Government, United States Federal, Impact of the Great Depression on

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Prior to 1930, the economic role of the federal government was relatively small. Federal civilian employment barely exceeded 1 percent of total employment, and the government's share of the gross national product (GNP) was a mere 1.6 percent. Aside from veterans' pensions, the federal government did not provide a social safety net of transfer payments to the aged, the unemployed, or the merely poor. Larger banks were federally regulated, but there was no federal deposit insurance, and failures among smaller banks were common in the 1920s. The stock market boom of the 1920s proceeded without significant federal oversight. Only 2.5 million families paid any federal income tax in 1929.

After 1929, the federal government's economic role increased substantially. By 1940 its civilian payroll exceeded one million workers, and federal purchases of goods and services accounted for over 6 percent of the GNP. From the New Deal period beginning in 1933 came many programs that have remained important into the twenty-first century, including Social Security, unemployment compensation, the minimum wage, agricultural price supports, deposit insurance, and protection for labor unions.

The decrease in aggregate demand that under-lay the Depression caused production to fall. By 1933, about one-fourth of the labor force was unemployed. Falling prices increased the burden of debt on farmers, business firms, and home owners, and bankruptcies and foreclosures increased.

The federal government under President Herbert Hoover moved promptly to try to deal with the Depression. Hoover pressed employers not to reduce wages, and he increased federal funding for public works projects. He also persuaded Congress to reduce income tax rates in December 1929. Despite misgivings, he accepted a bill to pay about $1 billion as a bonus to war veterans in 1931. Beyond this, Hoover opposed giving federal money to the unemployed. In June 1930, he signed the Hawley-Smoot Tariff bill, which greatly increased the taxes imposed on imports. The tariff reduced U.S. imports and helped spread the Depression to other countries.

Worsening business led to a rising tide of bank failures, beginning in late 1930. This in turn provoked depositors to withdraw currency and gold coin. Hoover refused to suspend convertibility of dollars into gold, and gold outflows exerted a strong deflationary force. At Hoover's urging, Congress created the Reconstruction Finance Corporation (RFC) in January 1932. It provided funds to distressed banks.

The federal government entered the Depression with a substantial surplus of revenues over expenditures. Hoover was willing to see federal spending increase as long as it did not lead to deficit spending. However, as declining incomes led to declining tax revenues and a deficit of $2 billion in 1931, Hoover reduced federal spending and persuaded Congress to enact the largest peace-time tax increase in American history.


During the presidential campaign of 1932, Franklin Roosevelt criticized the deficits under Hoover, and on taking office in March 1933 he moved to cut federal spending, including veterans' benefits. He also suspended the convertibility of dollars into gold; private individuals were required to turn in all their gold coins. Roosevelt ordered all the banks to close and be examined, so the sound ones could be reopened. When they reopened, depositors stopped drawing out funds, and the tide of bank failures ceased. In June 1933, Congress created the Federal Deposit Insurance Corporation (FDIC), which successfully prevented a recurrence of the massive deposit withdrawals.

Roosevelt then undertook an extensive economic program that sought relief, recovery, and reform. Unlike Hoover, Roosevelt was willing to use federal money to make direct assistance payments to the unemployed. The Federal Emergency Relief Act of May 1933 authorized $500 million for such purposes. In June 1933 the government created the Public Works Administration (PWA), which was empowered to undertake government construction projects that would provide employment and produce useful infrastructure. Among its many activities were slum clearance and the development of public housing projects. These activities were extended by the U.S. Housing Act of September 1937. Greater stress on job creation was provided by the Civil Works Administration (CWA), begun in December 1933. Lasting for only four months, the CWA employed approximately five million people and spent nearly $1 billion. By early 1934, about one-fifth of American families were receiving direct benefits from one or more of these programs. The Works Progress Administration (WPA), established in August 1935, gave primary emphasis to providing jobs for the unemployed, with secondary attention to the quality of the projects undertaken. WPA employment through the rest of the 1930s averaged slightly over two million persons. Much more popular was the Civilian Conservation Corps (CCC), established in April 1933. It recruited young men for outdoor work, such as tree planting and improving national parks.

In May 1933 Congress created the Tennessee Valley Authority (TVA). Initiated out of the debate over the disposition of the government power dam and nitrate plants built at Muscle Shoals, Alabama, during World War I, the TVA was designed as a comprehensive economic development plan for the region. Multipurpose dams provided cheap electricity and created recreational facilities on the resulting lakes.

In the area of international trade, the high-tariff policy adopted in 1930 with the Hawley-Smoot Tariff was modified by the Trade Agreements Act of May 1934. This authorized the government to negotiate reciprocal trade agreements with other countries, providing for mutual reduction of trade barriers. It helped expand the value of U.S. merchandise exports from $1.6 billion in 1932 to $5 billion in 1941.


The National Industrial Recovery Act of June 1933 authorized—even pressured—business firms in each industry to adopt codes of "fair competition." Such codes, when approved by the National Recovery Administration (NRA), were binding on all firms in the industry that joined the NRA and were exempt from antitrust laws. Each code was required to contain pro-labor provisions, such as minimum wages, maximum hours, and protection for collective bargaining. Many of the codes contained provisions to reduce competition. Since the program did nothing to increase the demand for goods and services, it also did little to improve employment and was generally condemned by economists. The Supreme Court held it to be unconstitutional in 1935. However, measures to limit competition in individual industries, such as airlines, motor transport, petroleum, and coal, were subsequently adopted.

