A Case of Unemployment
The decade of the 1930s saw the Great
Depression in the United States and many other countries.
During this decade large numbers of people lived in poverty,
desperately in need of more food, clothing, and shelter. Yet the
resources that could produce that food, clothing, and shelter were
sitting idle, producing nothing.
At the worst point of the Great Depression, in 1933, one
in four Americans who wanted to work was unable to find a job. Further,
it was not until 1941, when World War II was underway, that the
official unemployment rate finally fell below 10%. This massive wave of
unemployment hit before a food stamp program and unemployment insurance
existed. There were few government programs designed to help the poor
or those in temporary difficulty. Further, most wives did not work, so
if the husband lost his job, all income for that household stopped. An
equivalent rate of unemployment today would cause less economic
hardship because of the variety of programs (often inspired by the
Great Depression) that cushion unemployment and poverty.
Many people date the beginning of the Depression at
October 24, 1929, Black Thursday, the day the stock market crashed.
This was indeed a traumatic day for those who owned stock as sales
volume broke all records. But the decline in overall stock prices was
only about 2.5%, from 261.97 to 255.39 as measured by the New
York Times index of 50 stocks. Most of the decline still laid
in the future; the market hit bottom on July 7 of 1932 when the Times
index was only 33.98, a decline of over 89% from its high of 311.90 of
September 19, 1929.
However, economists date the Depression somewhat
differently. First, they usually make a distinction between recession
and depression, and they use the concept of recession
much more than they use the concept of depression. A recession is a
period in which economic activity is receding or falling, while a
depression is a period in which it is depressed below some level. In
the picture below, which shows a path of economic activity through
time, the period from a to b is
the period of recession. At time a the economic
activity is peaking, and there is a trough at time b.
After b the economy is in a recovery or expansion
stage. (Some economists call the period from b to c the recovery and the period after c the expansion phase.) Which period is best called a depression is less clear since one must first decide which level provides the measure of normalcy. One could consider the period from a to c
the depression because after c the economy is above
its previous high point, but there are other options that make as much
The period that is called the Great Depression contained
two periods of recession. The first began in August of 1929 (two months
before the stock market crash) and ended in March of 1933. (These dates
have been chosen by the National Bureau of Economic Research, a
nonprofit organization that sponsors a great deal of economic research.
They are based on the analysis of a large number of economic time
series, and do contain some subjective elements.) In the first
recession the value of goods and services that the economy produced
fell by about 42% (but only by 36% once the effects of price changes
are eliminated). The recovery in the four years that followed was slow
and not completed by the time the second recession began. In this
recession lasting 13 months from May 1937 until June 1938, output fell
by 9% (but only 6% when the effects of changes of prices are
The three graphs here show the effects of these two
recessions on output (Gross National Product or GNP), unemployment, and
prices. Note that prices fell considerably from 1929 to 1933, but not
afterwards despite the very large levels of unemployed resources. As a
result of this fall, those who kept their jobs and received the same
pay in 1933 as in 1929 were much better off in 1933 than they were in
1929. Another group that should have benefited from the decline in
prices was creditors because the real value of what was owed to them
increased as prices fell. However, many debtors could not pay because
of the poor business conditions, so not all creditors actually
benefited from the deflation.
People perceive the 1930s as a period in which business
failures were very high, and they were when one compares them to what
happened in the 1940s and 1950s. During the years 1930 to 1933, the
annual failure rate was 127 for every 10,000 businesses. In contrast,
failure rates in the 1950s were between 40 and 50, and for the 1940s
they averaged only 23. However, during the years 1925 to 1929, a period
usually considered prosperous, the failure rate averaged 104.
There was one segment of business that was unusually
hard hit during the Depression, the banking industry. The table below
shows the number of banks each year and the number of bank suspensions.
A bank suspension indicates that the bank closed during the year, but
it does not mean that the bank failed. Some banks closed only
temporarily. Nonetheless, the total number of banks fell by about one
third during five years, either through merger, failure, or voluntary
liquidation. This process was not invisible to the public. The most
dramatic banking crisis in the history of the United States took place
in early 1933. In one of his first acts as president, Franklin
Roosevelt declared a banking holiday and, as a result, no banks were
open from Monday, March 6 to Monday, March 13. The drastic reduction in
bank suspensions in 1934 reflects both new policies and the enactment
of legislation to insure banks.
of Banks and Bank Suspensions
Number as of 12-31
Data are from Banking and Monetary Statistics, Board of Governors of the
Federal Reserve System, 1943, pages 18 and 283.
The high unemployment rates of the 1930s made those who
had jobs both thankful that they had jobs and fearful that they could
lose them. Those who could not find jobs often took to the
roads--thousands of men regularly rode the rails. The numbers in skid
rows increased greatly, and other homeless set up homes in shantytowns
throughout the nation that became known as "Hoovervilles." Because the
Depression caused so much suffering, it is not surprising that it
caused major changes in the political structure in the United States.
From the Civil War until the Depression, the Republican
party was the dominant political party--it generally controlled the
House of Representatives, the U.S. Senate, and the Presidency. In the
elections of 1930, the Democrats took control of the House of
Representatives, and after the 1936 elections they outnumbered the
Republicans 331 to 89. Only once in the next fifty years did
Republicans capture a majority in the House. After the Republicans lost
control of the Senate in 1932, they regained a majority in only six of
the next fifty years. In the same year of 1932, Franklin Roosevelt was
overwhelmingly elected, defeating Herbert Hoover with a total of 22.8
million votes to 15.8 million. Along with the change in dominant
political party has come a change in what Americans expect from
government. Only a limited understanding of American politics is
possible without understanding the effects of this period; the shadow
of the Depression dominated American political life for decades.
Finally, the Depression was more than an American
affair. Many other nations, though not all, experienced a similar
decline, though the severity and timing differed from country to
country. For example, Britain hit its trough in the third quarter of
1932, while France did not reach its low point until April of 1935.
The questions that the Great Depression raises are
similar to those that the Great Inflation raised. What caused this
disaster? Was it caused by some defect in the economic system of the
United States or the world? Was it caused by some accidental occurrence
of unlikely events? Was the government in any way responsible for it?
Can a society take steps to insure that such an event does not happen
to it? Why was the Depression international in scope? Finally, is there
any relation between what happened in Germany in 1921-1923 and what
happened in the United States in 1929-1940?
are from Geoffrey H. Moore, Business Cycles, Inflation, and
Forecasting, (Cambridge, Mass: Ballinger, 1980), page 440.
Other sources will give slightly different numbers.