Great Depression in the United States

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The Great Depression in the United States of America was part of an international economic crisis that was longer and deeper than any that have happened before or since. It had a profoundly damaging effect upon welfare and morale of the people of the United States, depriving many of jobs, homes and savings, creating widespread poverty, and destroying a previous mood of optimism. It started eleven years after the end of the First World War and was not over until the outset of the Second World War.

Its effect upon many Americans was reflected in a popular song of the time that include the lines:

They used to tell me I was building a dream...
once I built a railroad; now it's done ...
brother, can you spare a dime?
"Brother, Can You Spare a Dime," lyrics by Yip Harburg, music by Jay Gorney (1931)[3]

The causes of that international disaster are discussed in the article on the Great Depression. The following article provides only a factual account of what happened to the American economy and to the American people.

For an annotated chronology of the main events, see the Timelines subpage;
for associated international developments see the article on the Great Depression;
for a summary of the relevant US economic statistics, see the Tutorials subpage;
for definitions of terms shown in italics see the Glossary.


Background (1918 - 23)

The condition of the United States in the 1920s differed markedly from its pre-war condition. The wartime destruction of much of Europe's productive capacity had made it the richest country in the world, and Europe's wartime borrowing had made the United States the largest creditor.

After the end of the war, the full convertibility of the dollar into gold under the gold standard which had been suspended during the war, was immediately resumed. The shock of the ending of wartime production led to a minor recession that was followed by a resumption of strong output growth. A few years later there occurred severest bout of deflation ever experienced in the United States when wholesale prices fell by 56% in a little over a year, following an attempt to end wartime inflation by a tightening of the federal budget, and sharp reduction in the monetary base. [1]

In 1921 Warren Harding became President and pushed through a program of tax reductions, farming subsidies, tariffs and immigration restrictions.

In 1923, a committee appointed by Herbert Hoover (then Commerce Secretary) published a 300-page report on the subject of recessions and the associated unemployment.[2] The committee had regarded it as inevitable that every boom would be followed by a slump. It had considered how a future boom could be restrained and how the following downturn could be countered. Among its recommendations were the postponement of commercial and public investment projects from times of expansion to times of contraction and the control of banks' credit expansion. Although Hoover endorsed those recommendations at the time, he subsequently proposed severe limits upon the government's ability to act upon them. He said—at the depth of the depression—that there should be "... no tampering or inflation of the currency," that the budget should be "unquestionably balanced, even if further taxation is necessary," and that "the government credit [should] be maintained by refusal to exhaust it in the issue of securities." Later, John Kenneth Galbraith understood these policies to amount to the rejection of both fiscal policy and monetary policy actions in face of a depression.[3]

Monetary policy in the 1920s was dominated by Benjamin Strong, a participant in the creation of the Federal Reserve System and first governor of the Federal Reserve Bank of New York. Strong maintained a close relationship with Montague Norman of the Bank of England who was most interested in recovering the British financial strength following the First World War. In 1924, Strong supported the British pound by lowering U.S. interest rates, which by making the dollar less attractive and the pound sterling more attractive to investors, drove up the foreign exchange value of the British currency and facilitated Britain's return to the gold standard. In 1927, Strong forced through the Federal Reserve System a decrease in the discount rate from 4 to 3 percent which is quoted to have called "un petit coup de whisky for the stock exchange." This appeared to have been influenced by the previous Long Island meeting of central bankers of Great Britain, the United States, France, and Germany to discuss means of strengthening Britain's gold reserves and of the general European currency situation.[4]

Boom (1923 - 29

Following the election of Calvin Coolidge to the Presidency, the mid-1920s came to be known as the "Coolidge Prosperity". Having declared that "the chief business of the American people is business" the President persuaded Congress to give private business substantial encouragement, including construction loans, profitable mail-carrying contracts and other indirect subsidies [5]. America experienced rapid increases in mass production and mass consumption, turning it into the richest society in the world. It saw the birth of what came to be known as the "American Dream" - a "dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement" [6] and became a modern middle-class economy of radios, consumer appliances, automobiles and suburbs with about one American in five owning a motor vehicle. It also became a land of great inequality, with the richest one percent of U.S. households holding an estimated 45 percent of national wealth, [7]. Hire-purchase became increasingly popular [8], and an increase in the use of stockbrokers' margin accounts for the purchase of stocks. Holidays in the Florida sun were growing in popularity, plots were being assigned to anyone able to pay a 10 per cent deposit and land prices were driven up initially by a growth in demand by prospective builders, but later by speculators; creating a "bubble" that finally burst, with a collapse of land prices, in 1926.

