Depression and World War II, 1929–1945 (Overview)

DEPRESSION AND WORLD WAR II, 19291945 (OVERVIEW)


When Herbert Hoover (19291933) took the oath of office as president of the United States in March of 1929, he and most Americans were confident that the economic prosperity that had characterized the 1920s would continue indefinitely. Individual income had risen from $480 in 1900 to $681 in 1929. Purchasing power had increased even more as improvements in manufacturing methods and technology brought down prices for many goods. Yet, by the end of 1929, millions of Americans were unemployed and much of the nation's industrial capacity was idle. Hoover's promise that poverty was about to be eliminated from the nation was mocked through the name "Hooverville" attached to the many ramshackle camps of the dispossessed. The nation was mired in the Great Depression (19291939), which continued until preparations for World War II (19391945) began to revive the economy.

The causes of the Great Depression were complex and rooted in the transition of an economy based on the production of durable goods and building infrastructure to one based on the manufacture and sale of consumer goods. The introduction of a wide range of new consumer products after World War I (19141918) helped end the post-war recession relatively quickly and firmly established the new economy.

Farmers had not shared in the prosperity of the 1920s. They were encouraged to expand production during World War I and had borrowed heavily to bring more land into production and to take advantage of mechanized farm equipment, especially the tractor. This created a problem when the end of the war came almost before the farmers could bring their new land and equipment into full use. As Europe recovered from the devastation of the war farm prices fell, leaving farmers with sizable gaps between their incomes and their expenses.

On the industry front, rising wages for workers during the 1920s were rooted in increasing efficiency. Industrial production increased faster than industrial employment; profits increased even faster. Fewer workers were needed to produce more goods. Much of the wealth created by the new economy was returned to shareholders as stock dividends. While this spurred reinvestment and kept the economy healthy when infrastructure and durable goods were its backbone, the new consumer products-based economy presented a different situation. Surpluses of inventory began to accumulate and many industries began to cut back on production and employment.

A third factor leading to the depression was the increase in consumer debt. For most of U.S. history debt was seen as a negative thing. Except for a mortgage, most consumers avoided debt and saved for things they needed. The array of new products available during the 1920s, along with the introduction of the installment plan, broke down this traditional resistance to making payments over time and Americans accumulated unprecedented levels of debt.

A fourth factor was the interconnection of the U.S. and European economies. Following World War I the United States began lending money to Germany to facilitate the payment of war reparations. Germany paid England, France, and the other allies, who then repaid their war-time loans from the United States. When the European economies experienced economic crises in the late 1920s the cycle was broken and shortages of capital quickly hit the United States.

The final factor leading up to the depression was the national fascination with the stock market and large-scale speculation with borrowed money. The expansion of industrial production and profits made stocks an attractive investment. New companies (formed to manufacture new products) and established firms that expanded their sales offered very impressive returns on their stocks in the early 1920s. As stock prices rose steadily the market attracted investors who only intended to hold the stock until it turned a profit. The dividends, or actual return on the investment, became secondary to the market itself. The seemingly endless capacity of the market to rise lured millions of Americans to buy stock on margin, i.e., a credit loan with the promise to pay within a stipulated period, usually 30 days. As long as the stock increased in value everything was fine.

In October 1929 the stock market began to show signs of reversing its long upward trend. Many firms began to experience a decline in or slower growth in profits due to excess inventories caused by slowing sales. Declining stock prices forced those with margin contracts to sell their investments in order to minimize their losses. Stock prices, which had surged upwards steadily for years, now spiraled downward. J.P. Morgan and others tried to stabilize the market, but its crash wiped out many investors. The most serious consequence of the collapse of the stock market was that it became almost impossible for companies to use the sale of stock to raise capital or to cover their short-term needs. Massive layoffs and wholesale closures of plants followed rapidly after the market's collapse.

The economy now spiraled downward, seemingly out of control. Unemployment spread across the nation and banks began to fail as debtors defaulted and depositors withdrew their funds. Within weeks it was clear that the entire nation faced a grave economic crisis.

The Hoover administration did not see the depression as a reason to deviate from its basic economic policies and it attacked the depression with traditional remedies. Federal construction projects were moved ahead of schedule and Hoover urged state and local governments to do the same. The Agricultural Marketing Act was designed to encourage the organization of farm cooperatives to address the farmers' problems. Other federal legislation established the Grain Stabilization Corporation and the Cotton Stabilization Corporation to shore up prices of those key crops. Hoover and his administration tried to keep people's hopes up with frequent predictions of the imminent revival of the U.S. economy.

The Smoot-Hawley Tariff of 1930 raised tariff rates in an effort to promote the purchase of U.S. manufactured goods. By early 1931 there were signs that the economy was on an upward swing and that the Hoover administration's optimism and adherence to traditional policies were about to be vindicated. In March of that year, however, the European economic situation turned from bad to worse. Hurt by the loss of U.S. markets due to Smoot-Hawley and the resulting crisis, Europe's economic problems dragged the fragile U.S. economy down to new depths. A wave of bank failures further eroded public confidence in the economy and dried up sources of financing for businesses. Many individuals lost their life savings when banks failed.

