great depression case study

Economics 201

Case of the day: the great depression, the broad outline.

The Great Depression of the 1930s has affected the study of macroeconomics more than any other event in history. Indeed, the founding of macroeconomics as a separate discipline largely coincided with attempts to explain the Great Depression. It wasn't until the 1970s and 1980s that mainstream macroeconomics emerged from being dominated by theories of recession and depression.

The most common association that the general public has with the Great Depression is the crash of the stock market that occurred in October of 1929. Stock prices did fall dramatically on the day of the crash and continued in a general downward trend for several years. However, the Great Depression was much more than a crash in financial markets. Although the crash had an impact on the Depression, it was less a cause of the Depression than a co-symptom of a collection of underlying problems.

Both because of its magnitude as a social phenomenon and because of its impact on the development of macroeconomics, it is important to understand some basic facts about what happened during the Great Depression. In the words of Milton Friedman and Anna Schwartz, from their Monetary History of the United States , "The contraction from 1929 to 1933 was by far the most severe business-cycle contraction during the near-century of U.S. history we cover [1867-1960] and it may well have been the most severe in the whole of U.S. history. Though sharper and more prolonged in the United States than in most other countries, it was worldwide in scope and ranks as the most severe and widely diffused international contraction of modern times. U.S. net national product in current prices fell by more than one-half from 1929 to 1933; net national product in constant prices, by more than one-third; implicit prices [a broad index of prices across the economy], by more than one-quarter; and monthly wholesale prices, by more than one-third."

The most commonly cited indicator of business cycles, the unemployment rate, rose from 3.2% of the labor force in 1929 to 24.9% in 1933. Unemployment fell to 14.3% in 1937, but then increased again to 19.0% in 1938 and was still 9.9% in 1941 before the military boom associated with World War II brought it down to 1.9% in 1943. Real gross national product (output of goods and services) per person did not until 1940 recover to the level it had achieved in 1929. As the quote from Friedman and Schwartz indicates, prices were falling steadily through the 1930s as well. Table 1 summarizes some major macroeconomic statistics for the period 1925 to 1940.

 Table 1

Source: Historical Statistics of the United States, Colonial Times to 1970 (Washington, DC: United States Bureau of the Census, 1975).

Financial markets, banks, and the real economy

The stock-market problems—stock prices lost about three-quarters of their value between October 1929 and 1933—had significant repercussions for the banking system, which in turn affected the economy. At that time, it was common for investors to borrow from banks to purchase stocks "on the margin," using the value of the stocks as collateral on the loans. (Such margin loans are now much more carefully restricted.) A sudden collapse in stock prices reduced the value of the collateral, causing banks to make "margin calls," in which investors were asked to either repay their loans or provide additional collateral. In order to try to obtain enough liquidity to do one of these things, many investors attempted to sell their stock, which of course drove stock prices down even more rapidly in a self-reinforcing spiral.

Since many customers were not able to get enough liquidity to make their margin calls, defaults on bank loans soared, leading to a loss in confidence in the banking system. Meanwhile, as the economy soured, other bank loans were beginning to look less safe as well, raising the prospect of significant bank failures. At that time, bank deposits were not insured, so that if a bank was destined to fail, those depositors who were able to get their money out before it actually closed would be paid in full, while others would get their money back only in part and only after a delay (because the bank's remaining assets would have to be sold to determine how much could be paid). This gave depositors a very strong incentive to race to the withdrawal window to be first to get their money, starting a "run on the bank" any time a bank was thought to be in difficulty.

However, banks—then as now—keep only a small amount of depositors' money in the form of reserves (vault cash and readily available deposits at the Federal Reserve Banks). The rest is lent to customers to earn interest or used to purchase interest-bearing securities. A bank run can use up a bank's reserves very quickly, forcing it to either (1) sell off some of its loans and securities very quickly to get cash, (2) borrow cash from someone, perhaps the Federal Reserve, or (3) close down, at least temporarily. The securities (and even loans) of an individual bank may be quite "liquid" (commonly traded, so it is easy to find a willing buyer) during normal times, but when a whiff of crisis is in the air there are far more sellers in the market than buyers. If a bank is forced to sell into a frightened market, they may get very low "fire-sale" prices for the assets they are able to sell. If they have to sell assets at a loss, this worsens the bank's financial situation and may push it over the edge into insolvency, where the bank's liabilities exceed the value of its assets—the bank may fail.

When the Federal Reserve System was founded in 1913, its principal mission was to provide an "elastic currency" by acting as a "lender of last resort" for banks, lending to them through the "discount window" by purchasing their loans and securities for cash when the banks faced possible runs and needed liquidity. However, during the bank crises of the Great Depression the Fed put such strict rules on the kinds of assets that it would buy that emergency borrowing from the Fed failed to avert bank runs. Between 1929 and 1933, bank failures were so wide-spread that the number of commercial banks operating in the United States fell by over one-third.

The extraordinarily high rate of unemployment of the economy's labor resources was mirrored by underutilization of its capital. Industrial production declined by about half from 1929-33, leaving many factories, mines, and shops shut down and many others operating at far below their capacity. The economy had entered a vicious circle: aggregate demand for goods and services was so low that firms could not sell as much output as they could produce under full utilization of resources. Because production and employment were so low, households' incomes contracted severely so that they could not afford to buy many goods, which in turn kept aggregate demand depressed.

The apparent failure of the market system to coordinate households' and firms' economic decisions in an efficient way directly contradicted the fundamental efficiency implications of classical economics, which was based on the perfectly competitive model of general equilibrium. Moreover, the source of this coordination failure did not seem to lie in any of the classical causes of market failure such as externalities, public goods, or monopoly. Rather, the price system seemed to be ineffective at providing the appropriate signals to clear the markets for products and resources. Markets did not seem to clear; demand was apparently not equal to supply.

Explaining the nature of this failure was the task attempted by John Maynard Keynes, a brilliant but maverick British economist, in The General Theory of Employment, Interest and Money , published in 1936. Keynes focused on the key role played by aggregate demand in determining the overall level of economic activity in an economy. The refinement of models based on Keynes's insights and of alternative models exploring the relationships among economic aggregates led to the development of the discipline of macroeconomics.

Modern macroeconomists fall into two broad categories. Neoclassical macroeconomists think of the world as being primarily well explained by the competitive, market-clearing model. Keynesian (or New Keynesian) macroeconomists emphasize the imperfections of the market and the difficulties that may attend convergence to market clearing. Although there is much on which these two groups agree, they tend often to support different strategies for macroeconomic policy. Neoclassical economists usually favor a laissez-faire approach, relying on the self-correcting mechanism of the market to restore the economy to equilibrium. Keynesians tend to support a more active role for the government in managing aggregate demand either directly through fiscal policy (government spending and taxation levels) or monetary policy (using changes in the quantity of money to affect liquidity, interest rates, and hence aggregate demand).

The differences are highlighted in an amusing way by this video .

Questions for analysis

1. Macroeconomists classify variables as "procyclical" if they tend to be positively related to real output across the business cycle, in other words, if they usually rise in booms and fall in recessions. Variables that move in the opposite direction are called "countercyclical." Based on the evidence in Table 1, would you say that inflation was procyclical or countercyclical during the period shown? What about nominal interest rates? The unemployment rate?

2. Describe the pattern of nominal and real interest rates during the Great Depression. (Recall that the real interest rate is approximately the nominal rate minus the rate of inflation.) Why can't nominal interest rates ever be negative? What bound does this put on real interest rates when there is substantial deflation? Is it possible that this could prevent the loanable-funds market from clearing?

3. Can you explain why long-term interest rates moved down less in the Great Depression than short-term rates? The rates shown in Table 1 are rates on loans to extremely creditworthy borrowers: the U.S. government and the largest corporations. How do you think the "spread" between these rates and those of less reliable borrowers changed during the Great Depression?

4. If you operated a bank that had not (yet) experienced a run during the Great Depression, how would you change your lending and reserve-holding policies to try to prepare yourself for that possibility? Would these changes in lending, in turn, contribute further to the depression in aggregate demand?

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Course: US history   >   Unit 7

• The presidency of Herbert Hoover

The Great Depression

• FDR and the Great Depression
• The New Deal

• The Great Depression was the worst economic downturn in US history. It began in 1929 and did not abate until the end of the 1930s.
• The stock market crash of October 1929 signaled the beginning of the Great Depression. By 1933, unemployment was at 25 percent and more than 5,000 banks had gone out of business.
• Although President Herbert Hoover attempted to spark growth in the economy through measures like the Reconstruction Finance Corporation, these measures did little to solve the crisis.
• Franklin Roosevelt was elected president in November 1932. Inaugurated as president in March 1933, Roosevelt’s New Deal offered a new approach to the Great Depression.

The stock market crash of 1929

Hoover's response to the crisis, what do you think.

• David M. Kennedy, Freedom from Fear: The American People in Depression and War, 1929-1945 (New York: Oxford University Press, 1999), 37-41, 49-50.
• T.H. Watkins, The Hungry Years: A Narrative History of the Great Depression in America (New York: Henry Holt, 1999), 44-45; Kennedy, Freedom from Fear , 87.
• Louise Armstrong, We Too Are the People (Boston: Little, Brown & Co., 1938), 10.
• On bank failures, see Kennedy, Freedom from Fear , 65.
• See Kennedy, Freedom from Fear , 87, 208; Robert S. McElvaine, ed., Down and Out in the Great Depression: Letters from the “Forgotten Man” (Chapel Hill: University of North Carolina Press, 1983), 81-94.
• John A. Garraty, The Great Depression: An Inquiry into the Causes, Course, and Consequences of the Worldwide Depression of the Nineteen-Thirties, as Seen by Contemporaries and in the Light of History (New York: Doubleday, 1987).
• Kennedy, Freedom from Fear , 83-85.
• On Hoovervilles and Hoover flags, Kennedy, Freedom from Fear , 91.

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Brookings’s analysis and recommendations on the Great Depression of the 1930s

Fred dews fred dews managing editor, new digital products - office of communications @publichistory.

October 24, 2016

• 11 min read

“Poverty has always been the lot of the great majority of mankind. It has been only within the very recent past that geographic exploration and scientific development have encouraged the human family seriously to entertain the idea that life could be so organized and conducted as to achieve general well-being.” (1) So began the first of four volumes in an expansive Brookings Institution project known formally as “The Distribution of Wealth and Income in Relation to Economic Progress,” and informally as the capacity studies, published in the mid-1930s and intended to illuminate the causes of the Great Depression and propose remedies for preventing another one.

BROOKINGS REseARCH ON THE GREAT DEPRESSION

In 1934, five years after the crash of the U.S. stock market and the onset of the Great Depression, the American economy was turning around as gross national product and employment began to rise again. During this period, scholars at the Brookings Institution had been engaged in analyses of President Franklin Roosevelt’s New Deal programs that, to varying degrees, were critical of the federal response to the crisis. Brookings President Harold G. Moulton, who had been supportive of the Roosevelt administration’s initial efforts to respond to the depression through austerity measures, became opposed to the deficit spending on public works and employment programs that became the hallmarks of the New Deal. The authors of a 1935 Brookings study of the National Recovery Administration, for example, concluded that the agency impeded economic recovery after the Depression, while a study of the administrative problems in the Agricultural Adjustment Administration (AAA), completed in 1936 but released the following year, was met by Agriculture Secretary Henry Wallace with the comment, “We’ve been doing so much wishful thinking around here, we’d benefit from an independent audit.” (2)

The critical analyses of specific administration policies to address the economic shocks were one thing, but a larger question of the day was, what caused the Great Depression in the first place, and how could another one be prevented? It was in this context that the Institution took up the four-part capacity studies, which have been characterized as “the most important theoretical work that the institution undertook during the Depression.” (3)

“MALADJUSTMENTS” IN THE ECONOMIC SYSTEM

In the early twentieth century, there was a belief, and evidence, that poverty was related to underused capacity in the economy—both in terms of physical manufacturing plants and human labor. As Edwin Nourse—lead author of the first volume in the study, “America’s Capacity to Produce”—wrote,

The period in which we and our fathers and grandfathers have lived, running back to the so-called Industrial Revolution, has on the whole been one of great economic progress, especially for the countries of Western Europe and the United Sates. At the same time it has been characterized by a great deal of idleness of productive plant and by widespread unemployment. Evidently we have not succeeded in utilizing our opportunities fully, and thus poverty has persisted where apparently it might be been reduced, if not removed. This has caused the question to be raised again and again whether existing conditions as to the distribution of national income were responsible for maladjustments in the economic system which retarded economic progress. (4)

Nourse, an agricultural economist who wrote the 1937 AAA report, would later become the first chairman of the president’s council of economic advisers in 1946.

