Industry, Effects of the Great Depression on

views updated

INDUSTRY, EFFECTS OF THE GREAT DEPRESSION ON

From a low point of recession in 1921 to its cyclical peak in 1929, the index of U.S. manufacturing production increased from fifty-four to one hundred. Within the overall upswing, the main expansion occurred during the 1922 to 1923 and 1928 to 1929 periods, and it was most pronounced in the automobile, electrical goods, and (to 1926) construction industries. Each of these sectors was associated with the expansion of "blocs" of interrelated activities, such as the rubber, paint, glass, steel, lumber, and engineering firms that supported the growth of the automotive industry. The other aspect of structural change in the 1920s was the performance of "sick" industries, notably cotton and woolen textiles, coal mining, and railroads. Their mature status was reflected, respectively, in relocation to the South in search of cheaper labor, the exhaustion of mineral resources in older mining districts, and the competitive challenge from automobiles and trucks. Other notable features of American manufacturing during the 1920s included relatively stable prices after 1922, modest wage increases, substantial growth in productivity, and rising levels of investment. Consequently, the expansion of production was achieved with limited growth of the industrial workforce; new employment was generated in the service sector.

Although certain trends continued into the 1930s, the favorable environment was transformed by the economic collapse of 1929 to 1932, which ushered in a difficult decade for manufacturers. The index of industrial production in the United States fell from one hundred in 1929 to fifty-five in 1932, a steeper contraction than in most other industrial economies, since elsewhere rates of growth had been modest during the 1920s.

During 1930 President Herbert Hoover encouraged industrialists to maintain wages and hours of work and to proceed with investment plans on the assumption that the recession would be brief. By mid-1931, however, retrenchment was gathering pace: consumers postponed the replacement of durable goods, such as automobiles, and, with the real value of debt increasing, they retreated from buying on credit. Simultaneously, the crisis of confidence in financial institutions and declining sales and profits undermined business confidence and new investment. Private investment fell from $16.2 billion in 1929 to only $1.4 billion in 1933, a level that was not sufficient to maintain existing productive capacity as firms abandoned plans for new factories and had no reason to replace idle equipment. Profits, though difficult to chart fully, dwindled: net profits of 488 leading industrial corporations had fallen from $3,174 million in 1929 to $662.2 million by 1932. Many firms posted losses or were forced into closure. Employment in manufacturing declined to 67 percent of its 1929 level by 1933. Such conditions broke the characteristic pattern of frequent bouts of short-term unemployment among industrial workers. Factory payrolls fell more than employment as employers and workers both accepted the adoption of short-term work or "sharethe-work" programs. Indeed, there was a vigorous public debate about the threat of technological unemployment, particularly automation, in the 1930s. Senator Robert Wagner, for instance, supported a "technotax" on innovations as a means to finance relief; unions advocated a thirty-hour workweek; and industrialists and scientists were forced to defend technology as a source of growth rather than instability.

In this context of falling prices and profits, some industrialists and trade associations embraced notions of cooperation as a route to either higher prices or stability. The Cotton Textile Institute influenced the development in the National Recovery Administration (NRA) of codes that were designed to raise prices and wages and to standardize trade practices in order to end "destructive" competition. Although the scale of the crisis, plus New Deal pressure, resulted in the establishment of hundreds of NRA codes, many firms opposed such intervention, especially in industrial relations. Some analysts attribute significant increases in wages and prices to NRA intervention, which, in effect, offset a potential stimulus to employment and production from an increase in the supply of money between 1933 and 1935. If this was the case, the defensive strategy of the codes achieved its narrow aims for business and workers, but delayed the revival of output and employment. In some cases the price data underlying this analysis may overstate actual prices since competitive pressures ensured extensive discounting. When the NRA came to an end in 1935, the oil and coal industries still sought federal backing for controls over their production, but most manufacturers welcomed the end of the codes.

Although a brief revival of industrial production had occurred during the second quarter of 1933 as demand rose in anticipation of higher prices with the imminent introduction of the NRA, sustained expansion only came between 1934 and 1937 when U.S. growth compared favorably to other economies. Real wages in manufacturing tended to rise, despite the persistence of high rates of unemployment. To some degree, wage rates did not reflect the full impact of economic trends because fluctuations in the number of hours worked were a significant part of adjustments during the 1930s. Another possible influence was the effect of "internal" labor markets in which the wages of people who were working were set without full reference to the availability of unemployed workers. The expansion of union organizing compelled some employers to concede higher wages after 1935, either in the hope of deterring the entry of unions or as a consequence of increased bargaining power, though the latter was achieved very unevenly in the face of aggressive resistance from many employers.