Hoover responded by proposing the formation of the Reconstruction Finance Corporation (RFC). Chartered by Congress in January 1932, the RFC loaned funds to banks, railroads, and building and loan associations. This was followed by the expansion of funds available to Federal Land Banks and a liberalization of Federal Reserve requirements for banks. The Glass-Steagal Act released gold to meet foreign demands and the Federal Home Loan Bank Act tried to stabilize the mortgage market. Hoover, however, refused to agree to any more direct programs to help end the depression and vetoed the Garner-Wagner Act which would have provided direct relief and large scale public works. He did sign legislation allowing the RFC to lend money to states for self-liquidating public works projects and to help with relief when state and local funds were exhausted.

Despite Hoover's efforts the economy worsened and appeared headed for a shut down. At the beginning of the summer of 1932 iron and steel production, for example, stood at twelve percent of capacity, unemployment nationally approached 25 percent and was much higher in single industry towns. Businesses failed at record rates, banks closed their doors, and the once vibrant economy was moribund.

During the presidential election of 1932 Franklin Delano Roosevelt (19331945) campaigned on the promise of a New Deal, offering hope for an economic recovery. During the months between the November election and his March 4 inauguration, Roosevelt and his "Brains Trust" developed a legislative agenda to provide relief for those out of work, recovery for the economy, and reforms to prevent such a disaster in the future. The first three months of the Roosevelt administration, known as the 100 Days, saw an unprecedented volume of legislation move quickly though Congress.

Roosevelt's first priority was relief and a number of government agencies were formed to provide work. The Civil Works Administration (CWA), the Public Works Administration (PWA) and the Works Progress Administration (WPA) provided jobs initially on public works construction projects cosponsored with local governments. The WPA developed a wide range of projects that employed writers, actors, and historians, among others, to use their special skills and talents. The National Youth Administration (NYA) provided work and job training for young people and helped them stay in school to complete their education. The Civilian Conservation Corps (CCC) provided jobs for young men on conservation and reforestation projects. These programs and others, cumulatively, put millions of people back to work.

While New Deal employment programs gave people money to meet their needs, its recovery programs sought to allow the economy time to regain its strength. The National Industrial Recovery Act (NIRA) established a series of boards to oversee every industry in the country. Each National Recovery Administration (NRA) board established rules for its industry, setting hours of work, wages, prices, and many other details. The idea was to limit competition while the economy regained its strength. Businesses that subscribed to the NRA code for their industry received a "Blue Eagle" emblem and consumers were urged to buy where they saw the blue eagle. In 1935 the Supreme Court held the NIRA unconstitutional in the case A.L.A. Schecter Poultry Corp. et. al. v. United States.

A second recovery goal was solving the longstanding problems of farmers. The Agricultural Adjustment Act provided price supports for farmers linked to limits on production and paid for by a processing tax administered by the Agricultural Adjustment Administration (AAA). The Commodity Credit Corporation provide loans to farmers who agreed to take land out of production. Despite initial negative images of crops being plowed under and hogs and piglets slaughtered in 1933, the program succeeded in raising farm income and crop prices and reducing farm debt from their 1932 levels. In 1936 the Supreme Court held the processing tax unconstitutional in United States v. Butler et al. In 1938 a second AAA was created by Congress to address the continuing problems of farmers.

The third aspect of the New Deal was its attempt to reform the economy to prevent future depressions. Several agencies were created to address specific problems that were seen as major factors in bringing on the depression. The Securities and Exchange Commission (SEC) was established to regulate the stock market and the Federal Deposit Insurance Corporation (FDIC) insured deposits against loss if the bank failed. In 1935 Roosevelt proposed a social security system, financed by a payroll tax, to provide pensions for those over age 65. The Social Security Act also established unemployment insurance, aid to the disabled and blind, and to women with young children. In a more general way the New Deal established the federal government as a major participant in every aspect of the economy.

Despite all the New Deal programs the economy remained stalled and millions remained unemployed, underemployed, or employed in federal programs. The value of industrial production of consumer goods in 1937 was still only 89 percent of what it had been in 1929 and declined to less than 75 percent in 1938. Steel production in 1938 was half what it had been in 1929, having declined sharply after several years of recovery. Throughout the economy it was hard to find good news as 1937 turned into 1938.

German leader Adolf Hitler's (18891945) invasion of Poland in September 1939 brought war to Europe, a war the United States was determined to avoid. It became clear to Roosevelt and his advisors that with the fall of France U.S. neutrality was impossible, even if the country avoided combat. The war led Congress to authorize large sums to build up the nation's defenseswhich helped revive industrial production. The defense build up also included expanding the armed forces and equipping them. In September 1940, Congress authorized a military draft. Beginning with the Lend-Lease program the United States gradually began to supply the British and later acted to defend ships carrying the weapons and other war materiel to them. War preparations brought mines and factories back in to operation, provided markets for farm production, and put people back to work.