What was the cause of this “idleness,” this “maladjustment in the economic system” that harmed the economy? To answer this question, Nourse and his colleagues reviewed a long-standing debate concerning the role and proper amount of saving , for both individuals and society as a whole. The authors described the existence of a “division of thought” on saving, between “those who extolled saving and yet more saving as the prime force to be relied upon in advancing our economic well-being” and those “who conceived that saving was in fact being overdone and that diverting more of the social income into the channels of consumers’ purchasing power was the surest way to promote a better functioning of the economic system.” (5) In other words, was too much saving restricting consumption and thus hampering economic activity?

In the nineteenth century, “the possibility of over-saving appeared ridiculous” because “the new capital that was created resulted in increased productive efficiency, which in turn yielded more and cheaper goods for consumers generally.” (6) However, by the early twentieth-century, economists began to view “excessive saving” as responsible for periodic gluts in the markets and resulting depression. In 1918, future Brookings chief Harold Moulton, then an economics professor at the University of Chicago, argued that “the very process of saving, in a pecuniarily organized society, tends to check the demand for the expansion of capital goods” because increased saving meant less demand for consumer goods, which meant that it’s unprofitable to expand capital goods. (7) And thus existed an underutilization of both labor and business capital in the years leading up to the stock market crash of 1929 and ensuring Great Depression.

What was to be done? “Obviously,” Nourse and colleagues wrote, “it is a matter of great importance in modern industrial society that we learn where between these conflicting views the truth lies. … Only on the basis of real understanding of the motivating forces in economic progress can the nation’s accomplishments in the years ahead be commensurate with the opportunities within our reach.” (8)

And thus was born the capacity studies—over 1,200 pages of analytical research and deep analysis, by seven authors contained in four volumes: “America’s Capacity to Produce” (1934); “America’s Capacity to Consume” (1934); “The Formation of Capital” (1935); and “Income and Economic Progress” (1935). The latter two volumes were authored by Moulton alone. Described as “the most ambitious effort to gain an empirical understanding of, and to chart a way out of, the depression,” (9) the studies drilled deeply into the inner workings of the American economy.

Capacity to produce

In the study of production capacity, Nourse and colleagues examined in great detail the productive capacities of a variety of industries, including coal and coke; petroleum; minerals; textiles and clothing; automobiles and tires; food—including meat packing and flour-milling; paper making; iron and steel; electric power utilities; railroads; merchandising; banking; and the labor force. In a section on “Boots and Shoes,” for example, the authors concluded that “When allowance is made for the special problems which impede the full use of shoe manufacturing equipment [reviewed in penetrating detail], as well as the tendency toward overstatement of capacity, there be little doubt but that the shoe industry had come much closer [in the 1920s] to attaining the full production of which it was capable under existing conditions as respects organization and methods of work …” (10) On the other hand, the authors revealed that the automobile industry demonstrated a “more serious and more sustained margin of non-utilization which has appeared since 1923.” (11)

Nourse and co-authors concluded that the U.S. “productive system as a whole was operating at about 80 per cent of capacity in 1929 and slightly less than that if we take the average of the five years 1925-29.” (12) They noted that while America couldn’t have achieved 100 percent capacity, it could have gone up to 95 percent, or a 19 percent increase. “Our economic society lacked almost 20 per cent of living up to its means,” they wrote. (13) Increasing production capacity by 19 percent “would have constituted a very substantial achievement. … This would have permitted of enlarging the budgets of 15 million families to the extent of $1,000 each. … We could have produced $608 worth of additional well-being for every family up to the $5,000 level. Or we could have brought the 16.4 million families whose incomes were less than $2,000 all up to that level.” (14)

Capacity to consume

In “America’s Capacity to Consume,” the capacity studies’ second volume, Maurice Leven, Harold Moulton, and Clark Warburton turned to the flow of income, the income “which determines the capacity of the people to purchase the consumption goods which are annually produced, and also to provide the savings which are essential to the formation of new capital.” (15) This part of the project examined, again in great detail, elements of national income such as geographic distribution between farm and non-farm populations; trends in family, individual, and corporate saving; and the different kinds of expenditures of American families. In 1929, the authors found, the top 10 percent of American families by income (those over $4,600 dollars), were responsible for one-third of the total amount of consumptive outlays in America. This included spending on food, housing, clothing, savings, and “other living.” Those in the top decile spent 11 times as much on housing than the bottom decile, and saved 13 percent of their income—far more than any other group. (16)

Leven and colleagues also detailed the “broad classes of economic activity,” as of 1929. Their chart, below, showed that manufacturing contributed the largest amount to national income at 23 percent, while only 10 percent (“it is surprising to note,” they wrote), came from agriculture. Government contributed 8.4 percent. (17)

At the conclusion of the consumption capacity volume, Leven and colleagues came to a number of findings, among them: the U.S. was not living beyond its means in the 1920s; income inequality was rising; and that the “unfulfilled consumptive desires of the American people are large enough to absorb a productive output many times that achieved in the peak year 1929.” (18)

Conclusions from the capacity studies

Moulton summarized the overall problem in the fourth volume, “Income and Economic Progress”:

Our study of the productive process led us to a negative conclusion—no limiting factor or serious impediment to a full utilization of our productive capacity could there be discovered. Our investigation of the distribution of income, on the other hand, revealed a maladjustment of basic significance. Our capacity to produce consumer goods has been chronically in excess of the amount which consumers are able, or willing, to take off the markets; and this situation is attributable to the increasing proportion of the total income which is diverted to savings channels. The result is a chronic inability … to find market outlets adequate to absorb our full productive capacity. (19)

He added that, in 1929, 23 percent of national income was going to 1 percent of the population, and a large proportion of their income was going into saving and corporate surplus that was being used in “less fruitful or positively harmful uses.” The unused capacity of the nation could have met “the unsatisfied wants” of the vast majority—over 90 percent—of the U.S. population, Moulton concluded. So how to solve this “basic maladjustment”? “All the world loves a panacea,” Moulton wrote, but then added that “there is no single formula by which desired results can be brought about.” Continuing, he said that:

The ultimate distribution of the national income is brought about through an elaborate process of pricing goods; determining wages and salary payments; disbursing premiums and bonuses; accumulating surplus and determining other aspects of corporate fiscal policy; operating profit-sharing, insurance, and pension schemes, both public and private; and carrying out an elaborate system of taxation and government expenditure. (20)

In his 1991 history of Brookings at 75, James Allen Smith underscored that the studies did not point to a redistribution of wealth, but that they looked to improvements in business efficiency that would have salutary effects. He observed that “Far from expounding a radical redistributionist argument … the studies were in keeping with the most conservative traditions of scientific management. The Brookings volumes contended that if business firms could be made more efficient, prices could be lowered, real wages would consequently rise, and living standards would improve for everyone.” (21)

Moulton ended the capacity studies with optimism tempered by caution in a chapter titled, “Economic Progress and the Democratic Ideal.” He concluded that the best distributive policy that could achieve economic progress was “the gradual but persistent revamping of price policy so as to pass on the benefits of technological progress and rising productivity to all the population in their role of consumers.” Such an approach could find the correct balance between business and labor interests, between the profit motive and consumers, and achieve the full capacity of American resources, technology, knowledge, and labor. “There is general faith that we will come out of the depression and rise in due time to levels of prosperity better than the best attained in the past,” Moulton believed. In the end, he returned to the trials suffered by Americans in the Great Depression, with a hopeful note:

In putting the old common necessities of food and clothes and housing within reach of the millions who are now underfed, ill-clad, and housed only in the tenement of the city slum or the shack of the country slum, we have an ample and accessible field of business enlargement. With capital resources ample and labor abundant to the needs of an increasingly automatic machine technique, we are confident that this goal is practically attainable if only our distributive system is readjusted along the general lines which have been set forth. (22)

Thanks to Brookings Senior Research Librarian and archivist Sarah Chilton for her comments.

• Nourse, Edwin G., and others, “America’s Capacity to Produce” (Institute of Economics, The Brookings Institution, 1934), p. 1.
• Lyon, Leverett S. and others, “The National Recovery Administration: An Analysis and Appraisal” (Institute of Economics, The Brookings Institution, 1935); Nourse, Edwin G. and others, “Three years of the Agricultural Adjustment Administration” (Institute of Economics, The Brookings Institution, 1937).
• Critchlow, Donald T., “The Brookings Institution, 1916-1952: Expertise and the Public Interest in a Democratic Society” (Northern Illinois University Press, 1985), p. 122.
• Nourse, p. 6.
• Nourse, p. 7.
• Nourse, pp. 10-11.
• Nourse, p. 14.
• Smith, p. 30.
• Nourse, p. 224.
• Nourse, p. 235.
• Nourse, p. 418.
• Nourse, p. 425.
• Nourse, p. 429.
• Leven, Maurice, Harold G. Moulton, and Clark Warburton., “America’s Capacity to Consume” (Institute of Economics, The Brookings Institution, 1934), p. 2.
• Leven, p. 262.
• Leven, pp. 18-19.
• Leven, pp. 125-127.
• Moulton, Harold G., “Income and Economic Progress” (Institute of Economics, The Brookings Institution, 1935), pp. 45-46.
• Moulton, p. 159.
• Smith, James Allen, “Brookings at Seventy-Five” (Brookings Institution Press, 1991), p. 30.
• Moulton, pp. 155-165.

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The human impact of the Great Depression: Stories of struggle and resilience

The Great Depression was one of the most significant economic downturns in modern history. It affected millions of people across the United States and around the world, resulting in widespread poverty and hardship.

While many of us are familiar with the statistics and facts surrounding the Great Depression, it is important to remember the human impact of this period in history.

Here, we will explore the stories of struggle and resilience that characterized the human experience during the Great Depression.

What was the Great Depression?

The Great Depression  started in 1929, with the stock market crash that signaled the beginning of an economic crisis.

By 1933, over 15 million Americans were unemployed, and the poverty rate had risen to over 50%.

The impact of this economic collapse was felt by people from all walks of life, regardless of race, gender, or socioeconomic status.

People were unable to find work, and those who were lucky enough to have jobs often faced reduced wages or hours.

Families struggled to put food on the table and keep their homes, and many were forced to rely on government assistance or charity organizations.

How did people cope?

Despite these challenges, many people showed incredible resilience in the face of adversity.

Families and communities banded together to support each other, sharing resources and helping each other find work.

Some people even turned to unconventional means of survival. This included growing their own food or starting their own businesses.

The stories of struggle and resilience during the Great Depression are many, but they are often not heard.

One of the most famous examples is the story of Migrant Mother, a photograph by Dorothea Lange.

The photo, which is now globally recognized as the face of the era, captured the desperation of a mother and her children living in a migrant camp during the Depression.

Flour sack dresses

During the Great Depression, people had to be creative and resourceful in order to cope with the economic challenges they faced.

One example of this creativity was the use of flour sack fabric to make clothing, particularly dresses for women and girls.

Flour sack fabric was a byproduct of the flour industry, and was typically made from a high-quality cotton material.

Manufacturers soon realized that they could market this fabric to women, who were looking for affordable and durable materials for clothing.

To appeal to women, the flour sacks were often printed with colorful patterns and designs, making them both practical and fashionable.

Women soon discovered that they could use these flour sacks to make clothing, including dresses, blouses, and skirts.

