The Great Depression, to 1935

The US Economy Hits Bottom, 1930-32 | Slow Recovery Begins in the United States | The US Economy in 1935 I Recovery in Sweden, France, Italy and Britain

The US Economy Hits Bottom, 1930-32

Between January and April in the year 1930, the value of stocks rose 13 percent. Then at the end of April the price of stocks began to decline again. Production and consumer buying were declining, and President Herbert Hoover opposed the view among bankers that the economy should be allowed to deflate. Hoover urged action. He approved a program in which the federal government had a few buildings built, and he urged state and local governments to accelerate their spending. From railroad and utility companies he acquired promises of investments. He called conferences of industrial and labor leaders and obtained from them pledges to maintain employment and production levels and to avoid strikes. But the economy continued to slide. Businesses felt compelled to respond to markets – including the labor market – and they cut production and wages more. Some financiers called for more government spending. There were other financiers who saw reduced wages as a blessing that would improve discipline and character.

Investors – also known as risk-takers – were pulling their money out of the economy, away from risk. Unemployment was rising, and consumers had less money to spend, adding to the downward spiral. Bankruptcies were more numerous. Bank loans were not being repaid. There was no federally guaranteed depositors insurance to inspire depositor confidence. In 1929 there had been 659 bank failures. That number in 1930 rose to 1,352. In November 1930 a run on banks started in the city of Nashville and swept through the South.

The congressional elections in 1930 reduced the Republicans in the House of Representatives to a majority of just six, and their majority in the Senate was reduced to one. At the end of the year, calls for more government action increased. Congress passed a law allocating 116 million dollars for public works and 45 million for drought relief. Fundamentally the government was aiming at a balanced budget, while Hoover spoke of the public works project as a "new experiment in our economic life" and an "advance in economic thought and a service to our people."

By the end of 1930 the value of stocks was down forty percent from its April 1930 high. On New Year's Day, 1931, predictions were made that the depression would be over by the end of the year. Instead, equities (stocks) continued to decline in value through the year.

In June 1931, Hoover addressed the growing problem of international debt. In the interest of people and companies being able to buy things, he electrified the world by proposing a one-year moratorium on all payments on reparations and other intergovernmental debts. He rejected calls from the US Chamber of Commerce and the National Civic Federation for restoring economic order through compulsory, private cartels. And he opposed a bill that would allow veterans to borrow against a pension fund, Hoover calling the bill a "breach of fundamental principle."

During 1931, world trade and Europe's credit structure collapsed, deepening economic depressions in Austria, Germany and Scandinavia. Europeans began withdrawing loans, investments and gold from the United States. Hoping to end more withdrawal of funds and gold by Europeans, the Federal Reserve Board raised interest rates, making borrowing more difficult – a move that normally cools overheated economies but does not mend depressed economies.

Hoarding money rather than spending it was damaging the economy. The world was on the gold standard and in the United States the Federal Reserve had an abundance of gold reserves, but this did nothing to increase buying and spending, an economy's life blood. Taxes could have been reduced, leaving more money for buying. And the federal government could have pumped more money into the economy through relief to the unemployed. But none of this was done. There was fear that cheapening money by printing more of it (increasing the money supply) would further weaken the economy. Also, Congress and President Hoover were opposed to creating an unbalanced budget. They believed that unbalanced budgets and rising government debt retarded business recovery and that unbalanced budgets were a threat to the credit of the federal government.

Many banks experiencing shortages of cash were forced to sell their assets at fallen price levels and were thus driven to insolvency. The federal government was not offering bailouts, believing that in every case it would be throwing good money after bad. Depositors lost confidence in the financial system. They didn't know which banks were sounder than others and they pulled their money out of all banks, good and bad, indiscriminately. People across the nation were putting their money into safe deposit boxes or stuffing it into mattresses. In 1931, 2,294 banks in the US failed.

In Washington DC, 3,000 Communists staged a "hunger march." In rural America farmers were more focused on specifics. They joined together to prevent insurance companies from foreclosing their neighbors' farms. In the spring of 1932, 15 to 20,000 unemployed veterans camped out in a park in Washington D.C. demanding full payment of the bonus promised them for serving in World War I, and they were dispersed by the US army.

Meanwhile, various explanations for the Depression were voiced. Some in the US blamed the Soviet Union for dumping goods on the world market. Henry Ford, who considered himself an expert on just about everything, blamed the Depression on what he called an era of laziness. Many blamed the Depression on high tariffs having caused a decline in world trade. President Hoover saw the Depression as caused by attitude that had somehow gone awry. And, of course, a few in the United States saw the Depression as the fulfillment of Biblical prophecy.

In Europe, many were blaming the Depression on the United States for withdrawing loans even to sound European enterprises. And people blamed the United States for cutting back on imports and for failing as the world's leading creditor nation.

Marxists had their own analysis of what was causing the economic crisis. In 1928 the Communist International (Comintern) claimed that capitalism was entering its third stage since the Great War: stage-one being the crises just after the war; stage-two the recovery that followed in the mid-twenties; and stage-three being a crisis created by the old problem of production out-racing consumption. By 1932, rank and file Communists were impressed by the Comintern's analysis. With Karl Marx having predicted the fall of capitalism, they saw capitalism as having entered its final crisis. The failure of capitalism, they believed, would bring the discontented masses falling in behind Communist Party leadership and then they would be able to overthrow the capitalist system – matching economic inevitability with human activity.

Decades after the Depression, "bourgeois" economists would argue that the Depression was more than just production out-racing consumption. Monetary stability after World War I had not returned to what it had been before the war. Before World War I, Great Britain had been the world's creditor nation, the world's lender of last resort and the world's champion of free trade. This had been destroyed by the war, and, according to some of these economists, the United States had not adequately taken Britain's place as the world's leader in sound finance.

Meanwhile the United States economy was sinking deeper, many believed that a sound recovery would come only by the government leaving the economy alone. They believed in a natural process of liquidation – the ruination of the weak and the survival of the efficient. And, indeed the US economy bottomed in 1932. Things could only get so bad in a society not engaged in a civil or international war or not suffering from some other great catastrophe such as plague or, widespread draught. In the United States, hitting bottom meant that manufacturing was down 48 percent from what it had been in 1929, and the prices farmers received for their products were down 44 percent. The stock market was down 80 percent from what it had been in 1929, but seventy-five percent of the workforce was still getting up in the morning and making themselves useful. But 25 percent of the work force remained unemployed, and people had little money for the buying that would have stimulated the economy.

Recovery in the United States began around the same time that it did in other countries. With the interconnectedness of economies in the world, it was more than a coincidence that economies in Europe also bottomed in 1932. And with economies having hit bottom, the issue became the speed of recovery – a matter affected by government policy.

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