Great Depression Economics

Economy

Causes of the Great Depression
The Business Cycle
Annual Earnings from 1932-1934
Classical vs Keynesian Economics
The Bank Holiday and Emergency Banking Act of 1933
Economic Differences
The Labor Force, 1929-1941
Welfare
The Bonus Army

Causes of the Great Depression

No one knows for sure what it was that caused the Great Depression, although there are a variety of theories and events that may have played a part. There are really two parts to the problem, those being (1) why economic activity turned down, and (2) why having begun to go down it continued to go down, and remain low for a decade.
The Federal Reserve indexes of industrial activity and factory production reached a peak in June, 1929. It wasn't until October that other indicators such as factory payroll, freight-car loadings, and department store sales, were reported as being down. The economy then, had weakened in the early summer (well before the crash). There are a variety of explanations for this weakening. (1) More products were being produced than were being consumed (supply outweighted demand). (2) businesses misjudged the increase in demand, and acquired more inventories than they needed. This resulted in less buying and a cutback in production (an inventory recession) (3) more deap-seated factors: production and productivity rose steadily per worker between 1919 and 1929 (output/worker in manufacturing rising by about 43%). Wages, salaries, and prices however all remained comparably stable (no comparable increase). Since the cost of production fell, with prices staying the same, profits increased. The profits kept the well-to-do spending, investing in the stock market (encouraging boom), and encouraged a high level of capital investment. The increasing investment in capital goods was a principal device by which profits were spent. Anything that would keep the investments from showing the necessary rate of increase could cause trouble by decreasing consumer spending. So if investment failed to keep up with the steady increase in profits, it would result in a decrease in total demand (by falling orders and output) (4) It could have had to do with the high interest rates, which finally caused people to stop buying (5) Or trouble was transmitted to the economy because of a weak sector such as agriculture (Galbraith 174-176).
There were a lot of things wrong, but here are some primary weaknesses had a major effect on the ensuing disaster:
(1) Bad distribution of income. The rich were rich, and although they only composed 5 % of the population, they had 1/3 of all personal income. The proportion of personal income in the form of interest, dividends, and rent of the well-to-do was twice as great as the years following WWII. This meant that the economy was dependent on those with the money to invest or spend a lot on luxury items, both of which are open to fluctuations (much more so than the bread and rent outlays a workman who makes $25 a week would have) (2) a severely depressed farm economy (3) barriers to international trade in the form of high tariffs (4) over production of consumer goods (5) The insufficient purchasing power of working men and women (5) the slipshod practices of banks and credit institutions (Twentieth Century... 21). There were a large number of independent banks, so when a bank failed, it led to another bank failure- the domino effect. (6) Bad corporate structure. Enterprise in the twenties had not been conservative; it had an exceptional number of grafters, promoters, swindlers, impostors, and frauds (Galbraith 177-183).

For More information see The Crash and the Great Depression

The Business Cycle:
As any economist can tell you, looking at the market as a whole, there is a business cycle involved. There are four phases to this cycle. There is the peak, which is the top, then the downturn, then the trough (the bottom), and the upturn, when total output begins to expand. The nineteen twenties were in the upturn portion of the cycle due to a boom in stock market prices, because of general optimism. Economists and businessmen alike believed the fledgling Federal Reserve would stabilize the economy, and that rapid technological advances would lead way to a better quality of life and expanding markets. The business cycle then hit its peak. The Federal Reserve had raised the interest rates two times, once in 1928, and then again in 1929 to try to slow down the economy, bringing on the initial recession (DeLong 1). The only place to go was down, and the economy stayed down for more than 2 consecutive quarters (called a recession). It continued to stay down and became known as a depression. Looking at the graph below, 1932 was the worst year of the depression, and could be considered the trough, the bottom of the depression. Production and expansion then began to rise, in part because of New Deal programs (Colander 489). By 1934, conditions had improved to the point where, although 11,000,000 people were still out of work, unemployment had decreased by about 1,700,000, while the number of men and woman with jobs rose by close to 2,300,000. The index of industrial production rose about six points, commodity prices were up, as were stock market prices (Boardman 83).

Annual Earnings from 1932-1934 (Hard Times 26).

Airline pilot: $8,000.00
Airline stewardess: $1,500.00
Apartment house superintendent: $1,500.00
Bituminous coal miner: $723.00
Bus driver: $1,373.00
Chauffeur: $624.00
Civil service employee: $1,284.00
College teacher: $3,111.00
Construction worker: $907.00
Dentist: $2,391.00
Department-store model: $936.00
Doctor: $3,382.00
Dressmaker: $780.00
Electrical worker: $1,559.00
Engineer: $2,520.00
Fire chief (city of 30,000-50,000): $2,075.00
Hired farm hand: $216.00
Housemother--boys school: $780.00
Lawyer: $4,218.00
Live-in maid: $260.00
Mayor (city of 30,000-50,000): $2,317.00
Pharmaceutical salesman: $1,500.00
Police chief (city of 30,000-50,000): $2,636.00
Priest: $831.00
Public-school teacher: $1,227.00
Publicity agent: $1,800.00
Railroad conductor: $2,729.00
Railroad executive: $5,064.00
Registered nurse: $936.00
Secretary: $1,040.00
Statistician: $1,820.00
Steelworker: $422.87
Stenographer-bookkeeper: $936.00
Textile worker: $435.00
Typist: $624.00
United States Congressman: $8,663.00
Waitress: $520.00