They would carefully remove the stitching from the sacks, wash and iron the fabric, and then sew it into a new garment.

The resulting dresses were often simple but stylish, with details like ruffles or lace added to make them more fashionable.

As a result, flour sack dresses became very popular during the Great Depression, as they were a cheap and practical way for women to get new clothing.

They were also a way for women to show their creativity and resourcefulness during a difficult time.

In some cases, women would even trade flour sacks with each other, in order to get different patterns and designs for their dresses.

Hooverville life

In addition to flour sack dresses, people found other clever ways to cope during the Great Depression.

One example was the creation of "Hoovervilles," makeshift communities of homeless people who lived in shanty towns made from cardboard, scrap metal, and other materials.

These communities were named after President Hoover, who was blamed for the economic crisis.

Hoovervilles were a practical solution to the housing crisis faced by many Americans during the Great Depression.

However, they had several problems including a lack of basic services such as sanitation, electricity, and running water, and poor living conditions that led to health problems.

People living in Hoovervilles were often stigmatized and discriminated against by government officials and the public, and had little privacy or security, which made it difficult to protect their belongings and maintain a sense of dignity.

The genius of community gardens

During the Great Depression, community gardens played a significant role in providing relief to many Americans.

Community gardens were an inexpensive and effective way for people to grow their own food, supplement their diets, and provide a sense of community and pride during a time of economic hardship.

One way community gardens helped during the Great Depression was by providing fresh food.

As the economic crisis deepened, many people struggled to afford basic necessities, including food.

Community gardens allowed people to grow their own fresh fruits and vegetables, which were often too expensive to buy.

This helped to supplement people's diets with nutritious food and reduced the reliance on government assistance and charitable organizations.

Another way community gardens helped during the Great Depression was by creating a sense of community.

They brought people together, regardless of their socioeconomic status or background, and provided a sense of purpose and camaraderie during a difficult time.

People worked together to plant, tend, and harvest their crops and shared tips and advice on gardening techniques.

This sense of community helped to foster social cohesion and provided participants with a support network during a time of great uncertainty.

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The Great Depression in the United States

• Living reference work entry
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• First Online: 09 July 2018
• Cite this living reference work entry

• Christopher Hanes 3  

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This chapter describes and explains the course of aggregate real activity and inflation in America from 1929 through 1937–1938 within the theoretical framework of “new Keynesian” models with “financial market frictions.” Those models point to plausible causes for the initial downturn, the depth of the subsequent decline in real activity, and the path of inflation and real wages over 1929–1933. One key factor was Federal Reserve interest-rate policy as constrained by the “zero bound” on nominal interest rates and adherence to the international gold standard. Another was the development of a massive financial crisis in which the Federal Reserve System failed to act as lender of last resort, mainly because Fed policymakers did not believe a lender of last resort was needed. The course of the economy after 1933 presents some open questions, especially about the extremely high inflation rates observed over 1934–1937 and causes of the second downturn in 1937–1938.

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Hidden and Repressed Inflation in Soviet-Type Economies: Definitions, Measurements and Stabilisation

Hayek, Deflation, Gold, and Nihilism

Cole and Ohanian ( 2007 ) observe that conventionally measured aggregate total factor productivity fell a lot from 1929 to 1933. They argue this may represent an exogenous shock and can account for over half of the 1929–1933 decline in real GDP. Ohanian ( 2001 , p. 37) speculates this TFP decline was due to “a decrease in organizational capital, the knowledge and know-how firms use to organize production...There are a number of reasons why this large stock of capital could have fallen, including breakdowns in relationships with suppliers that lead to changes in production plans, and breakdowns in customer relationships that lead to changes in marketing, distribution, and inventory plans.” Studies that account for variations in labor and capital utilization find little or no decline in productivity over 1929–1933 (Inklaar et al. 2011 , Watanabe 2016 ). Across the entire 1929–1939 decade, average productivity growth was remarkably rapid for reasons clearly related to the introduction and diffusion of new technologies (Field, 2011 ). On the labor wedge, Ohanian ( 2009 ) argues that Hoover administration policies prevented large industrial employers from cutting nominal wages after 1929. Thus price deflation, due to a drop in nominal aggregate demand, raised real manufacturing wages in a practically exogenous and historically unique way. In fact, as I will argue below, there was nothing at all unusual about the behavior of nominal wages over 1929–1933; manufacturing wages fell just as one would predict from the usual “Phillips curve” relationship. Rose ( 2010 ) looks for evidence that Hoover’s policies affected the timing or magnitude of wage cuts. He finds none.

Some authors (e.g., Bordo et al. 2000 ; Christiano et al. 2005 ) attempt to represent monetarist views within a new Keynesian model. In these models the interest rate that governs aggregate demand is indirectly determined by the quantity of a variable called “money” that is directly controlled by a central bank. The interest rate is related to “money” because “money” pays no interest, and the ratio of money to the price level is an argument of the representative agent’s utility function. Bringing the model to data, the authors match the model’s “money” to monetary aggregate statistics such as M1, which correspond (at least roughly) to the monetarist notion of the money supply. That does not do justice to the data: most assets within M1 pay interest at market-determined rates. It does not do justice to monetarists: they never argued that the money supply affected aggregate demand only (or even primarily) through interest rates on financial assets (Bordo and Schwartz 2004 ). And it gives a misleading notion of the way a central bank controls interest rates.

The closest thing to accepted bills in American financial markets was a type of bill called “commercial paper.” Commercial paper was less liquid than accepted bills, with no active secondary market, because it had no guarantor (James 1978 ). Its value depended on the perceived solvency of its original issuer, typically a firm that was relatively large but not as widely known as firms that accepted bills in Europe.

Strong explained the transmission mechanism from monetary policy to the price level this way: “when we have very cheap money, corporations and individuals borrow money in order to extend their business. That results in plant construction; plant construction employs more labor, brings in to use more materials for plant construction, and gives more employment. It may cause some elevation of wages. It creates more spending power; and with that start it will permeate through into the trades and the general price level” (quoted in Hetzel 1985 , p. 7).

Adolph Miller, the “dominant personality at the Board” (Meltzer p. 138), argued that arguments for price-level targeting relied on faulty assumptions: “One of those assumptions is that changes in the level of prices are caused by changes in the volume of credit and currency; the other is that changes in the volume of credit and currency are caused by Federal reserve policy. Neither one of those assumptions is true...undertaking to regulate the flow of Federal reserve credit by the price index is a great deal like trying to regulate the weather by the barometer. The barometer does not make the weather; it indicates what is in process” (quoted in Hetzel 1985 , p. 10). Miller further argued that there was nothing the Fed could do to stop a recession: “you can not stop the recession by the lowering of the discount rate, the cheapening of the cost of credit, or making credit more abundant” (p. 12). The head of the Philadelphia Reserve bank said he did not believe the Fed should attempt to resist changes in the price level: “When the movement of prices is underway, it seems to me that it is always a doubtful and generally a dangerous thing for any outside agency to interfere with and attempt to alter the current” (p. 12).

In their model the shift from deposits to currency occurs because of a shock to preferences, not a response to bank failures. They also assume that the supply of high-powered money would not respond to the consequences of the shock, which is not realistic. But the model does illustrate how deposit withdrawal can affect real activity within an otherwise-conventional new Keynesian model.

In some postwar years, from the later 1960s through the 1980s, real activity was correlated with the change in inflation – that is, inflation was strongly “persistent.” Inflation persistence can be generated in new Keynesian models by “indexing” wages and prices to lagged inflation (e.g., Christiano et al. 2005 ). It can also be generated in models where the expected long-run future inflation rate varies over time. The latter possibility is tricky; see Ascari ( 2004 ), Kozicki and Tinsley ( 2002 ), and Cogley and Sbordone ( 2008 ).

The Korean War controls were lifted in February 1953 (Rockoff 1984 ).

It is sometimes claimed that nominal wages were unusually rigid in the 1929–1933 downturn (e.g., O’Brien 1989 ; Ohanian 2009 ). Obviously not true.

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Hanes, C. (2018). The Great Depression in the United States. In: Diebolt, C., Haupert, M. (eds) Handbook of Cliometrics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-40458-0_40-1

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Book contents

• A Great Deal of Ruin
• Copyright page
• I Introduction
• Part I Financial Crises
• Part II Five Case Studies
• 3 The Great Depression, 1929–1939
• 4 The Latin American Debt Crisis, 1982–1989
• 5 The Asian Crisis, 1997–1999
• 6 The Subprime Crisis in the United States
• 7 The Financial Crisis in Europe
• Part III Lessons
• Abbreviations and Acronyms
• Bibliography

3 - The Great Depression, 1929–1939

from Part II - Five Case Studies

Published online by Cambridge University Press:  05 August 2019

The Great Depression has an outsized hold on the imagination of economists. Former Chair of the Federal Reserve, Ben Bernanke, once began an academic paper with the line “To understand the Great Depression is the Holy Grail of macroeconomics” (Bernanke, 1995). His sentiment reflects the importance of the Great Depression and a sense of mystery that is perhaps beyond our ability to completely understand. Many other economists have tried their hand at the Great Depression and many more have chosen careers in economics partly so they could develop a deeper understanding of the causes of that seminal event in world history.

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• The Great Depression, 1929–1939
• James Gerber , San Diego State University
• Book: A Great Deal of Ruin
• Online publication: 05 August 2019
• Chapter DOI: https://doi.org/10.1017/9781108608589.004

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Firsthand Accounts of the Great Depression

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At a Glance

• Democracy & Civic Engagement

Studs Terkel interviewed hundreds of people across the United States for his book on the Great Depression of the 1930s, which later aired on WFMT Radio in Chicago. Read and listen to selections from these firsthand accounts of the Depression by those who experienced it.

Virginia Durr, who later became a civil rights activist, describes the shame and humiliation people experienced:

It was a time of terrible suffering. The contradictions were so obvious that it didn’t take a very bright person to realize something was terribly wrong.

Have you ever seen a child with rickets? Shaking as with palsy. No proteins, no milk. And the companies pouring milk into gutters. People with nothing to wear, and the were plowing up cotton. People with nothing to eat, and they killed the pigs. If that wasn’t the craziest system in the world, could you imagine anything more idiotic? This was just insane.

And people blamed themselves, not the system. They felt they had been at fault: . . . “if we hadn’t bought that old radio” . . .“if we hadn’t bought that old secondhand car.” Among the things that horrified me were the preachers— the fundamentalists. They would tell the people they suffered because of their sins. And the people believed it. God was punishing them. Their children were starving because of their sins.

People who were independent, who thought they were masters and mistresses of their lives, were all of a sudden dependent on others. Relatives or relief. People of pride went into shock and sanitoriums. My mother was one.

Up to this time, I had been a conformist, a Southern snob. I actually thought the only people who amounted to anything were the very small group which I belonged to. The fact that my family wasn’t as well off as those of the girls I went with—I was vice president of the Junior League—made me value even more the idea of being well-born . . . .

What I learned during the Depression changed all that. I saw a blinding light like Saul on the road to Damascus. (Laughs.) It was the first time I had seen the other side of the tracks. The rickets, the pellagra—it shook me up. I saw the world as it really was . . . .

The Depression affected people in two different ways. The great majority reacted by thinking money is the most important thing in the world. Get yours. And get it for your children. Nothing else matters. Not having that stark terror come at you again . . . .

