Economic history · The Great Depression
Seven steps, about ten minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Roosevelt opened the banks again within days of taking office, insured people's savings, and put millions on public payrolls. The recovery was already running by then.
Recovery began in 1933, six years before the Second World War began in Europe. The American economy grew 11 per cent in 1934 and 9 per cent in 1935, faster again in 1936, at rates no rich country has matched in peace since.
It was never finished: output passed its 1929 level by 1937 and 7,700,000 people still had no job. Then policy tightened too early and the whole thing went backwards, and full employment, meaning enough jobs for all the people looking for one, came back only during the war.
Seven steps cover the recovery, why it was incomplete, the second fall and its cause, the spending that was never tried, and the question four institutions answer five ways.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 7
What ended the Depression has more than one respectable answer. The dates are the place to start.
Recovery began in 1933. American started growing again that year, six years before the Second World War began in Europe.
The National Bureau of Economic Research puts the bottom of the fall at March 1933.
The Brookings Institution puts the growth that followed at 11 per cent in 1934 and 9 per cent in 1935. The third year was faster again.
These are enormous figures, against about 2 or 3 per cent in a good year for a rich country today.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
The American economy grew 11 per cent in 1934 and 9 per cent in 1935. What did it do in 1936?
For scale. A good year for a rich country today is about 2 or 3 per cent.
The recovery was incomplete: American factories produced more in 1937 than in 1929, and 7,700,000 people still had no job.
Output and employment are two different measures, and in 1937 they moved apart: the factories were past their 1929 level and the workforce was not.
The rate was 14.3 per cent that year, against 3.2 per cent in 1929.
A recovery that returns the goods without returning the jobs does not feel like a recovery to the people counting it.
By 1937 American factories were producing more than in 1929. Why were 7.7 million people still out of work?
For scale. Unemployment was 14.3 per cent in 1937 and 3.2 per cent in 1929.
A second fall began in May 1937 and ran until June 1938.
The National Bureau of Economic Research counts it as thirteen months, a separate fall from the one that ran from 1929.
The recovery between the two falls is dated from March 1933, so this second fall interrupted four years of growth.
Brookings judges that the 1937 decision to make borrowing harder and raise taxes added two years to the Great Depression.
Unemployment was 14.3 per cent in 1937. What did it average across 1938, after the second fall?
For scale. The 1937 fall ran thirteen months, against forty-three months for the first one.
In August 1936 the Federal Reserve began doubling the share of customers' money that banks had to hold rather than lend.
Because a bank lends what it does not have to hold. Raise the share it must keep, and the same bank has less to lend. Loans then get harder to obtain for every firm and household that wants one. In 1936 the Federal Reserve saw banks sitting on money they were not lending and judged it safe to lock some of it away. The banks rebuilt the spare money they had lost by lending even less.
The share a bank must hold is called the , and raising it leaves the bank less to lend to firms and households.
The Economic History Association records the doubling in three steps: August 1936, March 1937 and May 1937.
The new Social Security payroll tax began in 1937 and took money out of wages at the same time.
Put these four in the order they happened.
For scale. Brookings judges the wrong turn in 1937 added two years to the Great Depression.
No nationwide government spending programme was tried in the 1930s on the scale of the gap, the difference between what America produced and what it could have produced.
Not enough to fill the gap, which is the finding most readers have never met. A nationwide spending programme of the kind now described as stimulus was never really attempted in the 1930s. The spending that did happen worked where it landed, and the same paper estimates that each extra dollar of government money was worth between one dollar and a dollar and a half of income in the state that received it.
Federal spending across the states has been measured year by year from 1930 to 1940, and none of it adds up to a nationwide programme of that kind.
Where the money did land, it can be traced: economists have set what each state received against what happened to income in that state.
The usual account is that the New Deal was a spending programme that fixed the economy. The economists who have measured that spending do not say so.
For every extra dollar of federal money a state received in the 1930s, how much income did that state gain?
For scale. Federal spending has been measured state by state for every year from 1930 to 1940.
Full output and full employment returned during the Second World War, on the account of the Federal Reserve, America's .
Federal Reserve History published two essays on the same day. The other one says recovery began when countries left the and let their money grow.
Neither essay is wrong about its own evidence. Five respectable answers exist in all, each held by a named institution that measured a different part of the decade.
Five respectable answers exist, each held by a named institution. What ended the Great Depression?
Most of the evidence on the ending points at the war. Federal Reserve History states that the return to full output and employment happened during the Second World War, and the Bureau of Labor Statistics series shows unemployment falling below its 1929 level by 1943.