The revival of the U.S. economy was impressive for its scale and its speed. Manufacturing production had an index value (a measure of production) of 58 in 1929 and had fallen to 46 in 1938, by 1940 it had reached 66, and rose to 110 by 1942 and 133 in 1943. Steel production, to cite a key industry, passed its 1929 level of 56 million tons in 1940 and reached 80 million tons in 1944. Unemployment fell from 19 percent in 1938 to 1.2 percent in 1944. Average weekly earnings in manufacturing more than doubled between 1938 and 1944. The challenge facing the economy changed from a shortage of jobs to a shortage of workers. The demand for workers in defense industries created new opportunities for women, Hispanics, and African Americans. The expansion of industrial production not only revived existing industrial operations and fields but saw new plants built, usually by the government, for war production in existing industrial areas. In addition, plants were built in new areas to disperse production of war materiel in case of sabotage or bombing. This policy decision greatly expanded the industrial capacity of the United States and spread it over a much wider area of the country.

Manufacturing was not the only segment of the economy to benefit from the war-time demands for increased production. Agriculture also expanded tremendously. The parity ratio, which compares farm prices with farm expenses, had edged downward from 1917 through 1941, falling from 120 to 93, with a low of 58 in 1932. The parity ratio rose to 113 in 1942 and remained above 100 until 1953. Farm wages rose from an index figure of 89 in 1932, to 208 in 1942, and 366 in 1945.

The revival of the economy during the war combined with the manpower demands of the armed services brought the various New Deal employment programs to an end. The federal government, however, remained heavily involved in the economy and a number of regulatory and coordinating agencies were created. Not only did defense contracts drive the manufacturing sector, but the government provided draft deferments for those working on farms or with critical industrial skills and mounted an advertising campaign encouraging women to work in the defense industry. The government also coordinated industrial production through the War Production Board, while the National War Labor Board set wages, hours, and working conditions and the War Labor Disputes Act allowed the government to seize factories in case of strikes. There were also price controls and extensive rationing of consumer goods including tires, gasoline, coffee, shoes, canned foods, sugar, and others administered by the Office of Price Administration. The War Food Administration worked to reverse the AAA's efforts to limit agricultural production to meet increased demand.

As the end of the war drew near there was concern about the conversion to a peacetime economy. The return of millions of servicemen seeking jobs during the conversion potentially compounded the problem. The Servicemen's Readjustment Act of 1944 (popularly known as the GI Bill of Rights) provided unemployment insurance, business loans, low-cost home mortgages, and educational assistance to returning veterans. The program spread the reentry of veterans into the workforce over a number of years and stimulated the home building industry. The GI Bill was an important factor in avoiding a post war recession.

At the end of the war there was tremendous demand for consumer goods that people had not been able to purchase for some time, first because of the depression and then because of the conversion of the economy to war production. Combined with the accumulated savings from money invested in war bonds and in savings due to the lack of goods during the war, the economy was poised for a period of prosperity.


See also: Civilian Conservation Corps, GI Bill, Glass-Steagal Act, Great Depression, Lend-Lease Act, National War Labor Board, New Deal, Office of Price Administration, Rationing, Reconstruction Finance Corporation, Franklin Delano Roosevelt, Smoot-Hawley Tariff, Social Security Act, Speculation, Stock Market, Stock Market Crash of 1929, War Production Board, Works Progress Administration, World War II


FURTHER READING


Blum, John Morton. V Was For Victory: Politics and American Culture during World War II. New York: Harcourt Brace, 1976.

Brinkley, Alan. The End of Reform: New Deal Liberalism in Recession and War. New York: Knopf, 1995.


Leuchtenburg, William E. The Perils of Prosperity, 19141932. Chicago: University of Chicago Press, 1958.

. Franklin D. Roosevelt and the New Deal, 19321940. New York: Harper and Row, 1963.

Watkins, T.H. The Great Depression: America in the 1930s. Boston: Little, Brown and Company, 1993.

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Depression and World War II, 1929–1945 (Overview)." Gale Encyclopedia of U.S. Economic History. 1999. Encyclopedia.com. 23 Jul. 2016 <http://www.encyclopedia.com>.

"Depression and World War II, 1929–1945 (Overview)." Gale Encyclopedia of U.S. Economic History. 1999. Encyclopedia.com. (July 23, 2016). http://www.encyclopedia.com/doc/1G2-3406400241.html

"Depression and World War II, 1929–1945 (Overview)." Gale Encyclopedia of U.S. Economic History. 1999. Retrieved July 23, 2016 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-3406400241.html