Trends in industrial production after 1933 can, on one level, be explained in terms of the severity of the slump between 1929 and 1933. Following the expansion of industrial investment in the late 1920s, the downturn left underutilized capacity during the 1930s that deterred new investment. Key growth industries, notably construction and automobile manufacturing, were particularly susceptible to the declines in consumer confidence and incomes. The falls in profitability were especially marked in the steel, oil, machinery, and automobile sectors. Michael Bernstein's analysis of U.S. manufacturing highlights the contrasting experiences of the different sectors. Cyclical trends are a central factor in the fluctuations of industrial output and employment: the steepest contractions in production in the early 1930s occurred in the iron and steel, coke, lumber, and cement industries, with a major factor being their dependence on the depressed construction industry.

The automobile industry illustrates the difficulties faced by manufacturers of durable goods, especially where production involved high capital costs. Given the geographical distribution of manufacturing activity, the loss of industrial jobs was concentrated in the northeastern and midwestern states. The flip side was less steep falls in the production of the nondurable products that consumers purchased regularly, such as food, textiles, clothing, footwear, and tobacco. As a result, employment in these industries did not fall so dramatically. The distinction should not be overstated since both textiles and footwear, though large employers, were already less dynamic in the 1920s, and sales of radios, a recent addition to the list of consumer durables, continued to expand throughout the 1930s. The contrasting fortunes of "heavy" industries, such as steelmaking, and "light" industries, such as food processing, were reflected in larger increases in rates of unemployment among men than among women in manufacturing. A further group of industries achieved impressive increases in production during the 1930s, notably chemicals, tobacco products, and paper products. The chemical and petroleum manufacturers combined new product innovations, such as artificial fibres and improvements in the cracking of oil, with capital and labor-saving innovations in production. Firms in the paper business developed new applications in packaging, a successful strategy also adopted by the glass and canning industries. Although a growing demand for cigarettes enabled the tobacco industry to increase its output rapidly, sustained productivity growth ensured that its workforce changed little.

A rise in the real incomes of employed people during the 1930s shifted effective demand for goods and services towards more affluent consumers, which may have delayed the recovery in terms of employment. This trend was reflected in an increase in sales of luxury goods, such as high-priced cars, refrigerators, and fashionable clothing, as well as in an increase in the purchases of services. More broadly, the largest industries in terms of employment, such as textiles and leatherworking, were in long-term decline, creating structural employment as their workers struggled to find alternative jobs. Durable goods producers, such as automotive manufacturers and steelmakers, remained depressed and offered few employment opportunities until the impact of rearmament and war could be felt. Finally, the most innovative sectors, including chemicals and petroleum, accounted for a relatively small share of the workforce. This, combined with their increasing labor productivity, prevented these more vigorous industries from providing sufficient new employment to counter the loss of dynamism elsewhere.

When recovery stalled during the 1937 to 1938 recession, New Deal liberals came to regard the weakness of investment, the persistence of high rates of unemployment, and rising prices as symptoms of monopolistic practices or even of a politically-motivated investment strike by corporate interests. As a result, the NRA phase of support for regulating prices and trade practices was replaced beginning in 1938 with an antitrust campaign, led by Thurman Arnold at the Department of Justice, that was intended to promote more competitive behavior as a route to recovery.

Manufacturing output and employment were transformed by rearmament and the switch to a war economy from 1941. Military demands stimulated the metalworking trades, vehicle production, aircraft manufacturing, and the chemical and petroleum industries, and also supplied a general stimulus to the production of raw materials. Although civilian consumption was restricted during the war, pent-up demand and increased savings were the foundations for renewed prosperity during the 1950s based on automobiles, electrical goods, and housing, as in the 1920s. In the longer run, industrial restructuring gained momentum, but from the mid-1950s services displaced manufacturing as the largest source of employment.

See Also: NATIONAL RECOVERY ADMINISTRATION (NRA).

BIBLIOGRAPHY

Bernanke, Ben S. "Employment, Hours, and Earnings in the Depression: An Analysis of Eight Manufacturing Industries." American Economic Review 73 (1983): 82–109.

Bernstein, Michael A. The Great Depression: Delayed Recovery and Economic Change in America, 1929–1939. 1987.

Bix, Amy Sue. Inventing Ourselves out of jobs? America's Debate over Technological Unemployment, 1929–1981. 2000.

Fabricant, Solomon. The Output of Manufacturing Industries, 1899–1937. 1940.

Fearon, Peter. War, Prosperity, and Depression: The U.S. Economy, 1917–45. 1987.

Weinstein, Michael M. Recovery and Redistribution under the NIRA. 1980.

Wells, Wyatt. Antitrust and the Formation of the Postwar World. 2002.

Michael French

About this article

Industry, Effects of the Great Depression on

Updated About encyclopedia.com content Print Article Share Article