The Great Depression: 1930-1940

In October 1929, eight months into newly elected President Herbert Hoover’s term, the stock market crashed. Through a series of dramatic policy missteps, the Federal Reserve Board allowed the money supply to fall by almost one-third over the next three years and despite their mandate, the Fed made little attempt to assist banks. Today, it is widely believed by economists that this was one of the single most important contributors to the Depression. Help, if any, would have had to come from fiscal policy, but here too, policy missteps worsened the downturn. Hoover attempted to stop “the downward spiral” which contradicts many contemporary critics who accuse Hoover of sharing Mellon’s laissez-faire viewpoint.

In 1930, Congress approved and President Hoover signed the Smoot-Hawley Tariff Act which raised tariffs on thousands of imported items. The intent of the Act was to encourage the purchase of American-made products by increasing the cost of imported goods while raising revenue for the federal government and protecting farmers. However, other nations, also suffering the effects of the Depression, quickly increased tariffs on American-made goods in retaliation, leading to a reduction in international trade further worsening the Depression. By 1932, the Great Depression had spread worldwide and in the U.S., unemployment had reached 24.9%. Combined with an agricultural drought, individuals, businesses and farmers defaulted on record numbers of loans leading to the collapse of over 5,000 banks. The sharp decline in incomes led to deficit in the federal budget, prompting Congress and the President to enact the Revenue Act of 1932 to pay for government programs. Under the Act, income taxes on the highest incomes rose from 25% to 63%, the estate tax was doubled, a 13.75% tax on corporations was passed and a two-cent (over 30 cents in today’s dollars) “check tax” was passed on all bank checks. As drastic as these measures seemed, they did not work.

Franklin Delano Roosevelt was elected President in 1932 without a specific program. Like Hoover, he felt the Depression was caused, in part, by people no longer spending or investing because they were afraid. He relied on a highly eclectic group of advisors who patched together many programs, known as ”The New Deal.” During Roosevelt’s “First 100 Days,” he sent Congress a record number of bills including the Emergency Banking Act, which declared a “bank holiday” and announced a plan to allow banks to reopen. The number of banks that reopened after the “holiday” was less than the number that had been open before. In addition, he signed the Glass-Stegall Act that created the Federal Deposit Insurance Corporation.

The economy eventually recovered from the low point of the winter of 1932-33, with sustained improvement until 1937 when the Recession of 1937 brought back 1934 levels of unemployment. Government spending increased from 8.0% of GNP under Hoover in 1932 to 10.2% of GNP in 1936 under Roosevelt. While Roosevelt balanced the “regular” budget, the emergency budget was funded by debt, which increased from 33.6% of GNP in 1932 to 40.9% in 1936. Deficit spending had been recommended by some economists, most notably John Maynard Keynes in Britain.

The CEPPI Index clearly shows the dramatic change in the economic environment between 1930 and 1933 when the indicator dropped from a Superior score of 104.6 at the end of 1929 to a Failing 49.5 at the end of 1933, the lowest annual score ever recorded by the CEPPI Index. Interestingly enough, the CEPPI Index also records an improvement in the economy from 1934-1936, which is consistent with other indicators, and then a drop again in 1937 and 1938 when America experienced “a recession within a depression” in 1937. Again, the economy began improving in 1939 and 1940, but at no time during the Great Depression did the unemployment rate drop below 14% after the peak Depression year of 1933, despite unprecedented intervention by the Federal Government by the Roosevelt Administration.