1 Boring Old Man

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The Great Depression and the New Deal

The Great Depression stands as an event unique in American history due to both its length and severity. With the unprecedented economic collapse, the nation faced "an emergency more serious than war." The Depression was a time of tremendous suffering and at its worst, left a quarter of the workforce unemployed. During the twentieth century, the annual unemployment rate averaged double-digit levels in just eleven years. Ten of these occurred during the Great Depression.

A confused and hungry nation turned to the government for assistance. With the inauguration of Franklin Delano Roosevelt on March 4, 1933, the federal government’s response to the economic emergency was swift and massive. The explosion of legislation — which came to be collectively called the New Deal — was designed, at least in theory, to bring a halt to the human suffering and put the country on the road to recovery. The president promised relief, recovery and reform.

Although the Civil Works Administration (CWA), the Civilian Conservation Corps (CCC), and the National Recovery Administration (NRA) were all begun two years earlier, the Works Progress Administration (WPA) became the best known of the administration’s alphabet agencies. Indeed, for many the works program is synonymous with the entire New Deal. Roosevelt devoted more energy and more money to the WPA than to any other agency. The WPA would provide public employment for people who were out of work. The administration felt that the creation of make-work jobs for the jobless would restore the human spirit, but dignity came with a price tag – an appropriation of almost $5 billion was requested. From 1936 to 1939 expenditures totaled nearly $7 billion…

This gradual collapse of the financial system was paralleled by a rise in unemployment. F.D.R. was inaugurated in March 1933 when the Depression was a solid fact of life for most Americans. He began his "alphabet agencies" – government employment agencies [NRA, CCC, CWA, WPA] hiring all comers to get people back to work. The programs continued throughout the remainder of the 1930’s until World War II made unemployment disappear. Even with these massive government work programs, unemployment remained in the double digits. His supporters felt these Agencies saved the nation. His critics said that World War II saved the nation. Whichever you think, the nation was saved.

With the coming of F.D.R.’s New Deal, the Stock Market rebounded, remaining stable through the late thirties and World War II.

Reading about the causes of the Great Depression is very frustrating. It seems like there are as many theories as there are theorizing economists, each arguing for some specific factor that was the essential piece of the puzzle. Banks, lending institutions, and the markets themselves  were essentially unregulated. And most theories start with the situation before the fall in 1929, the huge market upswing in the last half of the 1920’s prior to Black Tuesday in 1929.

Everyone agrees that it was a bubble. A bubble is a situation where the price of something begins to rise faster than its actual value. In my limited understanding of such things, that means that the trading of the commodity has developed a life of its own – become disconnected from the thing being traded. The problem with such a situation is that once that happens, people jump on it and the increased activity and success drives the price up  further. So it becomes a vicious cycle – as the price rises even faster, the actual overvaluation increases. Wealth inequities parallel the upside of the bubble. A bubble has to burst at some point, that’s just their nature. Then the price plummets, even falling below the actual value in many cases. Bubbles are the subject of Shiller’s recent book – Irrational Exuberance. In the 1920’s, the whole Stock Market and its rapid rise was a bubble, bursting in October 1929.

The economy has to do with a lot more things than just money. It has to do with the investor’s confidence in the economy. What apparently happened in the 1920’s is that the Market was soaring. Everyone wanted in the game. People borrowed money to put in the Market. Banks were glad to lend it to them. Having lots of loans out increased their interest income. They even got into investing themselves. So, the Bank’s holdings [including people’s savings] were in the Market or loaned out. On the upside of the bubble, investors took inordinant risks, ignored real value and consumers had plenty of money and spent it. Once the market failed, the vicious cycle reversed. Finding that value had been an illusion, everyone tried to retrieve their value and found it wasn’t there. No one wanted to take a risk. "Easy money" disappeared and parts of the economy dependent on borrowing failed. Investing dropped, spending dropped, "devaluation" and "deflation" followed, and the Market fell below where it had started and stayed there. People stopped buying, companies stopped making goods or disappeared, unemployment soared, no one took risks, etc. etc.

The "ups and downs" of the Stock Market were as much a part of American life in the 1920’s as they are today, as were their everyday names – Bull Market and Bear Market. It’s called the business cycle this fluctuation in the Market that speculators so enjoy playing with. And more or less, the Market is self-correcting. If prices outrun value too much, the Market dips, and vica versa. There are bigger corrections, called Recession, that likewise hold the Market in a safe range in the price/value equation. So, what the theorists argue about when they talk about the Great Depression is which of the prevailing conditions in the 1920’s allowed the business cycle to turn into something malignant that literally destroyed the Market and had a roll down effect on the entire economy. I wouldn’t presume to try to answer that question, though my guess would be "all of the above."

I started with a few words about F.D.R.’s alphabet agencies because they were part of the solution in the late 1930’s. To me, the question of whether F.D.R.’s interventions or World War II ended the Depression are immaterial, because the Depression was in Germany too. Hitler’s rise cannot be understood outside of that context. Like F.D.R., Hitler was a solution to the dour economy – a solution that worked for a while. So, back to the W.P.A., F.D.R. used the concept of a governmental intervention to put people back to work to combat the Depression. The War also put people back to work and combated the Depression. Hitler did the same thing.