Most of us learned a short version of this story. It has a villain, a hero and a happy ending.
What we were taught
Hoover did nothing. Roosevelt acted fast with the New Deal. Capitalism was saved.
The twist
Some economists say part of the cure made the sickness last longer. We will check their case against the numbers.
Unemployment went from 3% to 25% in four years
In 1929, about 3 in every 100 workers had no job. By 1933, it was 25 in every 100. Roosevelt took office that March, at the very bottom.
Source: Stanley Lebergott series, in Robert Margo, Employment and Unemployment in the 1930s.
people out of work in 1933. That is about 1 in 4 workers.
Source: BLS estimate, via Calculated Risk.
People named these camps after the president they blamed.
Hoover spent more, not less
At first he hoped the economy would fix itself. When it did not, he acted. Federal spending grew from $3.1 billion in 1929 to $4.7 billion in 1932.
Source: OMB historical tables, via Equitable Growth.
The RFC
In 1932 Hoover started the Reconstruction Finance Corporation. It lent government money to banks, railroads and farmers. Roosevelt kept it as a key New Deal tool.
He also raised taxes. The 1932 tax law lifted the top income tax rate from 25% to 63%. Public works like the Hoover Dam cost some $50 million.
It was not enough. Hoover left office with unemployment near 25%. But his term was the testing ground for bigger government action.
Source: History.com
Roosevelt stopped the bank panic
People feared their bank would fail, so they all rushed to take out their cash. That made banks fail for real.
Two days after taking office, Roosevelt closed every bank. Congress passed the Emergency Banking Act on March 9, 1933. Treasury officials had drafted it under Hoover.
- March 6 to 10, 1933Every bank closes for the bank holiday.
- March 9Congress passes the Emergency Banking Act.
- March 12First "fireside chat" on the radio.
- March 15Banks holding 90% of the country's banking resources have reopened.
- June 16The FDIC is created. Deposits are insured up to $2,500, then $5,000.
Sources: Encyclopedia.com, ushistory.org
Roosevelt made each dollar worth less gold
Back then, a dollar could be swapped for a fixed amount of gold. That tied the government's hands, and prices kept falling.
In April 1933, Roosevelt ordered people to hand in their gold and said the country was off the gold standard. In January 1934, he set the price of gold at $35 an ounce, up from $20.67.
That is 69% more dollars for each ounce. In plain words, each dollar was now worth less gold.
Price of one ounce of gold, in dollars
Source: Zocalo Public Square, Gold Reserve Act
Why try this?
From 1929 to 1933, wholesale prices fell about 40% and factory output fell about 50%. Falling prices make debts harder to repay.
Source: AEA
The next bet was bigger. If low prices were the problem, what if the government made sure prices could not fall?
That idea became the NRA.
Shops were told to stop competing on price
Roosevelt believed shops fought too hard on price, and that pushed prices and wages down. So in June 1933 he set up the National Recovery Administration (NRA).
Each industry wrote its own rules. The rules set minimum prices, minimum wages and maximum hours. A shop that followed them put the Blue Eagle in its window.
How a price rule works, in a made-up example
Three shops sell bread. Before the rules, they charge different prices. After, none may charge less than the highest price.
Illustration only. The numbers are invented to show the idea.
A giant parade
On September 13, 1933, about 1.5 million people watched an NRA parade in New York City.
Source: The Daily Economy
Higher prices and wages can mean fewer jobs
If every shop must charge more and pay more, fewer shops hire. The workers who keep jobs do better. The ones left out stay out.
Economists Harold Cole and Lee Ohanian studied this in the Journal of Political Economy in 2004. They say the rules explain about 60% of the gap between how the economy performed and how it should have. They say the Depression lasted as many as 7 years longer.
Six years on, the economy was still far below normal
Source: Cole and Ohanian, 2004
"The American economy has become a concealed cartel system [. . .] The disappearance of price competition is one of the primary causes of the present difficulties."
