Great Depression

Photograph of unemployed men at charity

National Archives #541927

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. Most historians consider the Great Depression to have encouraged the rise of authoritarian regimes in these countries, triggering the chain of events that ultimately led to the Second World War.

United States. Roosevelt sought to counter the Depression with the New Deal, a massive centralization and expansion of government economic powers. 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 economic recovery.

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. A more plausible explanation is that the Depression was 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 likely cause 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. This reflects the thinking of Roosevelt himself, who declared in his first inaugural address that "the only thing we have to fear is fear itself." These economists 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.

Nevertheless, the rightness of Roosevelt's policies towards the Axis should not blind one to the 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.

Japan. The Great Depression was severe in rural Japan, particularly in the northeastern part of Honshu, where falling prices for rice and silk led to famine. Silk was Japan's major source of dollars, peaking in 1929 at $363 million dollars and employing some 2.2 million Japanese farm households, mostly in Nagano prefecture. Some rural Japanese tenant farmers were driven to selling their daughters into prostitution and encouraging their sons to emigrate to Korea and Manchuria. 

The effects of the Depression in Japan were compounded by the Smoot-Hawley Tariff Act of 1930, one of the most misguided pieces of legislation ever enacted by the U.S. Congress. This imposed draconian tariffs on imported goods in order to prop up domestic producers, but it also raised prices of goods for consumers and provoked retaliatory tariffs from other nations that deepened the worldwide depression. The traditional ceiling of 90% total tariffs on an imported good, which based on the belief that any industry that could not compete even with a factor of two cost advantage didn't deserve protection, was thrown aside. Japan was particularly hard hit by the tariffs, since the collapse of the silk market forced Japan to look for other export markets just as Smoot-Hawley slammed the door on Japanese penetration of such markets.  Smoot-Hawley came just as the japanese had decided to put the yen back on the gold standard. Attempts to prop up the yen drained half the Japanese gold reserves, worth about $500 million in 1930, in less than a year.

These economic disasters fueled popular resentment against capitalism and democracy as embodied in the zaibatzu, Japan's large industrial combines, and the political parties, which were perceived to be tools of the zaibatsu. Talk of a Showa Restoration, which would sweep away corrupt Western values, was accompanied by the preaching of hakkō ichiu (八紘一宇 "the eight corners of the world under one roof"), which amounted to Japanese control of East Asia and perhaps beyond. This was accompanied by the rise of numerous secret patriotic societies, such as the Black Dragon (Amur River) Society. A conspiracy to overthrow the Japanese government took root in Ibaraki Prefecture and led to the 26 February 1936 mutiny. The 2-26 Incident, as it was known in Japan, marked the beginning of military domination of the government, though the Kwantung Army had already proven its ability to act independently of the civilian government in Tokyo during the Manchuria Incident of 1931.


Larrabee (1987)

Miller (2007)

Powell (2003)

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