The AAA immediately set out to slaughter six million baby pigs and reduce breeding sows to reduce pork production and raise prices. Since cotton plantings were thought to be excessive, cotton farmers were paid to plow under one-quarter of the forty million acres of cotton to reduce marketed production to boost prices. Most of the payments went to the landowners, not the tenants, making conditions desperate for tenant farmers. Though landowners were supposed to share the payments with their tenant farmers, they were not legally obligated to do so and most did not. As a result, tenant farmers, and especially black tenants, who were more easily discriminated against, received none of the payments and less or no income from cotton production after large portions of the crop were plowed under. Where persuasion was ineffective in inducing the many independent farmers to reduce production, the federal government intended to mandate production cutbacks and purchase the product to take it off the market and raise prices.
The NRA was a vast experiment in cartelizing American industry. Code authorities in each industry were set up to determine production and investment, as well as to standardize firm practices and costs. The entire apparatus was aimed at raising prices and reducing, not increasing, production and investment. As the NRA codes began to take effect in the fall of 1933, they had precisely that effect. The recovery that had seemed so promising in the summer largely stopped, and there was little increase in economic activity from the fall of 1933 through midsummer 1935. Enforcement of the codes was sporadic, disagreement over the codes increased, and, in smaller, more competitive industries, fewer firms adhered to the codes. The Supreme Court ruled the NRA unconstitutional on May 27, 1935, and the AAA unconstitutional on January 6, 1936. Released from the shackles of the NRA, American industry began to expand production. By the fall of 1935 a vigorous recovery was under way.
The introduction of the NRA had initially brought about a sharp increase in money and real wage rates as firms attempted to comply with the NRA’s blanket code. As firms’ enthusiasm for the NRA waned, money wage rates increased little and real average wage rates actually fell slightly in 1934 and early 1935. In addition, many workers decided not to join independent labor unions. These factors helped the recovery. Unhappy with the lack of union power, however, Senator Robert Wagner, in the summer of 1935, authored the National Labor Relations Act to ensure that union members could force other workers to join their unions with a simple majority vote, thus effectively monopolizing the labor force. Internal dissension and the new Congress of Industrial Organizations’ (CIO) development of strategies to use the new law kept labor unions from taking advantage of the new act until late in 1936. In the first half of 1937, the CIO’s massive organizing drives led to labor union recognition at many large firms. Generally, the new contracts raised hourly wage rates and created overtime wage rates as real hourly labor costs surged.
Several other factors also pushed up real labor costs. One factor was the new Social Security taxes instituted in 1936 and 1937. Also, Roosevelt had pushed through a new tax on undistributed corporate profits, expecting this to cause firms to pay out undistributed profits in dividends. Though some firms did pay out part of the retained earnings in larger dividends, others, such as the firms in the steel industry, also paid bonuses and raised wage rates to avoid paying their retained earnings in new taxes. As these three policies came together, real hourly labor costs jumped without corresponding increases in demand or prices, and firms responded by reducing production and laying off employees.
The second major policy change was in monetary policy. Following the end of the contraction, banks, as a precaution against bank runs, had begun to hold large excess reserves. Officials at the Federal Reserve System knew that if banks used a large percentage of those excess reserves to increase lending, the money supply would quickly expand and price inflation would follow. Their studies suggested that the excess reserves were distributed widely across banks, and they assumed that these reserves were due to the low level of loan demand. Because banks were not borrowing at the discount window and the Fed had no bonds to sell on the open market, its only tool to reduce excess reserves was the new one of varying reserve requirements. Between August 1, 1936, and May 1, 1937, in three steps, the Fed doubled reserve requirements for all classes of member banks, wiping out much of the excess reserves, especially at the larger banks. The banks, burned by their lack of excess reserves in the early 1930s, responded by beginning to restore the excess reserves, which entailed reducing loans. Within eighteen months, excess reserves were almost as large as before the reserve requirement increases, and, necessarily, the stock of money was lower.
By June 1937, the recovery—during which the unemployment rate had fallen to 12 percent—was over. Two policies, labor cost increases and a contractionary monetary policy, caused the economy to contract further. Although the contraction ended around June 1938, the ensuing recovery was quite slow. The average rate of unemployment for all of 1938 was 19.1 percent, compared with an average unemployment rate for all of 1937 of 14.3 percent. Even in 1940, the unemployment rate still averaged 14.6 percent.
Why was the recovery from the Great Depression so slow? A number of economists now argue that the NRA and monetary policy were important factors. Some maintain that Roosevelt’s vacillating policies and new federal regulations hindered recovery (Gary Dean Best, Richard Vedder and Lowell Gallaway, and Gary Walton), while others emphasize monetary factors (Milton Friedman and Anna Schwartz, Christian Saint-Etienne, and Barry Eichengreen). The New Deal’s NRA has received much criticism (Gary Dean Best, Gene Smiley, Richard Vedder and Lowell Gallaway, Gary Walton, and Michael Weinstein). A now discredited explanation from Alvin Hansen argued that the United States had exhausted its investment opportunities. E. Cary Brown, Larry Peppers, and Thomas Renaghan emphasize federal fiscal policies that were a drag on the return to full employment. Michael Bernstein argues that investment problems retarded the recovery because the older established industries could not generate sufficient investment while newer, growing industries had trouble obtaining investment funds in the depressed environment. Alexander Field argues that the uncontrolled housing investment of the 1920s severely reduced housing investment in the 1930s.
