Lessons from the Great Depression

Morgan during the following year. During the financial crisis developed with a sudden and terrifying force. In September, Freddie Mac and Fannie Mae, which together accounted for half of the outstanding mortgages in the US, were subject to a federal takeover because their financial condition had deteriorated so rapidly. At the same time Lehman Brothers, the fourth largest investment bank in the US, declared bankruptcy. It seemed as if financial meltdown was not only a possibility, it was a certainty unless drastic action was taken.

The crisis was not confined to the US. Meanwhile, the European Central Bank was forced to intervene to restore calm to distressed credit markets which were badly affected by losses from sub-prime hedge funds. On 14 September , the British public became aware that Northern Rock, which had moved into sub-prime lending after concluding a deal with Lehman Brothers, had approached the Bank of England for an emergency loan. Such was the pressure that Northern Rock was nationalized in February The run on Northern Rock was an extraordinary event for the UK. During the Great Depression no British financial institution failed, or looked like failing, but in there was immediate depositor panic.

It was clear that without some assurance on the security of deposits other institutions were at risk. A comparison of the catastrophic banking crisis in with that of —8 shows that the countries involved in accounted for This is the most widespread banking crisis since and it is also the first time since that date that major European countries and the United States have both been involved.

The financial tidal wave was totally unexpected and was of such severity that immediate policy action was required to prevent total meltdown. For a while it seemed that the world stood at the edge of an abyss, a short step away from an even greater economic disaster than had occurred three-quarters of a century earlier. In these circumstances, it has been natural to ask what the historical experience of the crisis of the s has to teach us. The big lesson that has been correctly identified is not to be passive in the face of large adverse financial shocks.

Indeed, aggressive monetary and fiscal policies were immediately implemented to halt the financial disintegration. Fortunately, countries were not constrained by the oppressive stranglehold of the gold standard. Both monetary and fiscal policies could be used to support economic expansion rather than to impose deflation or try to restore a balanced budget. Flexible exchange rates gave policy-makers the freedom to use devaluation as an aid to recovery.

The exception was in the Eurozone, where weak member states, for example, Greece, Ireland, and Portugal, were forced to deflate their economies Eichengreen and Temin, , this issue. Quantitative easing was used on a massive scale during through to early and, as a result, the money supply rose dramatically. In the UK, the Bank of England adopted the lowest interest rates since its foundation in , quantitative easing was used aggressively, and bank bail-outs were funded where necessary.

In both countries, monetary and fiscal policies were pursued on a scale that would have been unacceptable during the s but, crucially, these bold initiatives prevented financial meltdown. Fortunately, the crisis did not encourage the adoption of the beggar-thy-neighbour policies that helped to reduce the level of international trade so drastically during the s. This represents a dramatic contrast with the policy stances of 80 years ago. A dramatic financial collapse has been averted, economic recovery, though tenuous, is progressing, and unemployment has not reached the levels that some commentators feared when the downturn began.

The s has more to offer. In particular, we can look not only at the downturn but also the recovery phase. Here the issues that had to be addressed included re-regulation of the banking system, avoiding a double-dip recession, and dealing with the various legacies of the depression which included long-term unemployment and the need for a new, post-gold-standard, macroeconomic policy framework. This paper proceeds in the following way. Section II provides a narrative of events, section III delivers an analysis of the s depression, and section IV identifies important policy lessons from that experience.

During the s America became the vital engine for sustained recovery from the effects of the Great War and for the maintenance of international economic stability. Following a rapid recovery from the post-war slump of —1, Americans enjoyed until the end of the decade a great consumer boom, which was heavily dependent upon the automobile and the building sectors. High levels of investment, significant productivity advances, stable prices, full employment, tranquil labour relations, high wages, and high company profits combined to create the perfect conditions for a stock-market boom.