And then there was a small number of people who felt the whole system was lousy. You have to change it. The kids come along and they want to change it, too. But they don’t seem to know what to put in its place. I’m not so sure I know, either. I do think it has to be responsive to people’s needs. And it has to be done by democratic means, if possible. 1

Eileen Barth worked as a case worker in Chicago. Her job was to work with those who needed government assistance during the Great Depression. In one case, a family asked for government assistance in getting clothing, and Barth was instructed by her supervisor to look in their closets to determine how badly they needed the clothing they asked for. She describes what happened:

I’ll never forget one of the first families I visited. The father was a railroad man who had lost his job. I was told by my supervisor that I really had to see the poverty. If a family needed clothing, I was to investigate how much clothing they had at hand. So I looked into this man’s closet—[pauses, it becomes difficult]— he was a tall, gray-haired man, though not terribly old. He let me look in his closet—he was so insulted. [She weeps angrily.] He said, “Why are you doing this?” I remember his feeling of humiliation . . . the terrible humiliation. [She can’t continue. After a pause, she resumes.] He said, “I really haven’t anything to hide, but if you really must look into it. . . .” I could see he was very proud. He was so deeply humiliated. And I was, too. . . .” 2

Emma Tiller describes sharecropping during the Depression:

In 1929, me and my husband were sharecroppers. We made a crop that year, the owners takin’ all of the crop.

This horrible way of liven’ with almost nothin’ lasted up until Roosevelt. There was another strangest thing. I didn’t suffer for food through the Thirties, because there was plenty of people that really suffered much worse. When you go through a lot, you in better condition to survive through all these kinds of things.

I picked cotton. We weren’t getting but thirty-five cents a hundred, but I was able to make it. ’Cause I also worked peoples homes, where they give you old clothes and shoes.

At this time, I worked in private homes a lot and when the white people kill hogs, they always get the Negroes to help. The cleanin’ of the insides and the clean up the mess afterwards. And then they would give you a lot of scraps. A pretty adequate amount of meat for the whole family. The majority of the Negroes on the farm were in the same shape we were in. The crops were eaten by these worms. And they had no other jobs except farming.

In 1934, in this Texas town, the farmers was all out of food. The government gave us a slip, where you could pick up food. For a week, they had people who would come and stand in line, and they couldn’t get waited on. This was a small town, mostly white. Only five of us in that line were Negroes, the rest was white. We would stand all day and wait and wait and wait. And get nothin’ or if you did, it was spoiled meat. . . .

The Government sent two men out there to find out why the trouble. They found out his man and a couple others had rented a huge warehouse and was stackin’ that food and sellin’ it. The food that was supposed to be issued to these people. These three men was sent to the pen. 3

• 1 Studs Terkel, Hard Times: An Oral History of the Great Depression (New York: The New Press, 2005), 461-462.
• 2 Ibid., 420.
• 3 Ibid., 232-233.

How to Cite This Reading

Facing History & Ourselves, “ Firsthand Accounts of the Great Depression ,” last updated March 14, 2016. 

This reading contains text not authored by Facing History & Ourselves. See footnotes for source information.

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What was the Great Depression?

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Great Depression

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The Great Depression, which began in the United States in 1929 and spread worldwide, was the longest and most severe economic downturn in modern history. It was marked by steep declines in industrial production and in prices (deflation), mass unemployment , banking panics, and sharp increases in rates of poverty and homelessness.

Four factors played roles of varying importance. (1) The stock market crash of 1929 shattered confidence in the American economy, resulting in sharp reductions in spending and investment. (2) Banking panics in the early 1930s caused many banks to fail, decreasing the pool of money available for loans. (3) The gold standard required foreign central banks to raise interest rates to counteract trade imbalances with the United States, depressing spending and investment in those countries. (4) The Smoot-Hawley Tariff Act (1930) imposed steep tariffs on many industrial and agricultural goods, inviting retaliatory measures that ultimately reduced output and caused global trade to contract.

In the United States, where the Depression was generally worst, industrial production between 1929 and 1933 fell by nearly 47 percent, gross domestic product (GDP) declined by 30 percent, and unemployment reached more than 20 percent. Because of banking panics, 20 percent of banks in existence in 1930 had failed by 1933.

Three factors played roles of varying importance. (1) Abandonment of the gold standard and currency devaluation enabled some countries to increase their money supplies, which spurred spending, lending, and investment. (2) Fiscal expansion in the form of increased government spending on jobs and other social welfare programs , notably the New Deal in the United States, arguably stimulated production by increasing aggregate demand. (3) In the United States, greatly increased military spending in the years before the country’s entry into World War II helped to reduce unemployment to below its pre-Depression level by 1942, again increasing aggregate demand.

In most affected countries, the Great Depression was technically over by 1933, meaning that by then their economies had started to recover. Most did not experience full recovery until the late 1930s or early 1940s, however. The United States is generally thought to have fully recovered from the Great Depression by about 1939.

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Great Depression , worldwide economic downturn that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory. Although it originated in the United States , the Great Depression caused drastic declines in output, severe unemployment , and acute deflation in almost every country of the world. Its social and cultural effects were no less staggering, especially in the United States, where the Great Depression represented the harshest adversity faced by Americans since the Civil War .

Economic history

The timing and severity of the Great Depression varied substantially across countries. The Depression was particularly long and severe in the United States and Europe ; it was milder in Japan and much of Latin America . Perhaps not surprisingly, the worst depression ever experienced by the world economy stemmed from a multitude of causes. Declines in consumer demand , financial panics , and misguided government policies caused economic output to fall in the United States, while the gold standard , which linked nearly all the countries of the world in a network of fixed currency exchange rates , played a key role in transmitting the American downturn to other countries. The recovery from the Great Depression was spurred largely by the abandonment of the gold standard and the ensuing monetary expansion. The economic impact of the Great Depression was enormous, including both extreme human suffering and profound changes in economic policy .

The Great Depression began in the United States as an ordinary recession in the summer of 1929. The downturn became markedly worse, however, in late 1929 and continued until early 1933. Real output and prices fell precipitously. Between the peak and the trough of the downturn, industrial production in the United States declined 47 percent and real gross domestic product (GDP) fell 30 percent. The wholesale price index declined 33 percent (such declines in the price level are referred to as deflation ). Although there is some debate about the reliability of the statistics, it is widely agreed that the unemployment rate exceeded 20 percent at its highest point. The severity of the Great Depression in the United States becomes especially clear when it is compared with America’s next worst recession, the Great Recession of 2007–09, during which the country’s real GDP declined just 4.3 percent and the unemployment rate peaked at less than 10 percent.

The Depression affected virtually every country of the world. However, the dates and magnitude of the downturn varied substantially across countries. Great Britain struggled with low growth and recession during most of the second half of the 1920s. The country did not slip into severe depression, however, until early 1930, and its peak-to-trough decline in industrial production was roughly one-third that of the United States. France also experienced a relatively short downturn in the early 1930s. The French recovery in 1932 and 1933, however, was short-lived. French industrial production and prices both fell substantially between 1933 and 1936. Germany ’s economy slipped into a downturn early in 1928 and then stabilized before turning down again in the third quarter of 1929. The decline in German industrial production was roughly equal to that in the United States. A number of countries in Latin America fell into depression in late 1928 and early 1929, slightly before the U.S. decline in output. While some less-developed countries experienced severe depressions, others, such as Argentina and Brazil , experienced comparatively mild downturns. Japan also experienced a mild depression, which began relatively late and ended relatively early.

The general price deflation evident in the United States was also present in other countries. Virtually every industrialized country endured declines in wholesale prices of 30 percent or more between 1929 and 1933. Because of the greater flexibility of the Japanese price structure, deflation in Japan was unusually rapid in 1930 and 1931. This rapid deflation may have helped to keep the decline in Japanese production relatively mild. The prices of primary commodities traded in world markets declined even more dramatically during this period. For example, the prices of coffee, cotton, silk, and rubber were reduced by roughly half just between September 1929 and December 1930. As a result, the terms of trade declined precipitously for producers of primary commodities .

The U.S. recovery began in the spring of 1933. Output grew rapidly in the mid-1930s: real GDP rose at an average rate of 9 percent per year between 1933 and 1937. Output had fallen so deeply in the early years of the 1930s, however, that it remained substantially below its long-run trend path throughout this period. In 1937–38 the United States suffered another severe downturn, but after mid-1938 the American economy grew even more rapidly than in the mid-1930s. The country’s output finally returned to its long-run trend path in 1942.

Recovery in the rest of the world varied greatly. The British economy stopped declining soon after Great Britain abandoned the gold standard in September 1931, although genuine recovery did not begin until the end of 1932. The economies of a number of Latin American countries began to strengthen in late 1931 and early 1932. Germany and Japan both began to recover in the fall of 1932. Canada and many smaller European countries started to revive at about the same time as the United States, early in 1933. On the other hand, France, which experienced severe depression later than most countries, did not firmly enter the recovery phase until 1938.

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Fdr's policies prolonged depression by 7 years, ucla economists calculate.

The Place of Economic Crisis in American Constitutional Law: The Great Depression As a Case Study

Forthcoming, Liberal Constitutions in Financial Crises, Tom Ginsburg, Mark Rosen, & Georg Vanberg, eds., Cambridge University Press, 2019

Notre Dame Legal Studies Paper No. 1847

71 Pages Posted: 11 Oct 2018 Last revised: 19 Oct 2018

Barry Cushman

Notre Dame Law School

Date Written: September 21, 2018

This chapter considers the role that conditions of economic crisis might have played in cases involving judicial review of economic regulation decided by the Supreme Court of the United States between March of 1932 and June of 1937. Part I conducts a general examination of the possibility that contemporary economic conditions may have operated as an exogenous variable inducing the justices to uphold challenged regulations. Part II explores the extent to which underlying economic conditions might have operated as an endogenous variable that was relevant to analysis of whether particular regulatory measures could be supported by existing constitutional doctrine. An Appendix plots the timeline of cases involving constitutional challenges to ameliorative legislation against a variety of contemporary economic indicators.

Keywords: Hughes Court, Great Depression, New Deal, Constitutional Law, Judicial Review

Suggested Citation: Suggested Citation

Barry Cushman (Contact Author)

Notre dame law school ( email ).

P.O. Box 780 Notre Dame, IN 46556-0780 United States

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Journal of Economics and Economic Education Research (Print ISSN: 1533-3590; Online ISSN: 1533-3604)

Research Article: 2022 Vol: 23 Issue: 6S

The Great Depression: An Useful Case Study to Understand the Concepts of Deflationary Spiral and Unconventional Monetary Policy

Mauro Visaggio, University of Perugia

Citation Information: Visaggio, M. (2022). The great depression: an useful case study to understand the concepts of deflationary spiral and unconventional monetary policy. Journal of Economics and Economic Education Research, 23 ( S6), 1-14.

Great Depression, Deflationary Spiral, Unconventional Monetary Policy.

The US business cycle in period 1929-1936 is characterized by the Great Depression. This paper aims, through the analysis of this case of study, to clarify two relevant macroeconomic concepts: deflationary spiral process and unconventional monetary policy. On the one hand, the bursting of the speculative bubble on the stock market, and then the banking system crisis, produce a collapse in the growth rate of the GDP. In front of a neutral fiscal policy and a monetary policy aimed at defending the fixed exchange rate, the non-functioning of the perfect adjustment mechanism of the money wage implies a deflationary spiral so that the recession phase extends from 1929 to 1932. On the other hand, the economic recovery begins in 1933. While the fiscal policy is substantially neutral vice versa, the expansive monetary policy implemented after the abandonment of the fixed exchange rate regime is the decisive key which allows the economy of the USA to emerge from the great depression: the ultra-expansionary monetary policy, even in the presence of a liquidity trap, manages through the phenomenon of reflation to reduce the real interest rate and encourage an increase in private investment. In certain sense, it can be concluded that the monetary policy implemented starting from 1933 is the forerunner of the unconventional monetary policies (i.e., quantitative easing monetary policy) implemented in the first two decades of the present century in various western countries

JEL Classifications

E32, E62, E51, G15, G51.

Introduction

The Great Depression was the deepest and most lasting recession the US economy has ever experienced during a business cycle in the modern era. Furthermore, the dramatic contraction of economic activity in the USA, which began in 1929, spread immediately and with the same avalanche intensity in almost all Western countries. In fact, in the second half of the 1920s and in the first two years of the 1930s, a complex set of factors determined a perfect economic storm which is the Great Depression. This complexity and interweaving of these factors is reflected in the lack of consensus among economists and historians regarding the ultimate causes of the Great Depression. Nonetheless, it seems possible to conclude that at least four major factors played a crucial role in the origin of the Great Depression.

