Ninety years ago this fall, the stock market experienced the Great Crash. Shortly thereafter, America’s economy slumped into the Great Depression. Though misconceptions about them abound, these events have had a huge influence on decision-makers ever since. If, as Mark Twain supposedly said, “History does not repeat itself, but it often rhymes,” then right now might be a good time to correct some myths about the Great Depression.
'Roaring Twenties' excesses caused the Depression.
In his address to the 1932 Democratic National Convention, Franklin D. Roosevelt called the 1920s “a period of loose thinking, descending morals, an era of selfishness.” More recently, economist Mark Skousen argued that “given the fragile nature of the financial system” at the time, the easy credit that spurred a boom of overinvestment “triggered a global earthquake,” making the Depression inevitable. Economist Hans Sennholz attributed the slump to inflation and “the growth of covetousness and envy of great personal wealth and income, the mounting desire for public assistance and favors.”
Indeed, the Roaring Twenties were a time of consumerist excess among a certain moneyed class — think of the lavish parties in “The Great Gatsby.” But the period wasn’t primarily defined by this kind of indulgence or market speculation. Milton Friedman and Anna Jacobson Schwartz’s comprehensive 1963 study, “A Monetary History of the United States, 1867-1960,” shows that the 1920s experienced low price inflation and stable economic growth. Scholar Harold Bierman Jr.’s research on the 1929 crash found that overvalued stocks were isolated to a few sectors and were of relatively short duration. A 2003 study by the Federal Reserve Bank of Minneapolis concluded that in 1929, many stocks were undervalued.
In any case, only a small percentage of the population owned securities at the time. And a culture of excess and careless speculation hardly characterized the entire nation.
The Great Crash caused the Great Depression.
Writing for TheStreet.com in July, Steve Fiorillo called the October 1929 stock market crash “the most obvious occurrence that portended doom and started the depression.” A Library of Congress teaching guide says, “The Great Depression began in 1929 when, in a period of ten weeks, stocks on the New York Stock Exchange lost 50 percent of their value.”
Modern historians view the crash not as the cause but as an amplifier of macroeconomic forces. The uncertainty it generated helped deepen the Depression, Friedman and Schwartz acknowledge in “The Great Contraction, 1929-1933,” but it was “a symptom of the underlying forces.” The downturn that characterized the Depression — a global phenomenon — was brought about by an almost perfect storm of factors, including Germany, France and Britain returning to the gold standard that they’d abandoned during World War I, which proved unsustainable. In part to boost European economies, the Federal Reserve kept interest rates low. But when it increased rates in 1928 and again abruptly in 1929, lending decreased, as did resulting economic activity. World War I’s vanquished didn’t keep up with reparations payments imposed by the Treaty of Versailles, which made it harder for the victors to repay their war debts to the United States.
Herbert Hoover did nothing to fight the Depression.
In his 1932 DNC speech, FDR repeatedly laid the blame for the recession at President Herbert Hoover’s feet, criticizing “the failure of Republican leaders to solve our troubles” and “their broken promises of continued inaction.” In the 1977 Broadway musical “Annie,” set in 1933, the destitute sarcastically sing, “We’d like to thank you, Herbert Hoover,” as they catalogue their economic straits. In a short 2007 series on the “Worst Presidents,” U.S. News & World Report said that Hoover “failed to rise to the greatest challenge of his time.”
Just after the crash, though, Hoover cut taxes by about $160 million in an effort to stimulate the economy, increased public-works spending, and secured agreements among business and labor leaders to maintain wages and avoid work stoppages. Despite these efforts, by late 1931, America’s economic slump had accelerated, so Hoover increased federal spending and loans to states, liberalized the Fed’s credit expansion, created the Reconstruction Finance Corporation to lend to and invest in companies and jobs, established special banks to support farmers and homeowners, and declared an international debt moratorium to stabilize currencies and restore trade. He might have intervened more robustly and earlier, and he may have lacked the political skills needed to build public confidence in his policies. But the charge of inaction doesn’t hold.
The New Deal cured the Great Depression.
In 2009, Guardian columnist Michael Tomasky argued that “the New Deal worked pretty doggone well” even if it “didn’t solve every problem.” In a paper published that same year, scholars Greg Hannsgen and Dimitri Papadimitriou assessed that “the New Deal provided effective medicine for the Depression.” A “Great Depression Facts” entry on the FDR presidential library’s website states, “The New Deal jump-started the economy towards recovery.”
It’s true that FDR deserves credit for ending the death spiral of public confidence and economic conditions: Prices , trade and employment improved after his inauguration. However, recovery to pre-Depression conditions would be years away. And yes, useful reforms in banking and finance, electric power, labor relations, and Social Security were pillars of the New Deal. Yet it’s a stretch to say that the New Deal’s progressive reforms ended the Depression: Federal Reserve monetary policy, suspension of the gold standard by governments around the world, the easing of global trade and the industrial expansion during World War II arguably had more impact on recovery, according to studies by Christina Romer, Barry Eichengreen, Robert J. Gordon, Robert Higgs and many others.
Some New Deal experiments even stalled the recovery. For instance, the National Industrial Recovery Act favored big companies over small ones and fed confusion with a blizzard of rules and regulations. A 2001 paper for the Federal Reserve Bank of Minneapolis by Harold Cole and Lee Ohanian concluded, “New Deal policies are an important contributing factor to the persistence of the Great Depression.”
The Great Depression ended in 1939.
The titles of Charles P. Kindleberger’s book “The World in Depression, 1929-1939” and Pierre Berton’s book “The Great Depression: 1929-1939” lend the impression that the Depression lasted exactly a decade. Type “When did the Great Depression end?” into your Google search bar, and the result that comes back is 1939. The same goes for a “Great Depression History” lesson at History.com.
That year may be a convenient focal point because it marks a new historical episode, the onset of World War II. Yet it is hard to say the Depression really ended then, because important metrics of prosperity continued to lag. In 1939, the unemployment rate stood above 15 percent; it wouldn’t fall below 5 percent until 1941. Personal-consumption expenditures — a measure of how much Americans spend on goods and services — similarly didn’t return to 1929’s level until 1941 (assuming you could buy what you wanted during the war). And a variety of social indicators, including marriage and birthrates, rose materially only after the war.