Where the argument standsThe same institution published a second essay on the same day putting recovery at the moment countries left the gold standard. There is no settled answer: the National Bureau of Economic Research reports that estimates of how much the money side explains run from 20 to 70 per cent of the fall, which is a range wide enough to hold most of this argument inside it.
Every answer above is held by a named institution, and the honest position is that the size of each cause is open while the direction of each is not.
Defence production and calling men into the armed forces closed the gap in 1942 and 1943. The government bought everything the factories could produce.
Calling men into the forces in 1942 took them out of the count of people looking for work. Defence orders then put every other worker into a job making something.
Federal Reserve History records that the return to full output and employment happened during the Second World War, and the Bureau of Labor Statistics built the series that shows it.
The lessons show in what governments did when the banks went again in 2008. Banks were guaranteed rather than left to fail, money was expanded rather than allowed to shrink, and no large country held its currency to a fixed metal price.
Unemployment was 3.2 per cent in 1929. Where was it in 1943?
For scale. Unemployment was 19.0 per cent as recently as 1938.
That was module 7 of 7, the last in The Great Depression
Your score will appear here.
American growth, 1934 to 1936
11%, 9%, then 13%Out of work in 1937, with above 1929
7,700,000The second fall
May 1937 to June 1938, 13 monthsWhat banks had to hold
doubled in three steps, 1936 to 1937A nationwide spending programme
never really attemptedHow much the money side explains
20 to 70 per cent, 1929 and 1943
3.2%, then 1.9%You met five terms in this module
, , , ,
The next time the banks went, in 2008, governments guaranteed them within days, because of the 1930s.
[1] How fast the recovery was: Brookings Institution, Christina Romer, Lessons from the Great Depression for economic recovery in 2009. "Real GDP increased 11% in 1934, 9% in 1935, and 13% in 1936." "the Federal Reserve doubled reserve requirements in three steps in 1936 and 1937." "taking the wrong turn in 1937 effectively added two years to the Depression." Romer also records that between 1929 and 1933 real GDP fell over 25 per cent and prices fell 25 per cent.
[2] When each fall started and stopped: National Bureau of Economic Research, US Business Cycle Expansions and Contractions. The first fall runs August 1929 to March 1933, 43 months. The second runs May 1937 to June 1938, 13 months. The recovery between them is dated from March 1933.
[3] What happened to jobs: Congressional Research Service, Labor Market Data: Great Depression vs. Recent Recession, R40655. Unemployment was 3.2% in 1929, 24.9% in 1933, 14.3% in 1937 and averaged 19.0% in 1938. The report's own structure compares the Great Depression with the recession that began in December 2007, and it is the only source in the declared set that makes that comparison in its own structure.
[4] Output back, employment not: US Department of Labor, History, Chapter 5: Americans in Depression and War. In 1937 "industrial production exceeded the level reached in 1929", and yet "because of the growth of the labor force and increased productivity, there were still 7,700,000 persons unemployed".
[5] Why 1937 went wrong, and what ended it: Federal Reserve History, Recession of 1937-38 and The Great Depression. "In 1936, to prevent an 'injurious credit expansion,' Fed policymakers doubled reserve requirement ratios to soak up banks' excess reserves." The Social Security payroll tax began in 1937. The essay also quotes Marriner Eccles on the too rapid withdrawal of the government's support. The companion essay, published the same day, states: "Return to full output and employment occurred during the Second World War." A third essay published the same day says recovery "began at the time they suspended the gold standard and reflated their economies", which is the same institution holding two positions.
[6] The three steps of the tightening: Economic History Association, Frank Steindl, Economic Recovery in the Great Depression. "The increased requirements were in fact doubled, in three steps: August 1936, March 1937, and May 1937." The entry also gives the facts of the recovery and the reasons offered for it their own headings.
[7] Whether spending was ever tried: National Bureau of Economic Research, Price Fishback, US monetary and fiscal policy in the 1930s, w16477. "A nationwide Keynesian fiscal stimulus was never really attempted in the 1930s." "Preliminary estimates of the impact of net federal spending using annual data for 48 states between 1930 and 1940 suggest that a marginal increase of $1 in net federal spending was associated with an increase of $1 to $1.50 in per capita personal income in the states." "Estimates from a variety of models suggest that the impact of monetary policy explains a range of 20 to 70 percent of the decline in real output between 1929 and 1933."
[8] Unemployment before and during the war: Economic Report of the President 2015, Table B-11, printing the Bureau of Labor Statistics series, via GovInfo. The civilian unemployment rate is 3.2 per cent in 1929 and 1.9 per cent in 1943. The 1942 annual rate is above the 1929 one, which is why this part dates the crossing to 1943 rather than 1942.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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