Classical vs. Keynesian Economics:
Before the 1930s, economists had seen the market from a classical viewpoint and only microeconomics were in existence. This began to change in the thirties, with the help of John Maynard Keynes. When the US economy fell into the Great Depression, businesses collapsed and unemployment rose to the point where twenty-five percent of the workforce was out of work. Previously, economics had concentrated on microeconomics (the study of partial-equilibrium supply and demand). This did not take into account the aggregate however, and so macroeconomics emerged (Macroeconomics is the study of the aggregate moods in the economy, concentrating on problems of growth, business cycles, unemployment, and inflation). There were two groups of macroeconomists: Classicals and Keynesians (pronounced KAIN-sian) both of which still exist today, although their differences have become less distinct. Classicals were "macroeconomists who generally favored laissez-faire or non activist policies" (Colander G-2). Keynesians believed that the government should play an active role in the market (Colander 483-559).
Classicals argued that fluctuations in the market were to be expected, that it would be strange if there were not fluctuations when the market allowed individuals the freedom to do what they wanted to do. Therefore, they should be accepted, just as people accept the changes in seasons. If the government stepped in to take control of the situation, people would anticipate the government's reaction, and thereby undermine its attempt to control cycles. In reference to unemployment, classicals believed that anyone who wanted to find work could find work, at some wage, even if it was lower than a previous wage. If a person was not working, it was his choice (making all unemployment frictional - "unemployment caused by new entrants intoo the job market and people quitting a job just long enough to look for and find another one" (Colander 493). Economic growth was based on saving. If the economy wanted to grow, people should save more, the more saving the better. Therefore, classicals objected to government deficits (when gov't spends more than gets through taxes). Classicals focused on the long run. While there might have been problems in the short-run, in the long run the economy would return to its potential output and natural rate of unemployment. When the Depression hit, most Classical economists ignored the issue of unemployment. When they were asked how the invisible hand could have allowed the depression. They replied that the government policies and labor unions kept prices and wages from falling, not allowing the invisible hand to coordinate economic activity (Colander 483- 559).
Keynesians on the other hand, felt that fluctuations were symptoms of underlying problems in the economy, and that the government should step in and deal with them. They felt the same way about unemployment- Society owes people jobs that equal their training or job experience. Furthermore, jobs should be close enough to home that people don't have to move. This would mean most employment was structural "unemployment caused by economic restructuring making some skills obsolete" and cyclical "unemployment resulting from fluctuations in economic activity" (Colander 492). If people weren't working and they wanted to, Keynesians wanted a short run policy to address this. During the depression, people became dissatisfied with Classical economists "have faith" solution and wanted help at that moment. As Keynes said, '"In the long run, we're all dead"' (Colander 558). Keynes concentrated on the the causes of the Depression, and on solutions to it. He believed that wages and the price level adjusted to changes in expenditures, and it could get stuck in a rut. If people stopped buying, then production would decrease, causing people to lose their jobs. Those people would then have less money and would save more and buy less, going around in a circle, until the economy was stuck at a low level of income. Through this thought process, Keynes created the theoretical foundation that unemployment was caused by too little spending (Colander 483-559).

The Bank Holiday and Emergency Banking Act of 1933
On Monday, March 6, 1933 the president along with his economic advisors decided to close every bank in the country. By the third month of 1933, over 4,000 banks had gone under. Governors from 47 states had already declared bank holidays in order to stop the frantic withdrawals. Roosevelt's announcement however, put a halt to all banking transactions anywhere not specifically authorized by the secretary of the treasury and the president. It also outlawed the export of gold, in an effort to keep reserves from being further depleted. The bank holiday was a short term solution which could remain effective only until Congress acted. Both houses approved Roosevelt's administration-drafted Emergency Bank Act on Thursday, March 9 (Watkins 150-151). The Emergency Bank Act
    not only authorized the president to do what he already had done--close the banks and embargo gold--but stipulated that
    no bank could be reopened until approved by the secretary of the treasury, permitted the comptroller of the currency to
    install conservators over insolvent banks and gave such conservators the power to reorganize them, authorized the purchase
    of bank stocks and notes by the Reconstruction Finance Corporation to provide qualified banks with long-term investment
    funds, gave the president greater control over credit, currency, foreign exchange, and the setting of the price for gold and
    silver, and allowed the Department of the Treasury to call in all privately held gold and gold certificates to be exchanged for
    paper currency (Watkins 151).