Many contemporaries believed that a new age of cooperative capitalism had dawned in sharp contrast to the weak economies of class-ridden Europe Barber, Britain and France sought punitive damages from Germany in the form of reparations. But the post-war network of inter-government indebtedness eventually involved 28 countries, with Germany the most heavily in debt and the US owed 40 per cent of total receipts Wolf, , this issue.

Between and the US was responsible for about 60 per cent of total international lending, about one-third of which was absorbed by Germany. American investors, attracted by relatively high interest rates, enabled Germany both to discharge reparations responsibilities and to fund considerable improvements in living standards. Austria, Hungary, Greece, Italy, and Poland, together with several Latin American countries, were also considered attractive opportunities by US investors. By paying for imports and by investing overseas the US was able to send abroad a stream of dollars, which enabled other countries not only to import more goods but also to service their international debts.

The fact that a high proportion of the borrowing was short term did not disturb the recipients Feinstein et al. It is easy to understand the appeal of the gold standard to contemporaries. The frightening inflations after and the severe deflation of —1 made policy-makers yearn for a system that would provide international economic and financial stability. To policy-makers the gold standard represented a state of normality for international monetary relations; support for it was a continuation of the mindset that had become firmly established in the late nineteenth century Eichengreen and Temin, There was a widespread belief that the rules of the gold standard had imposed order within a framework of economic expansion during the 40 years before and order was certainly required in the post-war world.

In particular, contemporaries believed that the discipline of the gold standard would curb excessive public spending by politicians who would fear the subsequent loss of bullion, an inevitable consequence of their profligacy. Unfortunately, the return to gold was accomplished in an uncoordinated fashion. Belgium and France adopted exchange rates that were not only significantly below their levels, but also provided a significant competitive advantage.

The reverse was true for the UK, which, in , returned to gold at the exchange rate after a deflationary squeeze had made this possible. The achievement of international competitiveness through deflation was the dominant force determining domestic economic policy during the s. Unfortunately, UK exports suffered from war-induced disruption.

Markets which had been readily exploited before offered much reduced opportunities after Unfortunately coal, cotton and woollen textiles, and shipbuilding faced severe international competition. Over-capacity led to high and persistent structural unemployment in the regions where these industries were dominant. During the s, UK unemployment was double the pre level and also higher than in all the other major economic powers.

On average, each year between and , almost 10 per cent of the UK insured workforce was unemployed. The jobless were concentrated in the export-oriented staple industries. In those parts of the economy not exposed to foreign competition, unemployment was closer to pre-war levels. A further problem for Britain, and many other countries too, was the uneven distribution of gold stocks.

The US was gold rich throughout the s, but, after the stabilization of the franc in , the Bank of France began to sell its foreign exchange in order to purchase bullion Clarke, As a result, other countries were forced to deflate in order to compensate for a shortage of reserves. Unfortunately, the gold standard imposed penalties on countries which lost gold while the few which gained did so with impunity.

Unfortunately, potential domestic investors suffered as the real cost of credit rose. Nevertheless, as the membership of the gold standard club grew in the s, policy-makers congratulated themselves that all major trading countries were bound together in a system that was dedicated to the maintenance of economic stability. With the benefit of hindsight, it is clear that the international economy was in a potentially precarious position in Continuing prosperity was dependent upon the capacity of the US economy to absorb imports and to maintain a high level of international lending.

If an economic crisis struck the US, how would the Federal Reserve deal with it? The Fed, created in , was a relatively untested central bank. Would it act aggressively as lender of last resort if the banking system became stressed? Would its decentralized division into 12 regional reserve banks with monetary policy formulated by a seven-member Board demonstrate weakness or strength in fighting a depression? In January the Federal Reserve ended several years of easy credit and embarked on a tight money policy.

The Fed began a sale of government securities and gradually raised the discount rate from 3. The Fed was fully aware that a sudden rise in interest rates could be destabilizing for business and might bring a period of economic prosperity to an unhappy conclusion. To avoid this possibility, the monetary authorities aimed gently to deflate the worrying bubble on Wall Street by making bank borrowing for speculation progressively more expensive.