First, some economists have underlined the crucial role of the collapse of the stock market which, by undermining confidence in the American economy, has produced a drastic reduction in consumption and investment ( Galbraith, 1954; De Long & Shleifer, 1991; Bernanke, 2000; Romer, 1990; White, 1990 ). Second, others economists, have stressed the relevant role played by the contagion of fear that results in banking panic in the early 1930s Figure 1 .

Figure 1 The Business Cycle in the USA During the Period 1929-1937 Source : United States Census Bureau, the National Data Book.

That has produced many banks to fail and therefore by reducing the loans has produced a decrease in investment ( Olney, 1999 ). Third, others distinguish economists have stressed the role of a “wrong” contractionary monetary policy that has implied an increase in real interest rate and therefore a significant decrease in investment ( Friedman & Schwartz, 2008a; Bernanke, 2002; Galbraith, 1954; McCallum, 1990; Hamilton, 1987; Temin, 1976; Wicker, 1965 ). Fourth, another group of researchers has pointed out the relevance of the constraint of gold standard regime that forcing la FED to increase interest rate in the second five-year period of the 1920s in order to counteract the trade imbalances has depressed consumption and investment ( Eichengreen, 1996; Eichengreen & Temin, 1976; Temin & Toniolo, 2008 ). Fifth and finally another group of economists has stressed the role of the Smoot-Hawley Tariff Act promulgated in 1930 that by introducing tariffs on many industrial and agricultural goods has resulted in a reduction of global trade and ultimately a decrease of output ( Krugman, 2009; Whaples, 1995; Eichengreen & Irwin, 2009 ).

The objective of this paper is twofold. First of all, the paper aims to retrace the different phases and interpretations of the origin of the Great Depression through the presentation of the trend of the main macroeconomic variables. Secondly, the paper aims to clarify two important concepts of macroeconomic theory through the study of the events that occurred during the 1930s: the genesis and development of the inflationary spiral and the implementation of an unconventional monetary policy to support economic growth in the presence of a liquidity trap ( Hamilton, 1988 ).

Us Businnes Cycle During 1929-1937

The economic crisis of 1929—i.e. the start of Great Depression—comes at the end of a decade of euphoria, light-heartedness and strong economic growth: the Roaring Twenties Figure 2 .

Figure 2 US Stock Market and Banking Crisis 1920-1941 Source : Federal Reserve of St. Louis, Federal Reserve Economic Data.

This decade has been a period of economic growth and widespread prosperity, driven by the recovery following the post-war devastation, by the deferral of spending, the boom in the construction sector and the widespread diffusion of innovative consumer goods figure 3 .The spirit of the roaring twenties has characterized itself for a general feeling of novelty associated with modernity and from a break with the tradition favored by the pervasive diffusion among the great part of the population of new technologies and inventions such as cars, cinemas and radio. The intense dynamism of the time spread in all sectors of society and, in a particular way, in the field of fashion and music. From an economic point of view, the macroeconomic picture of the twenties of the last century is particularly positive: figure 1 shows that the GDP growth rate in the USA remains, on average, high, reaching a peak of 16% in 1922; graph (b) of figure 4 shows how for the unemployment rate fluctuates at low levels for most of the decade; the graph(a) of the figure 4 shows how the inflation rate stabilizes at low values and, finally, graph (a) of figure 2 shows how the euphoria of the decade spills over into the market where the stock index increases from 7 points in 1921 to 24 points in 1928.

Figure 3 Inflation Rate and Unemployment Rate in USA 1920-1941 Source : United States Census Bureau, the National Data Book.

Figure 4 Real and Nominal Rates in USA 1920-1941 Source : Federal Reserve of St. Louis, Federal Reserve Economic Data.

The economic crisis of 1929 marks the start of the US business cycle over the period 1929-1937. This business cycle is often identified with the deepest and most prolonged recession that Western economic systems have ever experienced in the modern age and can be divided (as indeed all business cycles) into two phases: the phase of the Great Depression and the phase of the recovery.

The Great Depression Phases

The “Great Depression” phase extends from August 1929 to March 1932. Figure 1 shows that in 1929 the growth rate of real GDP reaches a maximum point of about 6% so that, soon after, the economy US enters a new business cycle. In the four-year period 1929-1932 a particularly deep recession develops (which, precisely because of its intensity, is defined as the great depression

Great depression the GDP undergoes a sharp contraction, reducing by -9.8% in 1930, by -7.9% in 1931 and, finally, by -16.2% in 1932. Between 1929 (high point in August 1929) and 1932 (low point in March 1932), real GDP fell by about -30%, going, in absolute terms, from 203 to 141 billion dollars (base year = 1958). The dramatic nature of GD is also demonstrated by the volatility of the business cycle: the difference between the maximum point of 1929 and the minimum point of 1932 is about 30 percentage points ( Bernanke & James, 1990 ).

Stock Market Crash of 1929

The occurrence of the first negative disturbance i.e., the US stock market crash is often associated, if not identified entirely, with GD. Graph (a) of Figure 2 shows that between 1921 and 1929 the Standard & Poor's 500 stock index (the composite index of the 500 leading American stocks) recorded an increase of about 250%, going from 7 to 26 points (where the greatest increase is concentrated in the three-year period 1927-29 when the index increases from 12.5 to 26.9 points). The rise in the stock index comes supported, in large part, by the use of credit by speculators. In fact, the latter, believing that share prices were destined to increase in the immediate future, borrowed from banks to support the purchase of shares as they were convinced that they make a profit from speculative activity.

In early 1928, the Federal Reserve (FED), deeming that speculation was pushing share prices to unjustified and harmful levels for the stability and solidity of the economic system due to the consequent reduction of bank lending to businesses, decides to implement a restrictive monetary policy. The nominal interest rates are raised with the aim of restricting credit from banks to speculators and, therefore, to curb the rise in stock indexes. In the 1929 the financial situation plummets. The FED continues and intensifies monetary policy restrictive by further increasing the nominal interest rate thus favoring the belief among speculators that the prices of shares had by now reached levels not justified by the discount of future profits (which are reflected, as is well known, in the stock price.

In addition to the abrupt change in expectations on the future course of shares, another factor which makes the situation on the stock market even more critical consists in the increase in interest paid on the debt contracted for the purchase of shares. The change in expectations and speculators' fear of falling into a state of insolvency generate a first wave of panic which pushes them to sell their shares massively on October 24, 1929 ("Black Thursday"). Within a few days i.e., on the 29th of the same month ("Black Tuesday"), a second wave of sales marks the definitive beginning of the bursting of the speculative bubble which has been feeding for over a decade.

Bank System Crash

The stock market crisis helps to trigger the second negative perturbation that hit the US economic system in the first months of 1931, i.e., the banking system crisis, for two basic reasons. First, the banking system crisis helps to strengthen, among economic agents, a negative state of expectations on the future trend of the economy; secondly, it pushes the speculators who had gotten into debt in order to finance the purchase of the shares into a situation of insolvency and, consequently, it fuels the expectation among savers that the banks were no longer able to honor the commitments undertaken and that is, to promptly transform deposits into currency. Added to this is the fact that the start of the deflationary phase starting from 1930 made the debt position of various companies suffer and, consequently, made the structure of the banking system even more fragile.

Starting from the first months of 1931, and until March 1933, the combination of all these adverse events generates waves of banking panic which induce savers to withdraw their bank deposits massively (the so-called "bank run"). The risk that the insolvency of businesses and speculators would lead the banks themselves into a situation of insolvency pushes savers achievement of the internal objective (i.e., increase in income).

In the opposite case, i.e. if the FED had created an amount of monetary base in excess of that consistent with the external objective, a balance of payments deficit would have been created which, sooner or later, would have led to a devaluation of the dollar. Furthermore, it is very probable that such behavior by the FED would have favored a speculative attack on the dollar by those economic agents who, in anticipation of a forthcoming and imminent devaluation of the dollar, would have anticipated the event by transferring gold from the USA to resulting in an immediate worsening of the balance of capital movements and thus forcing the Fed to devalue the exchange rate Figure 5 .

Figure 5 Real Value of the Money Balance in USA 1920-1941 Source : Federal Reserve of St. Louis.

Real Effects of the Stock Market and Banking System Crisis

The two perturbations described above activate a set of effects that generate a highly negative macroeconomic picture. Limiting ourselves to the description of the trend of the main variables that characterize the phase of the US business cycle in the period 1929-1932, we can observe the following stylized facts.

Drastic decrease in aggregate demand and GDP growth rate: Actually, the consequence of the stock market crash in the USA in 1929 consists in the worsening of expectations on the future trend of economic activity which, in turn, produces two effects on effective demand: the reduction of the exogenous component of investments due to the worsening of expected future profits; the contraction of the exogenous component of consumption resulting both from the worsening of expected future incomes and from a negative wealth effect due to the contraction of the stock index.

Deflationary spiral: The reduction in the price level produces two effects on aggregate demand: firstly, the increase in the real interest rate following deflation reduces spending on private investments, while secondly, the Keynes effect attributable to the increase in monetary balances again following the deflation also stimulates aggregate demand. Let's see how the two effects played out during the Great Recession.

In the first place, the price level, after having remained substantially stable in the 1920s, drops violently, starting a particularly intense deflationary spiral: the deflation rate (negative change in the price level) goes from 2.5 in 1930 to -10.3 in 1932 (minimum point) to then go back up to -5.1 in 1933 (see graph (a) of figure 3 ). The nominal interest rate on three-month government bonds begins to progressively decrease until it is completely zero starting from 1935 (see graph (a) of figure 4 ). The high deflation rate implies that during the recession the real interest rate (ex-post) reaches significantly high positive levels: 4.57 in 1930; 10.38 in 1931 and 10.75% in 1932 (see graph (b) of figure 4 ).

Secondly, as is known, deflation increases or should increase, through the Keynes effect, effective demand through the increase in money balances, the reduction of the real interest rate and finally the stimulation of investment. In the recession 1930-32, however, the Keynes effect—measured by the change in monetary balances, i.e. by the change in the ratio between the supply of nominal money and the general level of prices—is extremely weak (in 1931) and even strongly negative in 1932. In fact, when we study the effect of deflation on money balances we assume that the money supply remains constant. In this phase, however, as we have seen, the reduction in the monetary multiplier prevails over the weak increase in the monetary base with the consequent reduction of the money supply. The result of the two effects is that, as can be seen from figure 5 , the second effect prevails over the first with the consequence that the monetary balances, after registering an increase in 1931, decrease both in 1932 and in the following year (for simplicity we assume that in the two-year period 1931- 1932 the Keynes effect is negligible).

In conclusion, the reduction in consumption and investment produces an intense reduction in aggregate demand which, in turn, produces a violent reduction in the GDP growth rate. Graph (b) of Figure 6 —which shows the breakdown of the growth rate of real GDP according to the contribution of each of them—clearly shows that the sharp reduction in the growth rate of GDP is entirely attributable to the contraction of consumption and investment.

Figure 6 Absolute and Relative Contribution of Aggregate Demand In USA 1920-1941 Source : United States Census Bureau, the National Data Book.

In fact, as can be seen from the graph, consumption fell by 4.1%, -2.4%, and -7.3% while investments fell by -3.8%, -3.1%, and - 3.9% respectively in 1930, 1931 and 1932. As a result, as we saw at the beginning, GDP fell by -9.8% in 1930, by -7.9% in 1931 and finally by -16 2% in 1932 so that between 1929 and 1932 the cumulative reduction in the growth rate of GDP is about 30 percentage points.

