm prices and thus saved farms. The CCC (Civilian Conservation Corps) provided jobs to unemployed youths while improving the environment. The TVA (Tennessee Valley Authority) provided jobs and brought electricity to rural areas for the first time. The FERA (Federal Emergency Relief Administration) and the WPA (Works Progress Administration) provided jobs to thousands of unemployed Americans in construction and arts projects across the country. The NRA (National Recovery Administration) sought to stabilize consumer goods prices through a series of codes. Through employment and price stabilization and by making the government an active partner with the American people, the New Deal jump-started the economy towards recovery.

The extent to which the spending for relief and public works provided a sufficient stimulus to revive the U.S. economy, or whether it harmed the economy, is also debated. If one defines economic health entirely by the gross domestic product, the U.S. had gotten back on track by 1934, and made a full recovery by 1936, but as Roosevelt said, one third of the nation was ill fed, ill-housed and ill-clothed. See Chart 3. GNP was 34% higher in 1936 than 1932, and 58% higher in 1940 on the eve of war. The economy grew 58% from 1932 to 1940 in 8 years of peacetime, and then grew another 56% from 1940 to 1945 in 5 years of wartime. The unemployment rate fell from 25.2% in 1932 to 13.9% in 1940 when the draft started. During the war the economy operated under so many different conditions that comparison is impossible with peacetime, such as massive spending, price controls, bond campaigns, controls over raw materials, prohibitions on new housing and new automobiles, rationing, guaranteed cost-plus profits, subsidized wages, and the draft of 12 million soldiers.

GDP annual pattern and long-term trend, 1920–40, in billions of constant dollars

In 1995 economist Robert Whaples stated that measuring the effect of the New Deal remains a thorny issue for economists because it is so difficult to measure the effects it had on the country. A survey of academic specialists by Whaples showed that in regards to the statement “The New Deal lengthened and deepened the Great Depression”, 27% generally agreed, 22% agreed but with provisos, and 51% disagreed. Among professional historians, 6% agreed, 21% agreed with provisos, and 74% disagreed. However, economist Eric Rauchway of the University of California stated “very few people disapprove of most of the New Deal reforms”, which include Social Security, the Securities and Exchange Commission, the Federal Deposit Insurance Corp., and Fannie Mae. Regardless, unemployment peaked in 1932 at 25% and was reduced to 13.9% by 1940.

As Broadus Mitchell summarized, “Most indexes worsened until the summer of 1932, which may be called the low point of the depression economically and psychologically”.  Economic indicators show the American economy declined until February 1933. After Roosevelt took office, there began a steady, sharp upward recovery that persisted until the brief Recession of 1937–1938 (see graph) after which they continued their upward climb. Thus the Federal Reserve Index of Industrial Production bottomed at 52.8 on July 1, 1932, and was practically unchanged at 54.3 on March 1, 1933; however by July 1, 1933, it had climbed to 85.5 (with 1935–39 = 100, and for comparison 2005 = 1,342).

New Deal impact

A 2017 review of the published scholarship summarized the findings of researchers as follows:

The studies find that public works and relief spending had state income multipliers of around one, increased consumption activity, attracted internal migration, reduced crime rates, and lowered several types of mortality. The farm programs typically aided large farm owners but eliminated opportunities for share croppers, tenants, and farm workers. The Home Owners’ Loan Corporation‘s purchases and refinancing of troubled mortgages staved off drops in housing prices and home ownership rates at relatively low ex post cost to taxpayers. The Reconstruction Finance Corporation‘s loans to banks and railroads appear to have had little positive impact, although the banks were aided when the RFC took ownership stakes.

What did the letters in all those “alphabet agencies” stand for?

The New deal “alphabet agencies”:

AAA , Agricultural Adjustment Administration, 1933

BCLB , Bituminous Coal Labor Board, 1935

CAA , Civil Aeronautics Authority, 1938

CCC , Civilian Conservation Corps, 1933

CCC , Commodity Credit Corporation, 1933

CWA , Civil Works Administration, 1933

FCA , Farm Credit Administration, 1933

FCC , Federal Communications Commission, 1934

FCIC , Federal Crop Insurance Corporation, 1938

FDIC , Federal Deposit Insurance Corporation, 1933

FERA , Federal Emergency Relief Agency, 1933

FFMC , Federal Farm Mortgage Corporation, 1934

FHA , Federal Housing Administration, 1934

FLA, Federal Loan Agency, 1939

FSA , Farm Security Administration, 1937

FSA , Federal Security Agency, 1939

FWA , Federal Works Agency, 1939

HOLC , Home Owners Loan Corporation, 1933

MLB , Maritime Labor Board, 1938

NBCC , National Bituminous Coal Commission, 1935

NLB , National Labor Board, 1933

NLRB , National Labor Relations Board, 1935

NRAB , National Railroad Adjustment Board, 1934

NRA , National Recovery Administration, 1933

NRB , National Resources Board, 1934

NRC , National Resources Committee, 1935

NRPB , National Resources Planning Board, 1939

NYA , National Youth Administration, 1935

PWA , Public Works Administration, 1933

RA , Resettlement Administration, 1935

REA , Rural Electrification Administration, 1935

RFC , Reconstruction Finance Corporation, 1932

RRB , Railroad Retirement Board, 1935

SCS , Soil Conservation Service, 1935

SEC , Securities and Exchange Commission, 1934

SSB , Social Security Board, 1935

TNEC, Temporary National Economic Committee, 1938

TVA, Tennessee Valley Authority, 1933

USEP, United States Employment Service, 1933

USHA, United States Housing Authority, 1937

USMC, United States Maritime Commission, 1936

WPA, Works Progress Administration, 1935

WPA, Name changed to Works Projects Administration, 1939

Wartime output and controls: 1940–1945

Unemployment dropped to 2%, relief programs largely ended, and the industrial economy grew rapidly to new heights as millions of people moved to new jobs in war centers, and 16 million men and 300,000 women were drafted or volunteered for military service.

All economic sectors grew during the war. Farm output went from an index (by volume) of 106 in 1939 to 128 in 1943. Coal output went from 446 million tons in 1939 to 651 in 1943; oil from 1.3 billion barrels to 1.5 billion. Manufacturing output doubled, from a volume index of 109 in 1939 to 239 in 1943. Railroads strained to move it all to market, going from an output of 13.6 billion loaded car miles in 1939 to 23.3 in 1943.

The War Production Board coordinated the nation’s productive capabilities so that military priorities would be met. Converted consumer-products plants filled many military orders. Automakers built tanks and aircraft, for example, making the United States the “arsenal of democracy”. In an effort to prevent rising national income and scarce consumer products from causing inflation, the newly created Office of Price Administration rationed and set prices for consumer items ranging from sugar to meat, clothing and gasoline, and otherwise tried to restrain price increases. It also set rent in war centers.

Six million women took jobs in manufacturing and production; most were newly created temporary jobs in munitions. Some were replacing men away in the military. These working women were symbolized by the fictional character of Rosie the Riveter. After the war many women returned to household work as men returned from military service. The nation turned to the suburbs, as a pent-up demand for new housing was finally unleashed.

Household gas, water, electricity, sanitation, heating, refrigeration

By 1940 nearly 100% of urban homes had electricity, 80% had indoor flush toilets, 73% had gas heating or cooking, 58% central heating, 56% had mechanical refrigerators.

Did the New Deal or did WWII end the Great Depression? 

Roosevelt’s New Deal recovery programs were based on various, not always consistent, theories on the causes of the Depression. They targeted certain sectors of the economy: agriculture, relief, manufacturing, financial reforms, etc. Many of these programs contributed to recovery, but since there was no sustained macroeconomic theory (John Maynard Keynes’s General Theory was not even published until 1936), total recovery did not result during the 1930s.

Following the 1937 recession, Roosevelt adopted Keynes’ notion of expanded deficit spending to stimulate aggregate demand. In 1938 the Treasury Department designed programs for public housing, slum clearance, railroad construction, and other massive public works. But these were pushed off the board by the massive public spending stimulated by World War II. Even after 1938 private investment spending (housing, non-residential construction, plant and equipment) still lagged. It was war-related export demands and expanded government spending that led the economy back to full employment capacity production by 1941.

World War II ended the Great Depression by stimulating the economy through massive government spending on war production and military conscription, which created a huge demand for labor and brought the U.S. economy to full employment by 1941. This resulted in millions of people finding jobs in defense-related industries and the armed forces, effectively ending the high unemployment rates of the depression. 

Government Spending and Production

  • Massive Deficit Spending:.The U.S. government engaged in significant deficit spending to finance the war effort. 
  • War Production:.Factories converted their assembly lines to produce war materials, from vehicle parts to ammunition and aircraft, creating vast demand for workers and resources. 
  • Economic Stimulus:.This increased government spending and industrial output acted as a major stimulus, moving the economy out of the Depression. 

Increased Labor Demand 

  • Military Conscription: Millions of young men were drafted into the military. 
  • War-Related Jobs: The demand for labor in defense manufacturing and other war-related sectors soared, absorbing the unemployed. 
  • Full Employment: This influx of demand in both the military and civilian workforce led to full employment, a condition not seen since the start of the Great Depression. 

Shift in the Economy

By the start of World War II, the economic conditions were so transformed that the war is widely credited by economists and the public as the event that finally ended the Great Depression and restored prosperity. 