Monetary policy-makers believed that by acting steadily rather than suddenly, speculation could be controlled without damaging legitimate business credit demands. It seemed a good idea at the time, but unfortunately this policy had serious unforeseen domestic and international repercussions. The new higher rates made more funds from non-bank sources available to the ever-rising stock market, and speculation actually increased.

Unfortunately, countries that had become dependent on US capital imports, for example, Germany, were suddenly deprived of an essential support for their fragile economies. Adversely affected by Fed policies, the US economic boom reached a peak in August and after a few months of continuously poor corporate results the confidence of investors waned and eventually turned into the panic which became the Wall Street Crash in October After the stock-market collapse the Fed embarked on vigorous open-market operations and reduced interest rates.

The Wall Street crash markedly diminished the wealth of stock holders and could well have adversely affected the optimism of consumers. But in late the market seemed to stabilize close to the level it had reached in early For several months it appeared that the US economy was recovering after a dramatic financial contraction. Optimists saw no reason why vigorous economic expansion should not be renewed, as it had been in The optimists were wrong.

From the peak of the s expansion in August to the trough in March output fell by 52 per cent, wholesale prices by 38 per cent, and real income by 35 per cent. Company profits, which had been 10 per cent of GNP in , were negative in and also during the following year. The collapse in demand centred on consumption and investment which experienced unprecedented falls. Durables were especially affected; in , 4.

Automobile manufacture and construction had been at the heart of the s economic expansion but, as they fell, supporting industries tumbled, too. Inventories were run down, raw material purchases reduced to a minimum, and workers laid off. In particular, companies producing machinery, steel, glass, furniture, cement, and bricks faced a collapse in demand.

The number of wage earners in manufacturing fell by 40 per cent, but many lucky enough to hang on to their jobs worked fewer hours and experienced pay cuts. The producers of non-durable goods, such as cigarettes, textiles, shoes, and clothing, faced more modest declines in output and employment. The most dramatic price falls were in agriculture and a fall of 65 per cent in farm income was unsustainable for farm operators, especially if they were in debt.

Unlike manufacturers, individual farms did not reduce output in response to low prices. Indeed, their reaction to economic distress was to produce more in a desperate attempt to raise total income. The result was the accumulation of stocks which further depressed prices. Nor could farmers lay off workers, as most only employed family members. As banks and other financial institutions foreclosed on farm mortgages, distress auctions caused so much local anger that the Governors of some states were obliged to suspend them.

Farmers who were unable to pay their debts put pressure on the undercapitalized unit banks that served rural communities. As bank failures spread unease among depositors, the natural reaction of institutions was to engage in defensive banking. Loans were called in and lending, even for deserving cases, was curtailed; the banks gained liquidity by bankrupting many of their customers. Rural families were forced to reduce their purchases of manufactured goods, adding to urban unemployment. The bitter irony of starving industrial workers unable to buy food that farmers found too unprofitable to sell helped to undermine faith in the free-market economic system.

The slide from mid to spring was not smooth and continuous. Periodically, it seemed that the depression had bottomed out and recovery was under way. In spite of a destabilizing fall in consumption during Temin, it seemed possible that the economy would revive. This expectation was quashed by a wave of bank failures at the end of the year. Although mostly confined to small banks in the south east of the US, the failures gave depositors a warning sign. Many kept their withdrawn funds idle rather than trust another bank with their savings. There was a sharp difference between the British experience, where no financial institution failed, and that of the US, where financial paralysis was the end result.

Friedman and Schwartz emphasized the contraction by one-third of the US money stock between and , a reduction which they believe explains fully the severity of the depression. They accused the Federal Reserve of pursuing perverse monetary policies which transformed a recession into a major depression. It was, however, a combination of monetary and non-monetary causes, varying in intensity during these critical years, which accounts for the depth of this crisis Gordon and Wilcox, Nevertheless, as Fishback , this issue shows, the judgement of the Fed was at times seriously flawed, although policy errors are sometimes more apparent with the benefit of hindsight.