Rigidity of the monetary wage: Finally, although between 1929 and 1932 the trend of the money wage, quite faithfully follows that of prices, it differs in at least two aspects. First of all, in the initial phase of the recession, the salary money adjusts more slowly than prices: while the money wage index between 1929 and 1930 remains substantially stable (it falls from 100 to 99.9), that of prices falls from 100 to 98.8. It is only starting from 1931 that the monetary wage begins to decrease significantly, although its reduction is less than the reduction in prices. The result of the stickiness and the time lag with which the adjustment of money wages takes place means that the real wage increases slightly in the two-year period 1930-1931. Only in the two-year period 1932-33 was the reduction in the money wage greater than that in the prices with the result that the real wage decreased (graphs (a) and (b) of figure 7 ). The effect of the deflationary spiral on the trend of the unemployment rate proves to be dramatic: graph (b) of figure 4 shows how the unemployment rate which in 1929 was equal to 3% reaches a maximum point of 25% in 1933.

Figure 7 Monetary Wage, Real Wage and General Level Price Source: Federal Reserve of St. Louis.

Role of Fiscal and Monetary Policies

In line with the principle of a balanced state budget, supported by the classical theory, the tax authorities assume an extremely passive and neutral attitude during the entire business cycle with increases in public expenditure which, in the face of economic upheavals, turn out to be insignificant and derisory.

Following this extremely passive attitude in dealing with the economic depression in the four-year period 1930-1933, public spending remained substantially stable, increasing slightly in the two-year period 1930-1931 by 1.7 and 0.7 respectively (see the graph (b) of figure 7 ) and even shrinking by more than half a percentage point in the following two years. As we have seen previously, the monetary authorities do not oppose the drastic and sudden reduction of the banking multiplier, following the panic of savers (due to the defense of the fixed exchange rate of the dollar with gold), and consequently, they do not increase significantly the monetary base is adequate: the money supply, therefore, is drastically reduced. Only starting from 1933, i.e. only following the abandonment of the gold standard, the FED implements a decidedly expansive monetary policy through a strong change in the monetary base and a reduction in the nominal interest rate.

Interpretative Crisis of the Classical Model

The DG, in addition to representing a shocking and dramatic event for the lives of millions of individuals, constitutes a turning point in the evolution of economic theory, marking, in fact, the birth of modern macroeconomic theory. Faced with the systemic upheavals of the economy, the classic benchmark proves incapable of providing convincing explanations of economic events and, above all, of indicating the economic policy interventions suitable for overcoming the collapse of production and the emergence of endemics. In the classical model, a perturbation on the demand side produces only monetary effects, i.e. an immediate and perfect adjustment of prices and monetary wages which allows the equilibrium level of production to remain unchanged. Let's see in detail, with the help of figure 8 , the predictions of the classic benchmark in the presence of nominal disturbances on the demand side as it happened during the GD. Assume that the economic system in graph (a) of CS1.8 is in a full employment equilibrium, i.e. at point A = (X1928, r1928) and at point A′ = (X1928; Δπ1928 = 0) in graph (b), i.e. in a situation, hypothetically, similar to the one preceding the GD. Let us now assume that an adverse perturbation, such as the one that occurred in 1929, affects the exogenous part of the autonomous component of aggregate demand (e.g., reduction of investments and exogenous consumption). In accordance with the predictions of the classical model, graph (a) shows that the overall nominal disturbance on the demand side should generate a reduction in the general price level which, however, should correspond to an immediate and perfect reduction in the money wage so as to leave unchanged the level of real wages and, therefore, should cause the change in the inflation rate (or rather than forecast error made by the workers' union) is null. In other words, the adjustment mechanism envisaged by the classical benchmark should have kept the economic system stably at point A.

Figure 8 Graphical Representation of the Phase of Great Depression

As we have seen, the events that occurred during the recession in the USA of 1929- 1932 completely contradict the conclusions and predictions of the classical model. On the one hand, following the stock market and banking system crisis, the economic system suffers a drastic reduction in aggregate demand, while the behavior of the FED implies a rise in the real interest rate; on the other hand, the lag of the adjustment of the money wage (following the rigidity of the contractual money wage and, indirectly, of the expected inflation rate) to the reduction of the general price level produces an increase in the real wage. Following this chain of effects, the economic system spirals into a deflationary spiral that pushes the system further and further away from the initial equilibrium point.

In conclusion, two points deserve to be underlined regarding the case we have just studied. In the first place, in the two-year period 1930-1931, i.e. immediately after the emergence of the stock market crisis, the monetary wage showed a rigidity in 1930 and a stickiness in the following year. The time lag of the real wage adjustment pushes firms to contract the supply of goods (which is not admissible in the classical model due to the presence of a perfect and immediate price adjustment mechanism). Secondly, once the rebalancing mechanism of the price system fails and, therefore, the automatic nature of a full employment equilibrium, the economic system remains trapped in an equilibrium of underemployment which even worsens over time.

Phase of the Economic Recovery: 1933-1936

The turning point of the business cycle occurs in 1933. The GDP growth rate, after having reached the minimum of -14.9% in 1932, started to grow again in March 1933 and closed the year with a reduction of "only" -1.9%, thus starting the phase of expansion of the business cycle. As we have seen above, the intense deflation process of the period 1930-1932 is largely attributable to the conduct of the FED in the management of monetary policy. In fact, the choice to support the fixed exchange rate and therefore to adjust the base coherently with the achievement of the external objective prevents the FED from neutralizing the negative effect produced by the reduction of the monetary multiplier. Let us examine the factors behind the economic recovery in the period 1933-1936 ( Friedman & Schwartz, 2008b ).

On the one hand, fiscal policy contributed in a limited way to the recovery of the period 1933-1936. As we have seen in figure 6 , the increase in public expenditure is limited and the management of budgetary policy is still oriented towards the objective of balancing the budget balance (only starting from 1941, vice versa, the contribution of public expenditure to GDP growth will assume a significant weight). On the other hand, the monetary policy which in the period 1930-1932 had played a crucial role in accentuating the depression of the economy due to the decision to regulate the creation thus in the period 1933-1936 vice versa proves to be decisive in starting the economic recovery. The transmission mechanism through which monetary policy operates deserves particular attention.

1. First, the change in monetary policy strategy pushes the US economy into a liquidity trap. Between 1933 and 1936, the expansion of the monetary base – whose index (base = 1929) went from 68.1% to 96.3% – brought about the zeroing of the nominal interest rate (the latter fluctuates between 0 .05 and 0.014%). As we know, in these circumstances, the Keynes effect is essentially null and therefore fails to stimulate aggregate demand.

2. Secondly, in the economic recovery phase, monetary balances grow substantially: in fact, although the price level increases from 3% to 14.3%, monetary expansion is such as to generate an increase in monetary balances (see figure 6 ). The increase in monetary balances therefore provided a stimulus to effective demand through the Pigou effect: an increase in the real wealth of households, in fact, stimulating consumption is reflected in an increase in effective demand.

3. Thirdly, the declared objective of the FED to pursue a reflation process in an attempt to bring the price level back to pre-deflationary levels generates a state of expectations such that economic agents believe that the inflation rate must increase in future periods and consequently that the real interest rate must be negative (given the zeroing of the nominal interest rate). In fact, the latter went from +5.6% in 1933 to -2.8% in 1934 and further decreased to -3.2% in 1936. It is therefore probable that the reflation pursued by the FED has been the main stimulus channel for the effective demand through increased investment. Actually, reflation, by generating an increase in the inflation rate and therefore a reduction in the real interest rate, determines an increase in investment.

In conclusion, the economic recovery in the USA in the period 1933-1936 took place as a result of an expansive monetary policy following the abandonment of the gold standard. Expansive monetary policy (what we will nowadays call unconventional monetary policy implemented with quantitative easing) produces the following effects:

1. No Keynes effect, due to the presence of the liquidity trap.

2. Positive Pigou effect and therefore, via an increase in monetary balances, an increase in consumption.

3. Positive reflation effect which, by reducing the real interest rate, produces a significant increase in private investment.

This case study has examined a number of issues relating to the GD period of the 1930s. The different conclusions are as follows

• In the first place, the origin of the GD phase must be sought in the bursting of the speculative bubble created in the second five-year period of the 1930s by virtue of low interest rates and expectations of further increases in share prices.

• Secondly, the persistence of the recessionary phase which lasted for more than three years can be traced back to the traditional neutrality of fiscal policy and to a monetary policy which implicitly – given the reduction of the multiplier monetary policy due to the bank run – is restrictive since the defense of the fixed exchange rate does not allow the FED to adequately increase the monetary base.

• Thirdly, in line with the principles of the classical paradigm, macroeconomic policies at least until 1933 are neutral and in any case unable to effectively counteract the real adverse effects resulting from the bursting of the speculative bubble on the stock market.

• Fourthly, the economic recovery between 1933 and 1937 was driven decisively by the phenomenon of reflation favored by a monetary policy which today could easily be defined as unconventional. In fact, faced with a context characterized by the presence of a liquidity trap, the FED favors the stimulus of private investments by favoring the formation of expectations of an increase in the inflation rate so as to reduce the real interest rate.

• Finally, the theoretical repercussions of the Great Depression is–as is well known–the crisis of the classical paradigm unable to provide a plausible explanation of the persistence of the recessionary phase and, therefore, unable to provide useful indications to macroeconomic policy makers for a quick exit from the economic crisis.

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Received: 03-Dec-2022, Manuscript No. JEEER-22-005; Editor assigned: 05-Dec-2022, Pre QC No. JEEER-22-005(PQ); Reviewed: 19-Dec2022, QC No.JEEER-22-005; Revised: 22-Dec-2022, Manuscript No. JEEER-22-005(R); Published: 29-Dec-2022.

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Article Contents

Introduction, main findings of this study, what is already known on this topic, what this study adds, limitations of this study.

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Health inequalities in the Great Depression: a case study of Stockton on Tees, North-East England in the 1930s

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Michael Langthorne, Clare Bambra, Health inequalities in the Great Depression: a case study of Stockton on Tees, North-East England in the 1930s, Journal of Public Health , Volume 42, Issue 2, June 2020, Pages e126–e133, https://doi.org/10.1093/pubmed/fdz069

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Parallels have been drawn between the ‘Great Depression’ of the 1930s and the more recent ‘Great Recession’ that followed the 2007/8 financial crisis. Austerity was the common policy response by UK governments in both time periods. This article examines health inequalities at a local level in the 1930s, through a historical case study.

Local and national historical archives, Medical Officer for Health reports, and secondary sources were examined from 1930 to 1939 to obtain data on inequalities in health (infant mortality rates, stillbirths and neonatal mortality rates, 1935 and crude overall mortality rates, 1936) and ward-level deprivation (over-crowding rates, 1935) in Stockton-on-Tees, North-East England.

There were high geographical inequalities in overcrowding and health in Stockton-on-Tees in the 1930s. Rates of overall mortality, in particular, were higher in those wards with higher levels of overcrowding.

There were geographical inequalities in health in the 1930s and the most deprived areas had the worst overall mortality rates. The areas with the worst housing conditions and health outcomes in the 1930s remain so today - health inequality is extant over time across different periods of austerity.

The global financial crisis of 2007/8 led to a long period of recession across Europe. The catalyst was a downturn in the USA housing market which led to a collapse in financial markets across the world. Banks required state bailouts, stock markets posted massive falls depressing the ‘real’ economy and stimulating high unemployment rates of around 8.5% in the UK and the USA, 10–12% in France and Italy and more than 20% in Spain and Greece. The IMF announced that the global economy was experiencing its worst period since the 1930s: the ‘Great Recession’. 1

Government responses to the ‘Great Recession’ varied. In the UK (mirroring some other European countries most notably Spain and Greece), a strict policy of austerity was implemented from 2010 onwards. 2 This has been characterized by a drive to reduce public deficits via large scale cuts to central and local government budgets, reduced health care funding, and large reductions in welfare services and working-age social security benefits. Research shows that these cuts have hit the poorest parts of the country hardest 3 with austerity disproportionately impacting on the availability of key services in these areas, widening social inequalities within them and spatial inequalities between them and other areas. 4 , 5

Consequently, there is a growing public health research, policy and practice interest in the effects of austerity on health and health inequalities. Recent studies such as that by Barr et al. (2015) 6 suggest that inequalities in mental health and wellbeing increased at a higher rate between 2009 and 2013. Further, since the implementation of austerity from 2010, people living in more deprived areas have seen the largest increases in poor mental health 7 and self-harm. 8 , 9 Internationally, Niedzwiedz et al. (2016) 10 found that reduced spending or increased conditionality may have adversely effected the mental health of disadvantaged social groups between 2006 and 2012. These echo previous studies of the effects of public sector and welfare state contractions on increases in health inequalities in the UK, Finland, US and New Zealand in the 1980s and 1990s. 5 , 11 – 13

Rhetorical comparisons – e.g. with the media questioning whether the conditions of the 1930s have returned - have been made between the austerity that followed the ‘Great Recession’ of 2007/8 with the austerity of the ‘Great Depression’ in the 1930s. 14 The 1930s thereby provide a historical case study for the examination of health inequalities during a previous period of recession, high unemployment and austerity. In this paper, we set out to examine if there were inequalities in deprivation and in health in the 1930s and whether there has been a degree of historical continuity, whereby health inequalities have persisted in certain localities.