Slump (1929-31)

The boom in economic activity continued in the following years and is believed to have intensified after the 1927 monetary relaxation and it was then accompanied by rapid rises in prices on the New York Stock Exchange. Influenced, perhaps, by the Florida land price, bubble it was widely supposed that this, too was a speculative bubble that would inevitably burst, with damaging consequences. The 1923 report had recommended the use of monetary policy to counter such speculation and in 1928 some members of the Federal Reserve Board became convinced that a tightening of monetary policy had become necessary and by July of 1928 the discount rate had been raised in New York to 5 per cent, the highest since 1921 and the System's holdings of government securities had been reduced from a level of over $600 million at the end of 1927 to $210 million by August 1928 [1]. Benjamin Strong expressed reservations about that policy, but he died in October and the policy was supported by his successor, George Harrison, and the discount rate was raised a further point to 6 per cent in the following year. Disaster followed. During September and October of 1929 production fell at an annual rate of 20 per cent, wholesale prices at a rate of 7.5 percent and personal income at a rate of 5 per cent, and after the October stock market crash, the economy declined even faster. The Federal Reserve Board's desire to slow outflows of gold to France then led to a further tightening of monetary policy [9], and in the autumn of 1931 there was yet another tightening of monetary policy, following the UK's sterling crisis. A wave of speculative attacks on the pound had forced Britain to leave the gold standard and, anticipating that the United States might the next to do so, speculators turned their attention from the pound to the dollar causing an outflow of gold, which was stemmed by an increase in the discount rate of the Federal Reserve Bank of New York[10].

1931 was also the year that saw the start of the 10-year series of devastating "dustbowl" droughts [11] and of the rural tragedy recounted in Steinbeck's "Grapes of Wrath". Although not part of the Great Depression, it contributed to its severity by raising unemployment, reducing demand and reducing the value of banking assets.

Banking Crises (1930 - 33)

There was a substantial reduction in the profitability of banking investments between 1929 and 1930 [12] and a series of bank failures in the South and the Midwest led to attempts by depositors to convert their deposits into cash. That produced a 'contagion of fear' that culminated in a run on the country's fourth largest bank, which had the grandiloquent name of "Bank of the United States", leading to its total collapse [13]. That failure further intensified depositors' mistrust of the banks, and more severe banking crises followed in 1931 and 1932, and by 1933, nearly half of the banks that had existed in 1929 had gone out of business, and most of the rest had suffered heavy losses. The loss of nearly half of the banking system and the depleted reserves of the remainder led to what is now called a "credit crunch", during which householders, farmers and small businesses found credit to be expensive and hard to get, and a widespread loss of confidence in the country's financial institutions. The financial system was further disrupted by widespread defaults among mortgage holders and by insolvencies among small firms.

Those developments were associated with a progressive deepening of the depression, and by 1933 about half of the country's industrial production capacity was idle and more than a fifth of its workforce was unemployed [14]. There was also an intensification of the mass exodus of farming families from the rapidly spreading dustbowl [15].

Social Consequences (1930-36)

The transition from the popular outlook of the "roaring twenties" to the sombre view of the "hungry thirties" was not immediate. At first the downturn seemed no worse than those that had happened before and there were reassuring forecasts of imminent recovery. Towards the end of 1930, however, the mood began to change. More and more often, jobs were being lost, savings were running out, and homes were being repossessed; and as time passed, more and more people were leaving their communities in search of work. A nationwide census of the homeless in the care of various agencies taken in January 1933, yielded a total of 370 thousand, and when an estimate of those sleeping outdoors was added, the total rose to at least 1.2 million [16]. By that time, thousands of families were sheltering in cardboard shacks in "Hoovervilles" in many American cities, hundreds of thousands were roaming the country in search of jobs, and many families were experiencing hunger and malnutrition [17].
Those who were already poor suffered further hardship. According to the Brookings Institution, nearly 60% of American families had already been unable to buy basic necessities in 1929, and their incomes often declined further in the 1930s [18]. Thirty-four million men,women and children had no income at all [19]. Even in 1937, the President of the United States was to say " I see millions of citizens - a substantial part of the population - who are at this very moment deprived of the bare necessities of life. I see one-third of a nation ill-housed, ill-clad, ill-nourished."[20]. (Roosevelt's "one-third of a nation" phrase was taken up by researchers that claimed that a third of the country's housing was bad enough to amount to a health hazard,[21]).
Disillusion with a system that had brought about such hardship generated a distinctly leftward political trend in academic circles [22], which was not widely shared, however. The cultural life of America continued to exhibit vigour and creativity with writers such as Hemingway, Scott Fitzgerald and Steinbeck and musicians such as Copland, Gershwin and Glenn Miller [23].

Rescue and Recovery (1932-38)


The only expansionary legislation introduced by the Hoover administration was creation of the Reconstruction Finance Corporation, which made loans to banks, railroads, farm mortgage associations, and other businesses. Under pressure from Congress, the Federal Reserve also made some expansionary moves between March and July, but when Congress dissolved they abandoned them.


When international reaction to Roosevelt's election led to a run on the dollar, the Federal Reserve Bank of New York asked him to close the banking system in order to stem the drain on its reserves [24], and soon after his inauguration he declared a four-day "bank holiday". Also in early 1933, the President took action to revive the financial sector, tackling the problems facing both creditors and debtors. With the reopening of the banks in 1933 and the restoration of confidence in the banking system, deposits and money supply rose sharply [1].

