The Great Depression was a worldwide economic upheaval
that is generally considered to have begun with the United States stock market
crash of 29 October 1929. This triggered a downwards spiral of bank
failures and unemployment that, by 1933, had put 25% of the U.S. work
force out of a job. The effects spread around the world, and among the
countries worst hit were Germany
and Japan.
Roosevelt sought to counter the Depression with the New Deal, a massive centralization and expansion of government economic power. It was, and still is, a controversial program, both on constitutional and economic grounds, and a number of economists believe that the New Deal actually prolonged the Depression by distorting market signals and increasing uncertainty among businesses. The tremendous impetus given by the rearmament programs prior to the war were much more effective in stimulating the economy.
During the Depression years, Roosevelt took a strongly populist position, blaming Wall Street and big business (the "economic royals") for the Depression. This theory was enormously popular with large numbers of voters, but few economists today believe that there is any substance to the theory. The Depression was likely the result of the Federal Reserve's failure to expand the money supply following the severe contraction triggered by the stock market crash of October 1929.
Most of the money supply of the United States is in the form of bank deposits and other instruments rather than actual dollar bills. When 1928 saw record numbers of new stock issues, and the Federal Reserve cut the prime interest rate in an effort to prevent Britain from going off the gold standard, speculation in stocks overheated the market and a crash was all but inevitable. The crash resulted in numerous bank failures, 90% of which were of small banks in states that had unit-banking laws forbidding banks to have more than one branch. These banks lacked a diverse investment base and were vulnerable. With their collapse, a third of the United States' money supply disappeared. This contraction meant that consumers and businesses had less money with which to buy goods or raw materials. This in turn resulted in reduced demand, canceled orders, and layoffs of workers.
Herbert Hoover, who was President at the time of the crash, did nothing to increase the money supply. Neither did Roosevelt after his election. (In fairness, it was not until the 1950s and 1960s that economist Milton Friedman identified bad monetary policy as the root of the Depression, for which he later received the Nobel Prize.) What Roosevelt did instead was to centralize the Federal Reserve system, ensuring that the mistakes of even fewer people would have an even greater effect on millions; institute deposit insurance with fixed premiums, so that insolvent banks would be subsidized by solvent banks (the full effects of which were seen in the 1980s with the savings and loan bailout); raise taxes enormously, ensuring that there was even less cash for investment in new enterprises that might have created jobs; impose confiscatory taxes on businesses that retained profits, making it harder for these businesses to accumulate capital; institute massive jobs programs that shifted money to politically important states without actually increasing the money supply; artificially hold up wages through laws supporting labor unions, which ensured that massive unemployment would continue, particularly among African-Americans (who were excluded from most unions); fix prices for hundreds of commodities, ensuring that there would be surpluses or shortages, depending on how the fixed price compared with the market level; and artificially raise agricultural prices through the perverse mechanism of destroying produce at a time when many were hungry.
The New Deal did violence to traditional economic rights, which the Roosevelt administration dismissed as "secondary", and greatly extended the federal powers. The Supreme Court struck down important early New Deal legislation as unconstitutional, but Roosevelt succeeded in pressuring swing voters on the Court to ensure support for later measures. The resulting court opinions were marvels of twisted reasoning that ran roughshod over both precedent and the written Constitution.
Some economists take a more positive view of the New Deal, arguing that it prevented the United States from succumbing to Fascism by giving hope to those hit hardest by the Depression. They also argue that programs such as Social Security and deposit insurance are a lasting positive legacy of the New Deal, in spite of their flaws.
The rightness of Roosevelt's policies towards the Axis should not blind one to deep flaws in Roosevelt's economic policies. Roosevelt had to back away from his populist economic policies after the recession of 1938, which left the public increasingly dissatisfied with the New Deal. The gathering storm clouds abroad convinced Roosevelt that he had to have the support of big business if the country was to rearm for war. By then, the future Axis powers had grown contemptuous of the United States, which had failed to recover when their own economies were seemingly booming again. This may have been a factor in the failure of appeasement and deterrence in the final years of peace.
References
The Pacific War Online Encyclopedia (c) 2006-2007 by Kent G. Budge. Index