Great Depression in the United States

The Great Depression in the United States of America was longer and deeper than any downturn in economic activity that has happened before or since. It had a profoundly damaging effect upon welfare and morale of the people of the United States, depriving many of jobs, homes and savings, creating widespread poverty, and destroying a previous mood of optimism. It started eleven years after the end of the First World War and was not over until the outset of the Second World War.

Its effect upon many Americans was reflected in a popular song of the time that include the lines:

They used to tell me I was building a dream...

... once I built a railroad; now it's done ...

... brother, can you spare a dime?

"Brother, Can You Spare a Dime," lyrics by Yip Harburg, music by Jay Gorney (1931)

Efforts continue to understand that disaster by examining the events and beliefs that led up to it. and the policy decisions that contributed to its severity. A definitive explanation is not yet available.

Links and subpages

For an annotated chronology of the main events, see the Timelines subpage;

for an article about events in the United States and elsewhere, see the article on the Great Depression;

for a summary of the relevant economic statistics, see the Tutorials subpage;

for definitions of terms shown in italics see the Glossary.

Background: the early- and mid-1920s

The condition of the United States in the 1920s differed markedly from its pre-war condition. The wartime destruction of much of Europe's productive capacity had made it the richest country in the world, and Europe's wartime borrowing had made the United States the largest creditor.

After the end of the war, the full convertability of the dollar into gold under the gold standard which had been suspended during the war, was immediately resumed. The shock of the ending of wartime production led to a minor recession that was followed by a resumption of strong output growth. A few years later there occurred severest bout of deflation ever experienced in the United States when wholesale prices fell by 56% in a little over a year, following an attempt to end wartime inflation by a tightening of the federal budget, and sharp reduction in the monetary base. .

In 1921 Warren Harding became President and pushed through a programme of tax reductions, farming subsidies, tariffs and immigration restrictions.

In 1923 a committee appointed by Herbert Hoover (then Commerce Secretary) published a 300-page report on the subject of recessions and the associated unemployment . The committee had regarded it as inevitable that every boom would be followed by a slump, and had considered how a future boom could be restrained and how the following downturn could be countered. Among their recommendations were the postponment of commercial and public investment projects and the control of credit expansion by the banks. Although he endorsed those recommendations at the time, he subsequently proposed severe limits upon the government's ability to act upon them. He has been quoted as saying - at the depth of the depression - that there should be "...no tampering or inflation of the currency"; that the budget should be "unquestionably balanced, even if further taxation is necessary"; and that "the Government credit [should] be maintained by refusal to exhaust it in the issue of securities" - which John Kenneth Galbraith took to amount to the rejection of both fiscal policy and monetary policy actions in face of a depression

Monetary policy in the 1920s was dominated by Benjamin Strong, a participant in the creation of the Federal Reserve System and first governor of the Federal Reserve Bank of New York. Strong maintained a close relationship with Montague Norman of the Bank of England, and in 1924 he maintained low interest rates in the United States, which by making the dollar lesss attractive, and sterling more attractive to investors, drove up the foreign exchange value of the British currency and facilitated Britain's return to the gold standard and in 1927 he forced through the Federal Reserve System a decrease in the discount rate from 4 to 3 percent which is quoted to have called "un petit coup de whisky for the stock exchange". This appeared to have been influenced by the previous Long Island meeting of central bankers of Great Britain, the United States, France, and Germany to discuss means of strengthening Britain's gold reserves and of the general European currency situation .

Boom

Following the election of Calvin Coolidge to the Presidency, the mid-1920s came to be known as the "Coolidge Prosperity". Having declared that "the chief business of the American people is business" the President persuaded Congress to give private business substantial encouragement, including construction loans, profitable mail-carrying contracts and other indirect subsidies . America experienced rapid increases in mass production and mass consumption, turning it into the richest society in the world. It saw the birth of what came to be known as the "American Dream" - a "dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement" and became a modern middle-class economy of radios, consumer appliances, automobiles and suburbs with about one American in five owning a motor vehicle. It also became a land of great inequality, with the richest one percent of U.S. households holding an estimated 45 percent of national wealth, . Hire-purchase became increasingly popular , and an increase in the use of stockbrokers' margin accounts for the purchase of stocks. Holidays in the Florida sun were growing in popularity, plots were being assigned to anyone able to pay a 10 per cent deposit and land prices were driven up initially by a growth in demand by prospective builders, but later by speculators; creating a "bubble" that finally burst, with a collapse of land prices, in 1926.

Slump

The boom in economic activity continued in the following years and is believed to have intensified after the 1927 monetary relaxation and it was then accompanied by rapid rises in prices on the New York Stock Exchange. Influenced, perhaps, by the Florida land price, bubble it was widely supposed that this, too was a speculative bubble that would inevitable burst with damaging consequences. The 1923 report had recommended the use of monetary policy to counter such speculation and in 1928 some members of the Federal Reserve Board became convinced that a tightening of monetary policy had become necessary and by July of 1928 the the discount rate had been raised in New York to 5 per cent, the highest since 1921 and the System's holdings of government securities had been reduced from a level of over $600 million at the end of 1927 to $210 million by August 1928 . Benjamin Strong expressed reservations about that policy, but he died in October and the policy was supported by his successor, George Harrison, and the discount rate was raised a further point to 6 per cent in the following year. Disaster followed. During September and October of 1929 production fell at an annual rate of 20 per cent, wholesale prices at a rate of 7.5 percent and personal income at a rate of 5 per cent, and after the October stock market crash, the economy declied even faster. The Federal Reserve Board's desire to slow outflows of gold to France then led to a further tightening of monetary policy .

In September 1931 there was another tightening of monetary policy, following the UK's sterling crisis. A wave of speculative attacks on the pound had forced Britain to leave the gold standard and, anticipating that the United States might the next to do so, speculators turned their attention from the pound to the dollar. Central banks and private investors converted a substantial quantity of dollar assets to gold in September and October of 1931. The resulting outflow of gold reserves also put pressure on the U.S. banking system as foreigners liquidated dollar deposits and domestic depositors withdrew cash in anticipation of additional bank failures. According to Friedman and Schwarz: , "The Federal Reserve System reacted vigorously and promptly to the external drain. . . . On October 9, the Reserve Bank of New York raised its rediscount rate to 2-1/2 per cent, and on October 16, to 3-1/2 per cent--the sharpest rise within so brief a period in the whole history of the System, before or since (p. 317)."