So, what finally ended the Great Depression? That question may be the most important in economic history. If we can answer it, we can better grasp what perpetuates economic stagnation and what cures it.

On the surface, World War II seems to mark the end of the Great Depression. During the war, more than 12 million Americans were sent into the military, and a similar number toiled in defense-related jobs. Those war jobs seemingly took care of the 17 million unemployed in 1939. Most historians have therefore cited the massive spending during wartime as the event that ended the Great Depression.

Some economists—especially Robert Higgs—have wisely challenged that conclusion. Let’s be blunt. If the recipe for economic recovery is putting tens of millions of people in defense plants or military marches, then having them make or drop bombs on our enemies overseas, the value of world peace is called into question. In truth, building tanks and feeding soldiers—necessary as it was to winning the war—became a crushing financial burden. We merely traded debt for unemployment. The expense of funding World War II hiked the national debt from $49 billion in 1941 to almost $260 billion in 1945. In other words, the war had only postponed the issue of recovery.

Even President Roosevelt and his New Dealers sensed that war spending was not the ultimate solution; they feared that the Great Depression—with more unemployment than ever—would resume after Hitler and Hirohito surrendered. Yet FDR’s team was blindly wedded to the federal spending that (as I argue in New Deal or Raw Deal?) had perpetuated the causes of the Great Depression during the 1930s.

FDR had halted many of his New Deal programs during the war—and he allowed Congress to kill the WPA, the CCC, the NYA, and others—because winning the war came first. In 1944, however, as it became apparent that the Allies would prevail, he and his New Dealers prepared the country for his New Deal revival by promising a second bill of rights. Included in the President’s package of new entitlements was the right to “adequate medical care,” a “decent home,” and a “useful and remunerative job.” These rights (unlike free speech and freedom of religion) imposed obligations on other Americans to pay taxes for eyeglasses, “decent” houses, and “useful” jobs, but FDR believed his second bill of rights was an advance in thinking from what the Founders had conceived.

Roosevelt’s death in the last year of the war prevented him from unveiling his New Deal revival. But President Harry Truman was on board for most of the new reforms. In the months after the end of the war, Truman gave major speeches showcasing a full employment bill—with jobs and spending to be triggered if people failed to find work in the private sector. He also endorsed a national health care program and a federal housing program.

But 1946 was very different from 1933. In 1933, large Democratic majorities in Congress and public support gave FDR his New Deal, but stagnation and unemployment persisted. By contrast, Truman had only a small Democratic majority—and no majority at all if you subtract the more conservative southern Democrats. Plus, the failure of FDR’s New Deal left fewer Americans cheering for an encore.

In short, the Republicans and southern Democrats refused to give Truman his New Deal revival. Sometimes they emasculated his bills; other times they just killed them.

Senator Robert Taft of Ohio, one of the leaders of the Republican-southern Democrat coalition, explained why he voted against much of the program:

The problem now is to get production and employment. If we can get production, prices will come down by themselves to the lowest point justified by increased costs. If we hold prices at a point where no one can make a profit, there will be no expansion of existing industry and no new industry in that field.

Robert Wason, president of the National Association of Manufacturers, simply said, “The problem of our domestic economy is the recovery of our freedom.”

Alfred Sloan, the chairman of General Motors, framed the question this way: “Is American business in the future as in the past to be conducted as a competitive system?” He answered: “General Motors … will not participate voluntarily in what stands out crystal clear at the end of the road—a regimented economy.”

Taft, Wason, and Sloan reflected the views of most congressmen, who proceeded to squelch the New Deal revival. Instead, they cut tax rates to encourage entrepreneurs to create jobs for the returning veterans.

After many years of confiscatory taxes, businessmen desperately needed incentives to expand. By 1945, the top marginal income tax rate was 94 percent on all income over $200,000. We also had a high excess-profits tax that had absorbed more than one-third of all corporate profits since 1943—and another corporate tax that reached as high as 40 percent on other profits.

In 1945 and 1946, Congress repealed the excess-profits tax, cut the corporate tax to a maximum 38 percent, and cut the top income tax rate to 86 percent. In 1948 Congress sliced the top marginal rate further, to 82 percent.

Those rates were still high, but they were the first cuts since the 1920s and sent the message that businesses could keep much of what they earned. The year 1946 was not without ups and downs in employment, occasional strikes, and rising prices. But the “regime certainty” of the 1920s had largely returned, and entrepreneurs believed they could invest again and be allowed to make money.

As Sears, Roebuck and Company Chairman Robert E. Wood observed, after the war “we were warned by private sources that a serious recession was impending. . . . I have never believed that any depression was in store for us.”

With freer markets, balanced budgets, and lower taxes, Wood was right. Unemployment was only 3.9 percent in 1946, and it remained at roughly that level during most of the next decade. The Great Depression was over.