One of the most coherent explanations, which pulls together several of these themes, is what economic historian Robert Higgs calls “regime uncertainty.” According to Higgs, Roosevelt’s New Deal led business leaders to question whether the current “regime” of private property rights in their firms’ capital and its income stream would be protected. They became less willing, therefore, to invest in assets with long lives. Roosevelt had first suspended the antitrust laws so that American businesses would cooperate in government-instigated cartels; he then switched to using the antitrust laws to prosecute firms for cooperating. New taxes had been imposed, and some were then removed; increasing regulation of businesses had reduced businesses’ ability to act independently and raise capital; and new legislation had reduced their freedom in hiring and employing labor. Public opinion surveys of business at the end of the 1930s provided evidence of this regime uncertainty. Public opinion polls in March and May 1939 asked whether the attitude of the Roosevelt administration toward business was delaying recovery, and 54 and 53 percent, respectively, said yes while 26 and 31 percent said no. Fifty-six percent believed that in ten years there would be more government control of business while only 22 percent thought there would be less. Sixty-five percent of executives surveyed thought that the Roosevelt administration policies had so affected business confidence that the recovery had been seriously held back. Initially many firms were reluctant to engage in war contracts. The vast majority believed that Roosevelt’s administration was strongly antibusiness, and this discouraged practical cooperation with Washington on rearmament.
It is commonly argued that World War II provided the stimulus that brought the American economy out of the Great Depression. The number of unemployed workers declined by 7,050,000 between 1940 and 1943, but the number in military service rose by 8,590,000. The reduction in unemployment can be explained by the draft, not by the economic recovery. The rise in real GNP presents similar problems. Most estimates show declines in real consumption spending, which means that consumers were worse off during the war. Business investment fell during the war. Government spending on the war effort exceeded the expansion in real GNP. These figures are suspect, however, because we know that government estimates of the value of munitions spending, to name one major area, were increasingly exaggerated as the war progressed. In fact, the extensive price controls, rationing, and government control of production render data on GNP, consumption, investment, and the price level less meaningful. How can we establish a consistent price index when government mandates eliminated the production of most consumer durable goods? What does the price of, say, gasoline mean when it is arbitrarily held at a low level and gasoline purchases are rationed to address the shortage created by the price controls? What does the price of new tires mean when no new tires are produced for consumers? For consumers, the recovery came with the war’s end, when they could again buy products that were unavailable during the war and unaffordable during the 1930s.
Could the Great Depression happen again? It could, but such an event is unlikely because the Federal Reserve Board is unlikely to sit idly by while the money supply falls by one-third. The wisdom gained in the years since the 1930s probably gives our policymakers enough insight to make decisions that will keep the economy out of such a major depression.
About the Author
Gene Smiley is an emeritus professor of economics at Marquette University.
Further Reading
Bernstein, Michael. The Great Depression: Delayed Recovery and Economic Change in America, 1929-1939. New York: Cambridge University Press, 1987.
Best, Gary Dean. Pride, Prejudice, and Politics: Roosevelt Versus Recovery, 1933-1938. New York: Praeger, 1991.
Bordo, Michael D., Claudia Goldin, and Eugene N. White, eds. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Chicago: University of Chicago Press, 1998.
Brown, E. Cary. “Fiscal Policy in the Thirties: A Reappraisal.” American Economic Review 46 (December 1956): 857-879.
Brunner, Karl, ed. The Great Depression Revisited. Boston: Martinus Nijhoff, 1981.
Cole, Harold L., and Lee E. Ohanian. “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis.” Journal of Political Economy 112 (August 2004): 779-816.
Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.
Field, Alexander J. “Uncontrolled Land Development and the Duration of the Depression in the United States.” Journal of Economic History 52 (June 1992): 785-805.
Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.
Glasner, David. Free Banking and Monetary Reform. New York: Cambridge University Press, 1989.
Hall, Thomas, and J. David Ferguson. The Great Depression: An International Disaster of Perverse Economic Policies. Ann Arbor: University of Michigan Press, 1998.
Hansen, Alvin. Full Recovery or Stagnation? New York: Norton, 1938.
Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press, 1987.
Higgs, Robert. “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Returned After the War.” Independent Review 1 (Spring 1997): 561-590.
Higgs, Robert. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s.” Journal of Economic History 52 (March 1992): 41-60.
O’Brien, Anthony Patrick. “A Behavioral Explanation for Nominal Wage Rigidity During the Great Depression.” Quarterly Journal of Economics 104 (November 1989): 719-735.
Peppers, Larry. “Full-Employment Surplus Analysis and Structural Change: The 1930s.” Explorations in Economic History 10 (Winter 1973): 197-210.
Renaghan, Thomas. “A New Look at Fiscal Policy in the 1930s.” Research in Economic History 11 (1988): 171-183.
Saint-Etienne, Christian. The Great Depression, 1929-1938: Lessons for the 1980s. Stanford: Hoover Institution Press, 1984.
Smiley, Gene. Rethinking the Great Depression: A New View of Its Causes and Consequences. Chicago: Ivan R. Dee, 2002.
Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: Norton, 1976.
Temin, Peter. Lessons from the Great Depression. Cambridge: MIT Press, 1989.
Temin, Peter. “Socialism and Wages in the Recovery from the Great Depression in the United States and Germany.” Journal of Economic History 50 (June 1990): 297-308.
Temin, Peter, and Barrie Wigmore. “The End of One Big Deflation.” Explorations in Economic History 27 (October 1990): 483-502.
Vedder, Richard K., and Lowell P. Gallaway. Out of Work: Unemployment and Government in Twentieth-Century America. New York: Holmes and Meier, 1993.
Walton, Gary M., ed. Regulatory Change in an Atmosphere of Crisis: Current Implications of the Roosevelt Years. New York: Academic Press, 1979.
Weinstein, Michael. Recovery and Redistribution Under the NIRA. Amsterdam: North-Holland, 1980.
Wright, Gavin. “The Political Economy of New Deal Spending: An Econometric Analysis.” Review of Economics and Statistics 56 (February 1974): 30-38.