‘The Great Depression’ followed the Wall Street Crash of 1929, whereby share values in the United States plummeted rapidly, resulting in a global financial crisis. 15 In the UK a sharp rise in unemployment followed, suffered disproportionately by the major industrial areas such as the North-East of England. 16 , 17 National income fell while costs of supporting the unemployed rose due to the high numbers claiming benefits. Fearing a budget deficit, in 1931 a Conservative-dominated National Government cut unemployment benefits by 10%, alongside increased National Insurance contributions. Qualification for benefits, particularly via the introduction of the means-test, was also made more difficult and receipt was stigmatized by the media and politicians. 17

There has been some debate amongst historians about health inequalities during ‘The Great Depression’ with Webster (1982) finding that whilst there was not a detrimental impact on health inequalities nationally, some localities were adversely impacted. 18 Winter (1979) had previously suggested that the national improvements could also be seen across local areas, with an associated narrowing of inequalities. 19 Southall and Congdon (2004) analysed 1 770 local government districts between 1927 and 1936. 20 They concluded that inequalities in infant mortality rates were affected by the standard of housing, but not by unemployment rates. 20 Levene et al. (2004) concentrated on Borough Councils, and noted a rise in health expenditure over this period. 21 However, areas with a low rate base and high unemployment levels tended towards low health spending 21 —perhaps partly explaining Webster’s view that local inequalities were observed.

This article advances this debate—and also engages with contemporary public health discourse about austerity and health inequalities—by using archival material to examine geographical inequalities in health in Stockton-on-Tees, North-East England during the 1930s. Although Stockton was not exceptionally badly affected during the 1930s, and did not qualify for ‘special area’ status as one of the worst affected areas, nonetheless significant social and health inequalities were observed and documented by the Medical Officer for Health, and thus it provides an informative case study against which to compare more recent, exceptional, conditions.

As part of the ‘Local Health Inequalities in an Age of Austerity: The Stockton-on-Tees Study’ , 22 this paper presents historical, archival data on health inequalities by ward in the 1930s. Stockton-on-Tees was chosen as the study site because it has the highest geographical inequalities in health in England both for men (at a 17.3 year difference in life expectancy at birth between lower super output areas—LSOAs) and for women (11.4 year gap). 23 Today, Stockton has high levels of social inequality, with some wards with very low levels of deprivation (e.g. Ingleby Barwick) and others with high levels of deprivation (e.g. Town Centre). These areas are often only a few miles apart. Deprivation overall is higher than the national average, e.g. 21.9% of children live in poverty compared to 19.2% nationally. 23 This makes it a particularly important site to analyse health inequalities during both contemporary and historical periods of austerity. 24 – 26

Local and national historical archives, Medical Officer of Health (MOH) reports, and secondary sources were examined from 1930 to 1939 to obtain data on inequalities in health (measured using infant mortality rates [IMR—deaths per 1000 live births], stillbirth rates [per 1000 births] and neonatal mortality rates [per 1000 births] for 1935 and overall mortality rates [crude rates per 1000] for 1936—the only years for which data was found) and ward-level deprivation (measured using over-crowding rates for 1935—the only year for which data was found). Particularly informative regarding housing conditions and over-crowding rates were the minutes of Stockton Council committees and documentation pertaining to Durham County Council’s Public Assistance Committee (PAC). The MOH reports for Stockton by Dr George M’Gonigle 27 – 36 provided health statistics alongside substantial commentary on social conditions and the links between poverty and mortality.

Data from (MOH) reports were tabulated and presented in bar graphs to demonstrate the geographical distribution of deprivation measured via overcrowding rates and geographical health patterns measured by IMR, stillbirths, neonatal mortality and overall mortality rates,

Deprivation—overcrowding

Like many industrial regions of the UK during the 1930s, Stockton suffered from both overcrowding and slum housing, often referred to as ‘unhealthy areas’. 16 At this time, Stockton borough council defined overcrowding as any dwelling which did not meet the minimum requirements: 1 bedroom house for 1 person families, or 2 person families where 1 bedroom would suffice (e.g. father and son, mother and daughter, married couples); 2 bedroom house for 3 person families; 3 bedroom house for four, five and six person families; 4 bedroom house for all families over six persons (M’Gonigle 1934, p. 22). 32 Overcrowding exacerbates illness due to the close proximity of living, facilitating disease transfer between and amongst families. Furthermore, the psychological stresses of overcrowding could cause or aggravate high blood pressure—a major contributor to heart disease, the biggest killer of adults in Stockton at the time. 27 – 38 Additionally, slum housing created ill health through damp, poor ventilation, and cold temperatures. 39 , 40 A slum neighbourhood was defined as an area where the: ‘narrowness, closeness and bad management, or the bad condition of the streets and houses or groups of houses within such an area, or the want of light, air, ventilation and proper conveniences and other sanitary defects, or one or more of such causes are dangerous or injurious to the health of the inhabitants of the buildings in the said area, or of the neighbouring buildings ’. 41

Poor families could struggle to afford rental costs and M’Gonigle noted that cuts to unemployment benefits exacerbated this, forcing families into lower rent, less sanitary, overcrowded accommodation (sometimes with multiple families sharing the same house). This resulted in the health detriment highlighted above. Expenditure on food, again restricted by reduced benefits, was often cut to enable the rent to be paid. 42 The resultant poor diet exacerbated ill-health due to, or aggravated by, malnourishment. Dr. M’Gonigle considered, for example, that much of the child morbidity and mortality was influenced by the malnutrition of the child or of the mother during pregnancy.

In Stockton, surveys of slum clearance areas implemented by Stockton Borough Council in 1933 and 1934 indicated that slum housing was most prevalent in Victoria and South East wards. Overcrowding rates for 1935 are illustrated in Table 3 . It shows that Victoria, Portrack and Tilery, and South East wards all had the highest overcrowding rates.

Infant mortality rates (per 1000 live births), stillbirth rates (per 1000 births), and neonatal deaths (per 1000 live births) in Stockton by Ward, 1935

Health inequalities

M’Gonigle’s MOH reports highlighted the detrimental health effects of low-income and poor housing conditions concomitant with unemployment. 30 – 36 M’Gonigle considered that the lower purchasing power of the unemployed had resulted in an inability to buy sufficient quantity and/or quality of food alongside other costs. 42 In 1933 the British Medical Association formed a ‘Committee on Nutrition’. Calculations of the costs of suitable diets, alongside other outgoings such as rent and fuel, showed that some of the poorest households in Stockton could not afford even the minimum recommended diet. 42

A major killer of infants was developmental defects, such as congenital heart problems. Although such defects were not well understood in the 1930s, M’Gonigle speculated that a deficient maternal diet had adverse effects on the anatomical development of the foetus. He also suspected dietary deficiencies influenced cases of premature birth – the biggest cause of infant mortality. Both assertions have subsequently been supported by more recent research. By 1931 he believed that the unemployed were suffering malnutrition, and that malnourished children were dying of diseases that would be resisted in well-nourished children. The impact continued into 1936, when M’Gonigle stated: ‘The importance of good nutrition cannot be over-emphasised…the protective foods are expensive and families with low income levels cannot afford to purchase adequate quantities ’. 43

Tables 1 and 2 and Figs 1 and 2 show rates of IMR, stillbirths, neonatal mortality and overall mortality by ward for 1935 and 1936. These show that those areas with the highest rates of overcrowding (see Table 3 ) were amongst those with some of the worst health outcomes. For example, the highly overcrowded wards such as Victoria (14 deaths/1000 population and South East (13 deaths/1000 population), had two of the highest rates of crude mortality (Table 2 , Fig. 2 ). Indeed, these wards also had high levels of IMR, stillbirths, and neonatal mortality. However, it should be noted that mortality rates were also high in areas with lower rates of overcrowding such as West End (13 deaths/1000 Population). However, with the exception of Central, all of the wards that had an above average crude mortality rate also had an above average overcrowding rate. These patterns were less clear for IMR, stillbirths, and neonatal mortality.

Crude mortality rates per 1000 in Stockton by Ward, 1936 (Source: M’Gonigle 1936, p. 11 47 )

Overcrowding by Ward 1935 (Private Housing) (Source: Housing Committee 1936 50 )

Infant Mortality Rates (per 1000 live births) in Stockton by Ward, 1935 (source: adapted from Langthorne, 2019 51 )

Crude Mortality Rates per 1000 Population in Stockton by Ward, 1936 (source: adapted from Langthorne, 2019 51 )

The UK government responded to the 2007/8 financial crisis and subsequent ‘Great Recession’ by implementing a policy of austerity. Research has suggested that contemporary austerity has exacerbated health inequalities. 6 – 9 The policy response of the UK government to the 1930s ‘Great Depression’ was similar—of austerity also implemented particularly with regards to the welfare system. There has been debate in the historical literature about health inequalities in the 1930s, 18 – 21 and so our paper has used archival methods to examine local health inequalities in detail during the 1930s. It has found that there were large geographical inequalities in health by ward in Stockton-on-Tees. Mortality rates replicated patterns of deprivation as measured in terms of housing conditions, specifically overcrowding rates. However, this association was not so strongly reflected in terms of the other mortality measures.

Our study suggests that during the 1930s there were local inequalities in health in the 1930s and that these may have been related to deprivation. Webster 18 and others 19 – 21 have debated whether the 1930s should be perceived as ‘healthy or hungry’, concluding that, whilst nationally health did not suffer unduly during austerity, there could be more localized health inequalities—in other words, that many of the poorer areas were ‘hungry’ and not ‘healthy’. Our study has examined this issue in more detail and finds that there were indeed high health inequalities in this period, with the most deprived areas suffering the highest rates of overall mortality.

Our study also highlights issues of historical continuity (or determinism) in terms of poverty and ill health by geography. It is therefore of potential importance for understanding the impacts that the recent recession and associated austerity policies might have on contemporary health inequalities. For example, the slum wards of 1930s Stockton (such as the Victoria and South East wards) have been incorporated into the new ward of ‘Stockton Town Centre’. A recent profile of this ward 49 reported high levels of poverty and ill health, and the ward remains the most deprived in the local authority. Almost 11% of working age residents claimed Job Seeker’s Allowance benefits (compared to between 1.7–2.5% nationally) 44 , 45 and life expectancy was the lowest in the borough – 67.7 years for men and 74.8 for women (compared to the Stockton average of 77.8 years and 81.9 respectively) 23 . The slum areas identified in this paper from the 1930s are still amongst the most deprived areas of Stockton and also England today.

Research has suggested that contemporary austerity has exacerbated health inequalities in England 6 and internationally, 10 and that people living in the most deprived areas of England have seen the largest increases in poor mental health 7 and self-harm. 8 , 9 Previous historical studies have also examined the association between deprivation and health in the 1930s. For example, Winter, 19 Webster, 18 Levene et al. 21 and Congdon and Southall 20 have previously debated whether there was an adverse geographical impact of the ‘Great Depression’ on health outcomes. Further, geographical studies have examined whether there is historical continuity in terms of area level deprivation and ill-health, concluding that there is some historical continuity over time with places that were the most deprived and unhealthy across the 20th century, remaining so in the 21st. 46 , 47 Our study adds to these literatures.