For example, because nominal interest rates had been reduced to a very low level, the Fed believed that it was pursuing an appropriate easy money policy. Indeed, it was difficult to see how interest rates could be forced lower. However, the monetary authorities failed to take account of the savage deflation which caused real interest rates to rise to punitive levels for borrowers. The central bank was convinced that it was pursuing an easy money policy when the reverse was the case.

Moreover, when faced with a policy choice, the Fed always opted to follow the gold standard rule. As a result, during late , and also during the winter of —3, the Fed raised interest rates to protect the dollar from external speculation in order to halt gold losses. Unfortunately, this was the exact reverse of the low interest rate, easy credit policy needed to save the battered banking system. Little wonder that so many banks closed their doors.

There is no doubt that monetary policy had serious adverse effects during the worst depression years. Unemployment was one of the great curses of the depression. Widely accepted estimates show that the percentage of the US civilian labour force without work rose from 2. Many classified as employed were on short time and some had also experienced wage cuts.

Unlike Britain, the US had no national system of unemployment benefits; the jobless were subjected to a harsh regime which included dependence on miserly, poorly administered, local relief. Those most affected included the young, the old, and ethnic minorities, whose unemployment rates were relatively high. In addition, social workers stressed that those who had been out of work for long periods became increasingly unattractive to employers.

Lessons from the Great Depression

Loss of income and employment uncertainty combined to reduce consumer spending. Even fortunates who felt secure in their jobs and whose real incomes had risen were deterred by the persistent deflation. Deflation increased the burden of existing debt and acted as a warning against the accumulation of new obligations. Deflation also intensified business uncertainty and further undermined the confidence necessary to make investment decisions. Traditionally, price falls were seen as one of the natural self-correcting mechanisms of the market economy. Deflation automatically led to a rise in real incomes, it was argued, and consumers would soon start a purchasing drive that would lift the economy out of recession.

The persistent price falls over such a long period, however, brought about a paralysis in consumption and investment. Potential spenders wanted to wait until the price falls had reached their nadir before they committed themselves to major purchases and new debt. Herbert Hoover was hard-working, energetic, and intelligent. He probably had a greater grasp of contemporary economics than any twentieth-century president and was confident enough to be his own economic advisor Stein, He was familiar with the current literature on business cycles and was not a man to stand aside and watch as recession accelerated into depression Bernstein, Hoover publicly urged business leaders to share scarce work rather than add to the unemployed, and pleaded with them not to cut wage rates, which had been the instant response of employers in —1.

Big business held out against wage cuts until mid when, faced with overwhelming financial losses, the dam broke and they could resist no more. Nominal wage cuts became common, as did mass lay-offs. Hoover refused to listen to the pleas of 1, American economists who, in , urged him to veto the Smoot—Hawley tariff bill.

When it became law, this legislation raised US import duties and ultimately led to retaliatory action throughout the world. Not surprisingly, US foreign trade declined once the depression began to bite. Nevertheless, the US balance of payments remained in surplus. It was, however, the rapid income decline in countries that wanted to purchase US goods which was the most significant factor in causing the contraction in international trade Irwin, His priority was to protect companies that paid high wages from competition from cheap imported goods Vedder and Gallaway, The hope that the RFC, acting as lender of last resort, would bring stability to the financial system was compromised by a Congressional decision to publicize the names of all institutions that approached the RFC for financial help.

Hoover also authorized a large increase in federal spending on work relief projects, but the federal budget, at 4 per cent of GNP, was too small to make a noticeable dent in the growing social distress. Inevitably, declining revenue forced the budget into deficit for fiscal year The deficit was too small to exert an expansionary effect on the economy but it did enable Roosevelt to attack Hoover during the election campaign of for failing to appreciate the necessity of economy in government.

