capitalism

216 Great Depression
abandoned the gold standard, the quicker recovery commenced.
Unfortunately for the U.S. economy, it clung to the
gold standard longer than most other countries, suspending
convertibility of the dollar after Franklin Roosevelt’s inauguration
in 1933. When Britain suspended the convertibility
of the pound into gold in September 1931, the Fed knew
that international investors feared the United States would
soon join in abandoning the gold standard and thus devaluate
the dollar in the process. Investors began to convert
their dollar-denominated assets into gold, so the Fed acted
to make the dollar more attractive through the sharpest
increase in the rediscount rate in the system’s history.
Unfortunately, this interest rate hike worsened the domestic
banking crisis, making it harder for shaky banks to obtain
credit. In October 1931, more than 500 banks closed, and in
the 6-month period starting in August 1931, banks with
deposits totaling almost $1.5 billion suspended operations.
A final banking crisis hit in the period between Roosevelt’s
election and his March 1933 inauguration. As bank runs
spread from state to state and governors felt compelled to
declare banking “holidays,” depositors lost confidence in
the entire banking system.
Between 1930 and 1933, more than 9,000 banks
failed—more than a third of the initial total. Ben Bernanke
argues that this situation helps explain the subsequent
longevity of the Great Depression. The loss of these banks
made the economy much less efficient than it had previously
been, making it considerably harder for individuals
and businesses who had built up relationships with the
failed banks to obtain credit, forcing them to cancel plans
to buy and invest. In addition, the length of the Depression
has been explained by a series of policy missteps. In a
recent survey of economic historians, half agreed that,
despite many policies that helped to right the economy,
“taken as a whole, government policies of the New Deal
served to lengthen and deepen the Great Depression.”
The policy they found most blameworthy was probably
the National Industrial Recovery Act, enacted in June 1933,
which aimed to rein in competitive forces, which many
naively blamed for the economic collapse. The act allowed
industries to draw up “codes of fair competition,” which
effectively cartelized production in many sectors, significantly
boosting goods’ prices and, thus, reducing the quantity
of goods demanded and curtailing employment. The act
was finally declared unconstitutional in May 1935. In addition,
events suggest that the overall attitude of the
Roosevelt administration and specific policies that threatened
the security of property rights (such as the lack of
response by government entities to sit-down strikes) discouraged
investment, which jumped about 60% after the
New Deal coalition suffered electoral defeats in 1938.
Amid the recovery, the economy suffered another steep
downturn in 1937 when industrial production and wholesale
prices fell by 33% and 11%, respectively, whereas unemployment
rose 5%. This recession has been attributed to the
Fed’s deflationary overreaction in doubling banks’ reserve
requirements as a preemptive strike against inflation and the
reduction in aggregate demand caused by the levying of
social security payroll taxes several years before benefits
were to begin being paid out.
Research concludes that this era might have been one of
immense economic progress, as the years from 1929 to
1941 were, in the aggregate, the most technologically progressive
of any comparable period in U.S. economic history.
However, the scholarly consensus is that a series of
policy mistakes and a malfunctioning international financial
system made it an era of economic insecurity, opening
the door to a permanently expanded economic presence of
government.
See also Classical Economics; Friedman, Milton; Interventionism;
Money and Banking
Further Readings
RoW
Bernanke, Ben S. Essays on the Great Depression. Princeton, NJ:
Princeton University Press, 2000.
Eichengreen, Barry. Golden Fetters: The Gold Standard and the
Great Depression, 1919–1939. New York: Oxford University
Press, 1992.
Eichengreen, Barry, and Peter Temin. “The Gold Standard and the
Great Depression.” NBER Working Paper 6060, 1997.
Fearon, Peter. War, Prosperity and Depression: The U.S. Economy,
1917-45. Lawrence: University Press of Kansas, 1987.
Friedman, Milton, and Anna J. Schwartz. A Monetary History of the
United States, 1867–1960. Princeton, NJ: Princeton University
Press, 1963.
Hall, Thomas E., and J. David Ferguson. The Great Depression: An
International Disaster of Perverse Economic Policies. Ann
Arbor: University of Michigan Press. 1998,
Parker, Randall E. The Economics of the Great Depression:
A Twenty-First Century Look Back at the Economics of the
Interwar Era. Cheltenham, UK: Edward Elgar, 2007.
Romer, Christina D. “The Nation in Depression.” Journal of
Economic Perspectives 7 no. 2 (Spring 1993): 19–39.
Steindl, Frank G. Understanding Economic Recovery in the 1930s:
Endogenous Propagation in the Great Depression. Ann Arbor:
University of Michigan Press, 2003
Temin, Peter. Lessons from the Great Depression. Cambridge, MA:
MIT Press, 1989.
Weinstein, Michael. Recovery and Redistribution under the NIRA.
Amsterdam: North-Holland Publishing, 1980.
Wicker, Elmus. The Banking Panics of the Great Depression. New
York: Cambridge University Press, 1996.