The Great Depression: Going Up

Previously on this site there was an article on America’s Great Depression and how it affected the world. The Depression did, however, have an end, though it was long coming. It was called The New Deal – but how exactly did it work?

By 1933 the American economy was on its knees. The first thing the Federal Government under Roosevelt did was to inject massive amounts of public money into the ailing banking system – “quantitative easing” by another name. Stock market banks were legally separated from deposit banks, thus removing the dangers of speculative debt from ordinary bank depositors, and the Federal Government was given new powers of regulation aimed at controlling the use of credit for investment purposes.

The Federal Deposit Insurance Commission, established in January 1934, was set up to deal with the problem of bank runs (depositors demanding withdrawal of their money as soon as possible). The commission protected bank deposits of up to $2,500 per customer, thus instilling some confidence in the safety of the banking system. Limiting deposit losses protected income and stabilised the money supply. Banks advertised the fact that they were insured and bank runs quickly receded.

Roosevelt injected massive investment in the form of public money into public works, such as The Tennessee Valley Project, in the teeth of Republican opposition and obstruction from The Supreme Court, with both warning about the introduction of “socialism” into American life and the erosion of the independence of the individual state legislatures versus the Federal Government in Washington. However, Roosevelt’s New Deal did reduce unemployment, and it raised wages and thus spending power, restoring confidence in the economic system.

But it was America’s entry into the Second World War that really boosted the economy. The need for armaments boosted employment and thus consumption. By 1945, Europe was devastated and her industries destroyed. America filled the gap.

Historians and economists still debate why the crisis of the 1930’s caused the financial system to implode. It was the totally unexpected nature of the collapse and its lightning-swift onset which did most of the damage. It literally took only two days for the richest nation in the world to collapse. Statesmen simply had no time to plan or work out and implement a measured response to the crisis.

It was the public money (ultimately taxpayer’s money) which was used to bail out the bank’s mortgage debt; the catastrophe in the 1930’s was so deep that this was essential. The same policies have been adopted in the recent financial crisis and many economists argue that the risks of imprudent lending should remain with the banks rather than a long-term burden on taxpayers.