Ironically, the budget deficit of was the most expansionary of the entire decade, though no one at the time saw this as a benefit. In , Hoover became so concerned about the domestic and foreign disapproval of the federal budget deficit that spending was reduced and the Revenue Act introduced a raft of substantial tax increases. In spite of his efforts, the budget remained in the red and, not surprisingly, unemployment remained stubbornly high.

He shared with many contemporary economists the view that fiscal and monetary policies must be directed to support gold rather than directly to promote domestic economic expansion or bank stability.

I. Introduction

It is easy to see that the year-on-year reduction in imports by the main industrial powers and the collapse of international lending placed many economies in great difficulty. In particular, a regular flow of dollars had been crucial to debtor countries, enabling them to buy goods and services and discharge their debt payments. Once the flow dried up, countries had to confront balance-of-payment and debt-repayment problems which were entirely unanticipated. Primary producers had to act quickly to reduce imports and boost their exports as the terms of trade moved sharply against them.

Desperate to curb gold and foreign-exchange loss, they used restrictive monetary and fiscal policies to deflate their economies savagely. Public spending was slashed, wages were cut, and misery increased, but all to no avail. It was impossible to earn sufficient foreign currency, or to attract new international loans. Once the cure of deflation was judged more painful than the disease it was supposed to remedy, default on international loans was inevitable.

When this happened, foreign investors panicked. In , US lending virtually ceased and did not recover during the rest of the decade. The key element in the transmission of the Great Depression, the mechanism that linked the economies of the world together in this downward spiral, was the gold standard.

It is generally accepted that adherence to fixed exchange rates was the key element in explaining the timing and the differential severity of the crisis. Monetary and fiscal policies were used to defend the gold standard and not to arrest declining output and rising unemployment. Contemporaries believed that the gold standard imposed discipline on all economies wedded to the system.

But in operation the gold standard was not even-handed. As we have seen, states accumulating gold were not forced to inflate their currencies, but when gold losses occurred governments and central banks were expected to take immediate action in order to stem the flow. The action was always deflation but never devaluation Temin, Between and France experienced a surge of gold accumulation which saw its share of world gold reserves increase from 7 to 27 per cent of the total.

Since the gold inflow was effectively sterilized, the policies of the Bank of France created a shortage of reserves and put other countries under great deflationary pressure. Irwin concludes that, on an accounting basis, France was probably more responsible even than the US for the worldwide deflation of — This illustrates a serious flaw in the operation of the interwar gold standard. When US capital flows to Germany began to dry up in , the German economy was already experiencing an economic downturn and, at the same time, had a formidable reparations debt to discharge.

Germany was forced to deflate, even though already in the early stages of a depression. Soon mounting unemployment and violent political unrest gripped the country. Speculators then turned to Germany, which had a weak economy, a suspect banking system, a high level of short-term debt, and worrying political divisions. This was an opportunity for decisive coordinated intervention by the major economic powers. A flawed German economy faced the possibility of a catastrophic financial crisis, which, if not contained, could have serious ramifications for others. Who among the great powers would help?

Britain was too financially enfeebled to offer more than marginal assistance. In June President Hoover acted by unilaterally proposing a moratorium, for 1 year, on reparation and war debts payments. The moratorium referred only to inter-government debt. Hoover expected private debts to be honoured. His intervention was opposed by the French, who were furious at the lack of consultation but more fundamentally believed that they lost more than they gained from the moratorium.

France, with ample gold reserves, was in a position to assist, but the political conditions attached to its offer of help made it impossible for Germany to accept. In August , Germany abandoned the gold standard, introduced exchange controls, and halted the free flow of gold and marks. Even though this was a time of falling prices, the horrors of post-war hyperinflation were fresh in the memory of the German public and policy-makers. As a result, the mark was not devalued and the government continued with the draconian deflation that had been introduced in accordance with gold-standard rules.