Economic Differences:
In 1933, at the London Economic Conference in June, the United States announced that it would be coming off the international gold standard as a way to measure the worth of American currency. The Gold standard meant that currency would be measured in terms of a fixed amount of gold. Instead, the American dollar would measure its worth in relation to other countries currencies depending on the demand for it in world markets, as Great Britain had been doing since 1931. By announcing this decision, Roosevelt was actually encouraging a currency war. Though Roosevelt continued to support the purpose of the economics conferences, his administration was divided. Cordell Hull, the secretary of state, was a stout internationalist. He believed that by lowering trade barriers in the form of protective tariffs, the world's economy problems would be saved. One of Roosevelts closest friends however, assistant secretary of state Raymond Moley, was less convinced with the international approach. He believed that national solutions should solve national problems. On July 3rd, Roosevelt gave the "Indianapolis Statement", which sunk the ideas of Hull and the conference. "From the deck of the cruiser Indianapolis the president announced his own opposition to the very idea of stabilized currencies and pressing upon Europeans that need for balanced budgets and domestic financial reforms" (Depression America 48). By taking itself out of the international gold standard, Roosevelt felt that America's exports would be given a boost. The lowered value of the dollar would lower the cost of exports to foreign buyers. Roosevelt also felt that that a currency-stabilization scheme might ruin his New Deal efforts to raise prices, particularly farm prices. Therefore, Roosevelt and Moley went with the nationalist approach, forming the Johnson Act of 1934 (chief creator Senator Hiram Johnson of CA). This act barred foreign governments who had not paid back war debts from floating loans on the American financial markets (Depression America 47-48).

The Labor Force, 1929-1941
(Gregory 84)

Year	Total Labor Force #	Total Labor Force Noninstitutional Population *	Armed Forces	Civilian Labor Force	Employed Total	Employed Farm	Employed Nonfarm
1929	48,017	55.1	260	47.757	46,207	10,541	35,666
1930	48,783	55.0	260	48,523	44,183	10,340	33,843
1931	49,585	55.2	260	49,325	41,305	10,240	31,065
1932	50,348	55.4	250	50,098	38,038	10,120	27,918
1933	51,132	55.6	250	50,882	38,052	10,090	27,962
1934	51,910	55.7	260	51,650	40,310	9,990	30,320
1935	52,553	55.6	270	52,283	41,673	10,110	31,563
1936	53,319	55.7	300	53,019	43,989	10,090	33,899
1937	54,088	55.9	320	53,768	46,068	10,000	36,068
1938	54,872	56.0	340	54,532	44,142	9,840	34,302
1939	55,588	56.0	370	55,218	45,728	9,710	36,028
1940	56,180	56.0	540	55,640	47,520	9,540	37,980
1941	57,530	56.7	1,620	55,910	50,350	9,100	41,250

* means entire population excluding people under 14, students, wives and mothers at home--who were not counted as part of the work force, and those who were institutionalized.
(Source: Wattenberg, Statistical History, 126)

Welfare

    Before the Roosevelt administration, most relief services were provided by voluntary charities. The Hoover administration especially had declared that it was not the place of the government to provide such services to its people. To combat unemployment, President Herbert Hoover established the President's Emergency Committee on Employment (PECE) in 1930. It was later renamed the President's Organization on Unemployment Relief (POUR). Its sole purpose was to urge business to rehire workers and to create a sense of moral support and direction world-wide. But by 1931, voluntary agencies across the nation "tottered under the weight of rising case loads" (Gerdes 127).
     Thus, in 1933, when the Roosevelt administration established the Federal Emergency Relief Administration (FERA), people were shocked. It was considered "a landmark in American social welfare history" (Gerdes 125-6). It was the belief of Roosevelt and his advisors that the economic crisis had created such high levels of joblessness and poverty that it had become impossible for the government to ignore. These crises, it was believed, could undermine the fabric of American culture. Federal action, therefore, was needed to preserve the "American way of life" (Gerdes 126).   Furthermore, the administration believed, it was necessary to establish a series of work relief programs would need to be enacted. This assertion led to the establishment of the New Deal works projects.
    Additionally, in 1933, Americans were able to insure themselves against hospital care cost for the first time through a nonprofit system called the Blue Cross. Before long, millions of people were covered by this insurance (Boardman 82).

The Bonus Army
At the peak of the depression, 1932, thousands of WWI veterans paid a call to Washington, ordering Congress to pay them a wartime “bonus” which was scheduled to be paid in 1945 immediately. This movement was led by Walter Waters, a former

medic for the 146th Field Artillery. The group rose to over twenty-five thousand within two months, and Hoovervilles began to spring up all around Washington and in abandoned buildings. Representative Edward Eslick spoke before colleagues to support the veterans. During a debate over a bill which would allot some of the bonus money to the veterans, Eslick died of a heart attack. The next day, the bill was passed by the House, 21 to 176 with 40 abstaining. It then went on to the Senate, where it was defeated 62 to 18, with the help of Hoover. (Hoover was against increasing the national debt and a heard protester of the bill.) Crushed, many families left for home. Hoover even encouraged a 100,000 dollar transportation loan bill which would help marchers to return to their homes. Some families decided to stay however, hoping the situation would improve. Fearing health problems, Hoover ordered U.S. troops to “escort” anyone who remained out of the city. Army chief of staff Douglas MacArthur went a little further, by burning the shantytowns and routing any remaining campers with water hoses, bayonets, and tear gas (Nishi 14-17).

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