The Great Depression

Prosperity in the 1920s was unevenly shared. Per capita income rose 10 percent for all Americans during the decade but 75 percent for the wealthiest. Farmers had been in depression since 1920, when crop prices began to fall, and soil exhaustion compounded their troubles. The international gold standard tied nations’ economies together, so shocks in one country spread to others.

Historians and economists stress a combination of causes: rising inequality, weak demand, rural collapse, overextended investors, and the bursting of speculative bubbles. The crash of 1929 shook confidence, but the decisive blow was the collapse of the banking system: regional banking panics in 1930 and 1931 were followed by national and international crises through 1933. The Federal Reserve raised interest rates in 1928 and 1929 and then failed to act as a lender of last resort while thousands of banks failed. In 2002 Federal Reserve governor (later chairman) Ben Bernanke acknowledged that the Fed’s mistakes had contributed to “the worst economic disaster in American history.” The Smoot-Hawley Tariff of 1930, the highest in American history, prompted retaliation abroad; world trade fell from $36 billion in 1929 to $12 billion in 1932.

Industrial production plummeted, prices fell, and debts became crushing. Families lost homes and farms to foreclosure; homeless Americans built shantytowns called “Hoovervilles.” By 1932 sociologists estimated that millions of men were on the roads and rails looking for work. On the Great Plains, drought turned farmland into the Dust Bowl.

President Herbert Hoover believed in limited federal action. In 1932 he created the Reconstruction Finance Corporation to lend to banks, railroads, and businesses, but critics complained it bypassed the needy. That summer, thousands of unemployed World War I veterans — the “Bonus Army” — camped in Washington to demand early payment of promised bonuses; Hoover ordered them out, and troops under General Douglas MacArthur burned their camp.

The crisis hit some groups hardest. Black workers were often the first fired. Officials in the Southwest pushed out Mexican immigrants and Mexican Americans through deportation raids and “repatriation” drives; the Mexican-born population of Arizona, California, New Mexico, and Texas fell from about 617,000 in 1930 to 377,000 in 1940.

Voters elected Franklin D. Roosevelt in a landslide in 1932. The downturn bottomed out in March 1933, when he declared a national bank holiday. The New Deal brought relief, recovery, and reform, but recovery was interrupted by a second, “double-dip” recession in 1937. Unemployment remained in double digits in 1940, and only wartime mobilization restored full employment.

The Depression permanently changed Americans’ expectations of government: Washington now took responsibility for the economy, banking stability, and a basic safety net. Memories of hard times shaped the outlook of two generations, and economists and central bankers still study the Depression to avoid repeating its mistakes.