The speculative wave then engulfed sterling. There had been obvious signs of recession in the UK as early as , when the curtailment of US lending affected UK international trade in services. About 40 per cent of UK overseas trade was with primary producing countries, which were forced immediately to restrict their spending when US credit dried up Solomou, The crisis worsened in as world demand collapsed and the UK experienced a sharp fall in the export of goods and services.

Following gold-standard rules, real interest rates rose to defend sterling and public-expenditure cuts were imposed in an attempt to achieve budget balance. Like Austria and Germany, Britain was faced with the withdrawal of foreign deposits as the holders of sterling anticipated the potential loss to them from devaluation.

The struggle to defend the pound was all to no avail. On 21 September Britain was forced to leave the gold standard, the first major country to do so, and devalue sterling. The devaluation was substantial; sterling, once free to float, fell by 25 per cent against the dollar, though, of course, it is the multilateral effects of devaluation rather than the bilateral which are the most significant. Speculators then attacked the US dollar, which, as we have seen, was defended by the Federal Reserve, though at the cost of compromising the banking system and intensifying an already serious depression.

Curiously, once free from the need to pursue a deflationary monetary policy to defend sterling, the Bank of England actually increased the bank rate. In spite of experiencing one of the largest price falls in modern history, policy-makers worried about the inflationary effects of devaluation. Fortunately, Britain had not lived through the horrors of hyperinflation, or, indeed, the high levels of inflation endured by the French before the stabilization of the franc in The fears of financial instability quickly subsided and from early interest rates were reduced and a nominal interest rate of 2 per cent was a persistent feature of the British economy for the remainder of the s.

In contrast, fiscal policy was not expansionary until the end of the decade and the attraction of an annual balanced budget remained Middleton, , this issue. It is clear that unemployment was the major effect of the Great Depression as far as the UK is concerned. However, other indicators show that the impact of the crisis was relatively benign. No British bank or building society failed during these troubled years. Between and , the peak-to-trough contraction in real GDP was a mere 5. Even in these crisis years, consumption remained relatively stable. The early exit from the gold standard and the robustness of the financial system created a platform for UK recovery which could be exploited.

Indeed, between and , the peak of s performance, real GDP increased by Even today, no US macro textbook would be complete without a section analysing the causes and the course of the Great Depression. In the UK, apart from persistent unemployment, the downturn was not deep and was over quickly, and the recovery was impressive. However, was a watershed for UK economic policy.

The gold standard was abandoned and sterling was devalued. Monetary policy was freed from its obligation to support the gold standard and could be used as a tool for economic expansion. The crisis also provided the incentive for Britain to turn away from an emotional commitment to free trade. The Imports Duties Act imposed a general 10 per cent duty on a range of imports. Early UK recovery was helped by a favourable exchange rate, though within a few years that significant advantage had gone, as other countries devalued and as British tariffs improved the domestic trade balance.

It was not foreign trade but a reflationary monetary policy that drove recovery. Cheap money stimulated the housing industry and, with building societies playing a promotional role, this sector became a visible sign of prosperity, particularly in the Midlands and the south-east of England.

The Conversation

Unfortunately, the regions dominated by the old staple industries remained depressed. Apart from unemployment, UK macro performance during the recovery period was impressive. In , 47 countries were members of the gold-standard club. By the end of the only significant members were: The year was a dramatic one, when a major financial crisis dealt a mortal blow to the gold standard while output and prices continued to decline throughout the world.

Far from providing stability and fulfilling the expectations of its supporters, the gold standard was instrumental in forcing economies to deflate during a period of intense depression.

Indeed, departure from gold was a prerequisite for recovery. For a while the countries freed from the shackles of gold seemed overwhelmed by the enormity of their action. Policy-makers were concerned that devaluation might lead to inflation, so there was no immediate rush for expansionary economic policies. However, by it was clear that all the countries that had devalued their currencies in had performed far better than those who had opted for exchange control.