This study examines health inequality during the 1930s period of austerity. It provides a detailed examination of geographical inequalities in health during the period by focusing on local health inequalities in Stockton-on-Tees. Local level analyses of geographical inequalities in health in this period have not previously been conducted. It has found high health inequalities at a local level in the 1930s, adding geographical nuance to Webster’s national level analysis of the ‘healthy’ 1930s. 18 Given that austerity was the common policy response by UK governments in the 1930s and the 2010s, the insights from our historical study are therefore of potential importance for understanding the impacts that the recent recession and associated austerity policies might have on contemporary health inequalities, given the persistence of deprivation over time.

Our study is subject to some limitations. Firstly, we use IMR, stillbirths and neo-natal mortality rates as well as crude overall mortality rates. These are important indicators but they cannot be seen as proxies for wider health issues in the population such as morbidity rates. Further, the overall mortality rates are only crude (not age or sex adjusted as would be usual practice in modern epidemiology). The data obtained are also from the original Medical Officer of Health estimates made in the 1930s and the data collection in that period is not to the same standard as today and maybe unreliable at the local level, given the small numbers involved for each ward. Secondly, we use overcrowding as our indicator of deprivation. This is only one indicator and is obviously far more limited than modern measures such as the Index of Multiple Deprivation. 48 Other indicators such as household income or area-level unemployment rates might provide different geographical patterns in mortality. Thirdly, the mortality data were only available for one year each (1935 and 1936) and so provide only a snapshot of health inequalities in Stockton during the 1930s. The patterns of inequalities that we have detected may not have been consistent across the decade. Fourthly, the research relies heavily on the MOH reports, and the opinions (albeit it professional) of one particular individual in M’Gonigle, which may have been contradicted with evidence from different sources. Finally, our analysis relates only to one locality and it may well be the case that health inequalities were smaller—or larger—in other local authorities in the 1930s. Our study is therefore not generalizable beyond the case of Stockton-on-Tees, but it does provide a detailed example of health inequalities in an industrialized town in an important and under-researched time period.

Our paper used archival methods to examine local health inequalities in detail during the 1930s period of austerity. It has found that there were geographical inequalities in terms of infant mortality rates, neonatal mortality rates, stillbirths and overall mortality by ward in Stockton-on-Tees. Overall mortality in particular replicated patterns of deprivation as measured in terms of housing conditions. The insights from our study are therefore of potential importance for understanding the impacts that the recent recession and associated austerity policies might have on contemporary health inequalities.

This study was funded by a Leverhulme Trust Research Leadership Award held by Clare Bambra (reference RL-2012-006).

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• depressive disorders
• infant mortality
• patients' rooms
• time factors
• neonatal mortality
• health outcomes
• health disparity

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Great Depression: Causes and Impact

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Causes of the Great Depression

In economics, it seems, we can’t know the future, we are confused by the present, and we can’t agree on the past.

About every ten years or so, financial crises spoil economic hopes and many best-laid plans. As scary as they are while happening, like everything else, in time, they tend to fade from memory. For example, can you recall the remarkable number of US depository institutions that failed in the crisis of the 1980s? (The correct answer: More than 2,800 !)

The weakness of financial memory is one reason for recurring over-optimism, financial fragility, and new crises. But the Great Depression of the 1930s is an exception. It was such a searing experience that it retains its hold on economic thought almost a century after it began and more than 90 years after its US trough in 1933. That year featured the temporary shutdown of the entire US banking system and an unemployment rate as high as 24.9 percent. More than 9,000 US banks failed from 1929–33. Huge numbers of home and farm mortgages were in default, and 37 cities and three states defaulted on their debt. How could all this happen? That is still an essential question, with competing answers.

This collection of Ben Bernanke’s scholarly articles on the economics of the Depression was originally published in 2000. That was two years before he became a Governor on the Federal Reserve Board, and seven years before, as Federal Reserve Chairman, he played a starring world role in the Great (or Global) Financial Crisis of 2007–09 and its aftermath, always cited as “the worst financial crisis since the Great Depression.”

Bernanke’s Essays on the Great Depression has now been republished, with the addition of his Lecture, “Banking, Credit and Economic Fluctuations,” delivered upon winning the Nobel Prize in Economics in 2022. They make an interesting, if dense and academic, read.

“To understand the Great Depression is the Holy Grail of macroeconomics,” is the first line of the first article of this collection. “Not only did the Depression give birth to macroeconomics as a distinct field of study, but … the worldwide economic collapse of the 1930s remains a fascinating intellectual challenge.” Indeed it does.

Bernanke points out that “no account of the Great Depression would be complete without an explanation of the worldwide nature of the event.” As one example of this , we may note that Germany was then the second largest economy in the world, and “the collapse of the biggest German banks in July 1931 represents an essential element in the history,” as a study of that year relates. Germany was at the center of ongoing disputes about the attempted financial settlements of the Great War (or as we say, World War I). Widespread defaults on the intergovernmental debts resulting from the war also marked the early 1930s.

“What produced the world depression of 1929 and why was it so widespread, so deep, so long?” similarly asked the eminent financial historian, Charles Kindleberger . “Was it caused by real or monetary factors?” Was it “a consequence of deliberate and misguided monetary policy on the part of the US Federal Reserve Board, or were its origins complex and international, involving both financial and real factors?”

“Explaining the depth, persistence, and global scope of the Great Depression,” Bernanke reflects in his 2022 Lecture, “continues to challenge macroeconomists.” Although he concludes that “much progress has been made,” still, after nearly a century, things remain debatable. This calls into question how much science there is in economics looking backward, just as the poor record of economic forecasting questions whether there is much science in its attempts to look forward.

In economics, it seems, we can’t know the future, we are confused by the present, and we can’t agree on the past. Those living during the Depression were confused by their situation, just as we are now by ours. As Bernanke writes, “The evidence overall supports the view that the deflation was largely unanticipated, and indeed that forecasters and businesspeople in the early 1930s remained optimistic that recovery and the end of deflation were imminent.”

In Lessons from the Great Depression , a 1989 book that Bernanke often references, Peter Temin provides this wise perspective: “We therefore should be humble in our approach to macroeconomic policy. The economic authorities of the late 1920s had no doubt that their model of the economy was correct”—as they headed into deep disaster. “It is not given to us to know how future generations will understand the economic relations that govern how we live. We should strive to be open to alternative interpretations.”

Bernanke considers at length two alternative causes of the Depression and through his work adds a third.

The first is the famous Monetarist explanation of Federal Reserve culpability, referred to by Kindleberger, derived from the celebrated Monetary History of the United States by Milton Friedman and Anna Schwartz. Friedman and Schwartz, writes Bernanke, “saw the response of the Federal Reserve as perverse, or at least inadequate. In their view, the Fed could have ameliorated the deflationary pressures of the early 1930s through sustained monetary expansion but chose not to.” About this theory, Bernanke says, “I find it persuasive in many respects.” However, “it is difficult to defend the strict monetarist view that declines in the money stock were the only reason for the Depression, although … monetary forces were a contributing factor.” It seems eminently reasonable that multiple causes were at work to cause such a stupendously disastrous outcome.

“The Germans kept wages low and reached full employment quickly; the Americans raised wages and had to cope with continued unemployment.”

A second approach takes as central to the depth of the Depression the effects of governments’ clinging too long to the Gold Exchange Standard. That was the revised version of the gold standard that was put together in the 1920s as the world tried to return to something like the pre-Great War monetary system, which previously had accompanied such impressive advances in economic growth and prosperity. The Classic Gold Standard was destroyed by the Great War, as governments bankrupted themselves, then printed the money to spend on the war’s vast destruction and set off the rampant inflations and hyper-inflations that followed.

After the inflations, there was no simple going back to the monetary status quo ante bellum. However, “the gold standard [was] laboriously reconstructed after the war,” Bernanke relates, referring to the Gold Exchange Standard. “By 1929 the gold standard was virtually universal among market economies. … The reconstruction of the gold standard was hailed as a major diplomatic achievement, an essential step toward restoring monetary and financial conditions—which were turbulent during the 1920s—to … relative tranquility.”

Financial history is full of ironies. Here we had a “major diplomatic achievement” in global finance by intelligent and well-intentioned experts. But “instead of a new era of tranquility,” Bernanke tells us, “by 1931 financial panics and exchange rate crises were rampant, and a majority of countries left gold in that year. A complete collapse of the system occurred in 1936.” The United States left the gold standard in 1933.

Bernanke highlights the comparative studies of countries during the 1930s which found a notable pattern of “clear divergence”: “the gold standard countries suffered substantially more severe contractions,” and “countries leaving gold recovered substantially more rapidly and vigorously than those who did not,” and “the defense of gold standard parities added to the deflationary pressure.” Thus, he concludes, “the evidence that monetary shocks played a major role in the Great Contraction, and that these shocks were transmitted around the world primarily through the working of the gold standard, is quite compelling.” 

So far, we have an explanatory mix of the behavior of central banks faced with huge shocks in the context of the revised Gold Exchange Standard in the aftermath of the runaway inflations stemming from the Great War.

In addition, Bernanke’s own work emphasizes the role of credit contractions, not just monetary contractions, with a focus on “the disruptive effect of deflation on the financial system”—or in macroeconomic terms, “an important role for financial crises—particularly banking panics—in explaining the link between falling prices and falling output.” Bernanke provides a depressing list of banking crises around the world from 1921 to 1936. This list is nearly four pages long.

Bernanke concludes that “banking panics had an independent macroeconomic effect” and that “stressed credit markets helped drive declines in output and employment during the Depression.” This seems easily believable.

Bernanke’s articles also address employment during the Depression. Although economic conditions significantly improved after 1933, unemployment remained remarkably, perhaps amazingly, high. Continuing through all of the 1930s, it was far worse than in any of the US financial and economic crises since. At the end of 1939, US unemployment was 17.2 percent. At the end of 1940, after two full presidential terms for Franklin Roosevelt and the New Deal, unemployment was still 14.6 percent. Very high unemployment lasted a very long time.

The Depression-era interventions of both the Hoover and the Roosevelt administrations focused on maintaining high real wages. As Bernanke writes, “The New Deal era was a period of general economic growth, set back only by the 1937–38 recession. This economic growth occurred simultaneously with a real wage “push” engineered in part by the government and the unions.” But “how can these two developments be consistent?” Well, economic growth from a low level with a government push for high real wages was accompanied by high and continued unemployment. That doesn’t seem like a surprise.

The New Deal real wage push continued what had begun with President Hoover. The Austrian School economist, Murray Rothbard , says of Hoover in the early Depression years, “No one could accuse him of being slack in inaugurating the vast interventionist program.” He quotes Hoover’s statement in 1932 that wage rates “were maintained until the cost of living had decreased and profits had practically vanished. They are now the highest real wages in the world.” Rothbard rhetorically asks, as we might ask of the 1930s in general, “But was there any causal link between this fact and the highest unemployment rate in American history?” As Temin observes about the 1930s, “the Germans kept wages low and reached full employment quickly; the Americans raised wages and had to cope with continued unemployment.”

Turning to a more general perspective on the source of the Depression, Rothbard observes that “many writers have seen the roots of the Great Depression in the inflation of World War I and of the postwar years.”

Yet more broadly, it has long seemed to me that in addition to the interconnected monetary and credit problems carefully explored in Bernanke’s book, the most fundamental source of the Depression was the Great War itself, and the immense shocks of all kinds created by the destruction it wreaked—destruction of life, of wealth, in economics, in finance, of the Classic Gold Standard, of currencies, in the creation of immense and unpayable debts, and the destruction of political and social structures, of morale, of pre-1914 European civilization.

As Temin asks and answers, “What was the shock that set the system in motion? The shock, I want to argue, was the First World War.”

And giving Bernanke’s Nobel Prize Lecture the last word, “In the case of the Depression, the ultimate source of the losses was the economic and financial damage caused by World War I.” 

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