The New Deal recovery program also involved agriculture. On average, farm prices in 1932 were 56 percent below their 1929 levels. Raising farm prices and farm incomes was the major goal of the Agricultural Adjustment Act of May 1933. This legislation provided for cash benefits to farmers who agreed to reduce their output. To finance the benefits, the government levied a "processing tax" on firms that processed farm products. In addition, the government created the Federal Surplus Relief Corporation, which purchased farm products and distributed them to needy persons.

In response to these programs and to the international depreciation of the dollar, farm prices rose more than 50 percent from 1933 to 1935. The price increases benefited the wealthiest farmers and tended to burden consumers in proportion to their food consumption, falling most heavily on low-income families.

Like the National Industrial Recovery Act, the first Agricultural Adjustment Act was declared unconstitutional, in January 1936. Congress responded by adopting the Soil Conservation and Domestic Allotment Act in February 1936. This paid farmers to reduce output of soil-depleting crops. The second Agricultural Adjustment Act of February 1938 sought to implement the principle of the ever-normal granary—buying up surplus products in times of abundant production to be carried over for periods of less abundance. Emphasis tended to shift from reducing farm output to buying surplus products, but all with the goal of raising farm incomes.

The New Deal "reform" campaign extended into numerous industries and activities. Notable were the regulations imposed on corporate finance by the Securities Act of May 1933 and the Securities Exchange Act of June 1934. The latter created the Securities and Exchange Commission (SEC). Any firm wishing to issue new securities (stocks and bonds) was required to publish information about the company and how it would use the money. Companies whose securities were traded on organized exchanges were also required to file periodic reports of their condition and activities. Various unfair methods of securities trading, such as insider trading, were outlawed.


The Depression fell heavily on workers through loss of jobs, shorter hours, and reduced wages. Labor unions pressed for measures to improve their bargaining position. In 1932 the Norris-LaGuardia Act restricted the use of injunctions as an anti-union practice. As noted, the National Industrial Recovery Act of 1933 had contained provisions relating to minimum wages and collective bargaining. In May 1935 Congress enacted the National Labor Relations Act (Wagner Act), which gave workers the right to organize unions and to bargain collectively with employers. It also outlawed a number of anti-union practices and created the National Labor Relations Board, which had the authority to conduct elections among workers to determine if they wanted to be represented by a union. When a union was certified by the National Labor Relations Board, the employer was required to bargain with it in good faith.

In June 1938 Congress approved the Fair Labor Standards Act, which instituted a minimum wage law. Employers in interstate commerce were required to pay workers at least twenty-five cents per hour and to pay extra for overtime in excess of (initially) forty-four hours per week, and ultimately forty hours per week. The minimum wage was steadily increased over time, as was the proportion of workers covered by the law.


One of the most far-reaching of New Deal economic measures was the Social Security Act of August 1935. It created three types of programs: (1) old-age pensions to be financed by a tax on wages—benefits were paid as a matter of right, not according to need; (2) unemployment insurance to be administered by states, financed by another wage tax—both of these programs developed into large elements of the federal fiscal system over the rest of the twentieth century; and (3) federally funded, state-administered programs to aid low-income families—benefits were based on need and financed from general revenue. The most controversial was the program of aid to families with dependent children—"welfare."

From fiscal year 1932 to fiscal year 1940, federal cash payments to the public roughly doubled, from $4.8 billion to $9.6 billion. Higher tax rates raised the government's cash receipts from the public by almost the same dollar amount, from $2 billion to $7 billion. Most economists now believe this high-tax policy held down the potential stimulating effect of federal expenditures.

The New Deal economic program did not succeed in producing rapid recovery of production and employment, but recovery was rapid after the United States went to war in 1941. Most of the relief and recovery measures lapsed. However, the scale and scope of the federal government were vastly enlarged in response to the Depression. Notable areas that persisted through the twentieth century included:

  1. Agricultural price supports and production controls.
  2. The social "safety net" associated with Social Security, which transfers payments to the elderly, the unemployed, and the unfortunate.
  3. Measures to protect workers through the minimum wage law and support for labor unions.
  4. A vast array of regulatory programs directed at individual industries, including railroads, highway transport, airlines, electric power, and natural gas.
  5. Regulation of banking and finance, particularly through the Securities and Exchange Commission and the Federal Deposit Insurance Corporation and through direct loan and loan guarantee programs, particularly involving housing.

Influenced to an extent by the macroeconomic ideas of John Maynard Keynes, the government became committed to "demand management" to promote full employment, stable prices, and economic growth. Abolition of the gold standard enabled the money supply to be controlled by the government through the Federal Reserve System. Commitment to the balanced budget was replaced by a willingness to use deficit finance to combat depression. As a result, no serious economic depression occurred in the remaining years of the twentieth century.

One of the most significant legacies of the Great Depression was the dramatically altered relationship between the people and the federal government. The role of the federal government would continue to grow in later years, but it is clear that the decisive shift occurred during the Depression.



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