In , the US decided to leave the gold standard and devalue the dollar as it was clear that New Deal policies designed to inflate the economy were inconsistent with the rules of the game. Unlike Britain, the US was not forced to leave the gold standard but chose to do so. The performance of the gold bloc, headed by France, was increasingly dismal and in France, too, abandoned gold. Devalued currencies gave exports a competitive edge which trade rivals remaining on gold sought to blunt by the imposition of tariffs, quotas, and bi-lateral trade agreements Eichengreen and Irwin, In Nazi Germany, a drive for greater self-sufficiency was added to strict exchange controls and these policies were accompanied by a reliance on bilateral rather than multilateral trade Obstfeld and Taylor, Japan and Italy also provide examples of autarkic imperialism.

Liberal internationalism was no more. Individual countries, or groups, strove to minimize their imports and maximize their exports. Trade restrictions increased dramatically during the s but even when there was some relaxation it was not multinational. With the Reciprocal Trade Agreements Act , the US Congress authorized the President to negotiate bilateral tariff reductions with other countries. Unfortunately, during the s, multilateral trade gave way to bilateral arrangements as trading within blocs, of which Imperial Preference was one, grew more common.

The outcome was trade diversion rather than creation. Immediately on entering office the new President addressed the banking problem. Indeed, after devaluation, the US became a safe haven for gold, especially from a troubled Europe. The gold flows generated an expansion of the money supply which helped to stimulate recovery.

From the exceptionally low base of , real GDP grew rapidly at an average of over 8 per cent a year until After a check, growth between and was, at over 10 per cent, even more rapid. In , the best year of the decade, output had just reached levels and there were as many people at work as there had been in the prosperous year of Unfortunately the labour force had grown by 6m and the unemployment rate, at Private investment failed to revive satisfactorily. The recession of —8 was a sudden and devastating blow to an economy functioning far below full capacity.

The economy did not reach its long-run trend until June The New Deal is difficult to evaluate economically, partly because of its lack of consistency Fishback, In the first New Deal, —5, Roosevelt attacked the surpluses which many commentators believed had dragged the economy down. Farmers were paid to reduce the acreage on which they grew specified crops in the hope that reduced output would increase farm income and, indeed, revive the entire economy.

The National Industrial Recovery Act NIRA encouraged cooperating businesses to curb competition, which was seen as potentially destabilizing as it led to price reductions. Minimum wages and maximum hours were supposed to increase consumer spending power and help spread the available work. It was a misguided attempt to regenerate the economy by producing less. This bureaucratic nightmare was declared unconstitutional by the Supreme Court in FDR now abandoned the attempt to cooperate with business and advocated a more competitive society.

11 Life Lessons From The Great Depression

In order to protect the vulnerable, who would be exposed to exploitation in this new competitive environment, the formation and growth of trades unions was promoted by the Labor Relations Act , more popularly known as the Wagner Act. Roosevelt gained a stunning re-election victory in but by the following year the recession necessitated another change in direction. FDR, who had always disliked budget deficits, now came to accept that spending was a vital tool for recovery. Extra spending did bring about a revival. His supporters praise him for pragmatism.

It is hard to think of the twists and turns of New Deal policies having a uniformly positive effect on economic performance. The New Deal was not Keynesian. Neither fiscal nor monetary policy was used as a tool for economic revival. The reaction of many contemporaries to the problem of unemployment, for example, was to promote polices that would share work, promote high wages to aid purchasing power, remove married women from the workforce, and institute a compulsory age of retirement.

The growing money stock did exert a positive influence, but its cause was the substantial flow of gold entering the banking system from troubled Europe rather than direct policy action by the Fed Romer, The inflow also imposed costs even though it provided advantages. The Fed became concerned at the potentially inflationary excess reserves held by member banks and, in and , raised reserve requirements.

The banks responded by reducing their lending. Coincident with this restriction, federal spending was reduced. The combination of restrictive monetary and fiscal policies plunged the economy into a serious yearlong downturn during which real GDP fell by 10 per cent and unemployment rose to Fortunately, the recession bottomed out in May , as both fiscal and monetary policy became expansionary.