Roosevelt had undertaken to allow the dollar exchange rate to fall in order to reverse the deflationary fall in domestic prices, and on the 5th of June, by a joint resolution of Congress, his administration was relieved of its obligation to convert dollars into gold. There was an immediate fall of about 30 per cent in the exchange rate between the dollar and the pound sterling. The period of a variable price of gold came to an end on 31 January 1934, when the President, acting under the authority of the Gold Reserve Act of 1933, fixed the dollar at $35 an ounce for gold thereby devaluing the gold dollar to 59 per cent of its former weight in gold [25].

Roosevelt's New Deal had three components: a relief component comprising employment-generating, social security and unemployment insurance systems; a recovery component including the appointment of a National Recovery Administration with powers to restrict competition, control prices and wages, and the provision of subsidies, and the funding of infrastructure investment projects; and reform component for the regulation of banking and finance.
 :(The New Deal is described in detail in an article with that title, and its economic implications are discussed in the article on the Great Depression.)

There were immediately favourable reactions to those policy changes. Stock prices almost doubled in the second quarter of 1933, farm prices rose sharply and there was renewed investment in automobile and steel production. Between 1932 and 1935, Gross National Product rose by nearly 20 per cent. and by 1935, unemployment was about 30 per cent below its 1933 level.


Several New Deal programmes had to be replaced in 1935 following Supreme Court objections, but the main features of the policy were preserved - including continued attempts to reduce inequality by supporting pay rates, and by 1937, real earnings were 30 per cent above their 1933 level. The recovery of economic activity continued, and by 1936, consumers expenditure and national income were back to their 1929 levels, although employment remained depressed. In 1936, however, there was a sharp reduction in government spending, and the Federal Reserve introduced a sharp increase in the reserve ratio. There followed a deep recession in 1937 and into 1938, and full employment was not restored until the onset in Europe of the second world war.


  1. 1.0 1.1 1.2 Milton Friedman and Anna Schwartz, A Monetary History of the United States 1867-1960 (Princeton University Press for NBER, 1963), 289. Cite error: Invalid <ref> tag; name "Friedman" defined multiple times with different content
  2. Committee of the President's Conference on Unemployment, Business Cycles and Unemployment, (McGraw Hill, 1923).
  3. John Kenneth Galbraith, The Great Crash 1929 (Penguin Books, 1992).
  4. Priscilla Roberts, "Benjamin Strong, the Federal Reserve, and the Limits to Interwar American Nationalism: Part II: Strong and the Federal Reserve System in the 1920s," Economic Quarterly–Federal Reserve Bank of Richmond, Spring 2000.
  5. "War, Prosperity and Depression", Chapter 9, An outline of American History, The United States Information Agency 2008
  6. James Truslow Adams: The Epic of America, Little Brown & Co, 1931
  7. Bradford De Long: "The Roaring Twenties", Economic History of the United States Chapter XII, 1997
  8. Sharon Murphy: "The Advertising of Installment Plans" in Essays in History, Vol 37, The Corcoran Department of History at the University of Virginia, 1995
  9. James Hamilton: Monetary Factors in the Great Depression, Journal of Monetary Economics, 1987
  10. For a more detailed account of the monetary policy of the period see par 1.2.3 of the tutorials subpage of the article on the Great Depression [1]
  11. Drought in the Dust Bowl Years,National Drought Mitigation Center, University of Nebraska–Lincoln, 2006
  12. Elmus Wicker: The Banking Panics of the Great Depression, Cambridge University Press 2000
  13. Michael Bordo (Ed): Money, History and International Finance: Essays in the Honor of Anna J Schwartz, NBER Conference Report, University of Chicago Press, 1989
  14. See the industrial production and unemployment statistics on the tutorials subpage
  15. Mass Exodus from the Plains, The American Experience, PBS 2008
  16. Joan M. Crouse: The Homeless Transient in the Great Depression: New York State, 1929-1941, State University of New York Press, 1986
  17. Great Depression and World War II, Learning Page, Library of Congress 2008
  18. James R. McGovern: And a Time for Hope: Americans in the Great Depression, Praeger, 2000
  19. Russell Freedman Children of the Great Depression, Houghton Mifflin Harcourt, 2005
  20. Franklin D Roosevelt: Second Inaugural Address, January 1937
  21. Edith Wood: That One Third of a Nation, Survey Associates Inc 1940
  22. Robert Cohen: Activist Impulses: Campus Radicalism in the 1930s, New Deal Network, 1993
  23. American Cultural History 1930-39, Lone Star College - Kingwood, 2001
  24. Barry Wigmore: Was the Bank Holiday of 1933 Caused by a Run on the Dollar?, Journal of Economic History, September 1987
  25. Michael Bordo, Owen Humpage, and Anna Schwartz: The Historical Origins of U.S. Exchange Market Intervention Policy, NBER Working Paper No. 12662, November 2006[2]