Recovery was rapid but prices continued to fall for another 2 years. This recession was a serious self-induced wound. Hatton and Thomas offer an explanation for the mass unemployment in both the US and the UK during the s. Unemployment in the UK during the s was similar to that of the s.

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It was concentrated in the regions where the old staple industries, cotton textiles, coal mining, ship building, and iron and steel, dominated. However, in other parts of the country, a private housing boom, encouraged by low interest rates and rising real wages, created many jobs and there was employment growth, too, in the manufacture of consumer durables and in the service sector.

By the mids, UK unemployment was primarily regional and structural. In contrast, the US had enjoyed low unemployment during the s. The stubborn refusal of unemployment to decline to pre-Depression levels as economic recovery got under way ensured that expenditure on relief was a new and major item in the federal budget. There were other differences between the s and the s.

The Roosevelt administration encouraged the growth of trades unions and in the first New Deal, minimum wages and maximum hours raised both real wages and labour costs. Indeed, the support of both Hoover and Roosevelt for polices designed to prevent wage rates from falling helps to explain the extraordinary growth in money wages during a period of mass unemployment.

The employed benefited, but real wages increased above market-clearing levels and, as a result, unemployment persisted. Instead, they stressed the benefits of work relief with a cash wage and hourly wage rates identical to those in the private sector. Hours worked were restricted so that take-home pay was not so munificent that private-sector work would be rejected if it was offered. Unfortunately, limited funding enabled only 40 per cent of workers eligible for work project placements to find employment on them.

Rejected applicants were forced to accept relief from their counties, which was far less generous than that provided by Washington. Mass unemployment was a worldwide phenomenon during the depression. Sweden, Denmark and Norway, like Britain, endured double-digit unemployment in both the s and the s Feinstein et al.

In Germany, the deflationary policies pursued even after the gold standard had been abandoned led to an unemployment total of 6m in , roughly double that of the UK. The social and political distress in Germany, which played a significant part in the election of Hitler as Chancellor in , was widely seen at the time as one of the unacceptable costs of unemployment.

The Nazis abolished German trades unions and with them collective bargaining. A mass programme of public works financed by budget deficits was begun immediately. Industrial recovery emphasized the production of capital goods not consumer goods. Labour service, and the introduction of military conscription in , helped to reduce the ranks of the jobless so that, in , unemployment had been reduced to less than 2m.

A striking feature of the labour market was the very modest growth in real wages which this totalitarian regime was able to control. When the market became tight and shortages appeared, there were no trades unions to help workers exploit their scarcity. Depressed commentators in the free world wondered if the only way to eradicate unemployment was to embrace the policies of either Nazi Germany, or the Soviet Union. Neither option had great appeal. It was, however, preparation for war which sheltered Britain, France, and Germany from sharing the US experience during —8.

Expansionary fiscal policies sustained the European economies as they geared up for conflict and minimized the effects of this contraction. Economic historians have traditionally viewed the large falls in real GDP that happened in the Great Depression as the result of large aggregate demand shocks. We think this is still appropriate and identify the main sources of these shocks. Even scraps could be sewed together and made into something new. Nothing was ever wasted. There was no such thing as job security, so being able to adapt to different fields wherever they could find work was absolutely essential.

Most families grew their own groceries right in their backyard, like the feisty little lady pictured above. However, during the Depression, even when things seemed to be at their worst, communities still found ways to entertain themselves with simple and inexpensive fun. Being savvy with coupons, haggling, and other ways to stretch their pennies kept families from going without for too long. According to the Encyclopedia , crime rates went through the roof during the Depression. Families relied on each other to remain safe and protected, making the bonds between them all the more important.

According to CBS News , who spoke with a man who was living during the era, people found catharsis in the fictional stories playing at movie theaters. Get the best LittleThings.