Roosevelt himself, as quoted in the source text.
Wages stayed high
Real wages rose 16% from 1929 to 1932 while unemployment went from 3% to 23%. The Supreme Court struck down the NRA in May 1935. Two months later a new labor law gave workers even more bargaining power.
Sources: Margo, Knowledge Problem
Less food, higher prices
Farm prices were very low. The Agricultural Adjustment Act (AAA), signed May 12, 1933, paid farmers to plant fewer acres and raise fewer animals.
The idea was simple. Less food on the market means higher prices. The bill was paid by taxpayers, and food cost more at the shop.
young pigs were slaughtered. Millions of acres of crops were plowed under.
Source: ushistory.org
But who got the money? The payments went to landowners. Tenant farmers and sharecroppers often got nothing, and many lost their work.
Cole and Ohanian say this hit as many as 2 million farmworkers. The Supreme Court struck the first AAA down in January 1936.
Output passed its 1929 level by 1936
Source: real GDP data (BEA), Kent State lecture data
Jobs did not come back the same way
Counts relief workers as joblessCounts them as employed
Output came back. Jobs did not.
From 1933 to 1937 the economy grew about 9% a year. By 1937, factory output was above its 1929 level.
But in 1937, depending on who counts, between 9 and 14 in every 100 workers were still without a job.
Two ways to count
One count treats people on government work programs as jobless. The other treats them as employed. Even the lower count never fell below 9%.
Source: Darby, NBER
In one year, unemployment almost doubled
It hit a low near 11% in July 1937. By June 1938 it was 20%.
Source: NBER monthly series on FRED
The damage was fast. Factory output fell by about a third. The stock market lost more than 40%.
Roosevelt had been taking credit for the recovery. Now he had to explain the fall.
Sources: FEE, FDR fireside chat, 1938
Why? Economists still argue
Critics of the New Deal point to fear among business owners and to wage pressure from new unions.
Others point to the Federal Reserve doubling bank reserve requirements in 1936 and 1937. They also point to Roosevelt cutting spending to balance the budget. He then launched a $5 billion spending program in spring 1938.
Sources: Recession of 1937 to 1938
The Depression lifted in 1941
It lingered until 1941, as America geared up for World War II. Unemployment fell from 10.5% in January 1941 to 3.4% by September.
That is close to the 3.2% of 1929.
Unemployment, month by month, 1941
Source: NBER monthly series on FRED
"The America over which Roosevelt presided in 1940 was in its eleventh year of depression. No decline in American history has been so deep, so lasting, so far reaching."
Historian Doris Kearns Goodwin, as quoted in the source text.
from the 1929 crash to the end of the slump in 1941.
No savior, say the critics
The case made here is simple. Some reforms, like deposit insurance, calmed the banks. Others held prices and wages up and kept firms from hiring.
Critics add two more charges. Taxes to pay for public projects pulled money and workers from private business. And constant policy change scared firms away from long-term investment.
On this view, Roosevelt was no savior of capitalism. Some of his reforms shackled the free market and slowed the country's climb out.
Defenders point to money
Economist Christina Romer says nearly all the recovery before 1942 came from a growing money supply. Gold flowed into the US after the 1933 and 1934 dollar moves.
Economist Gauti Eggertsson says Roosevelt's policy change ended falling prices and changed what people expected. Both say something Roosevelt did helped.
Sources: Romer, NBER, Eggertsson, NY Fed
What is still open
If the bank rescue and the gold move helped, and the price rules hurt, what would the New Deal have looked like with only the good parts?
Sources and method
- Cole and Ohanian, New Deal Policies and the Persistence of the Great Depression, Journal of Political Economy, 2004
- Robert Margo, Employment and Unemployment in the 1930s (Lebergott and Darby unemployment series, real wages)
- Michael Darby, Three-and-a-Half Million U.S. Employees Have Been Mislaid, NBER
- NBER monthly unemployment rate, 1929 to 1941, on FRED
- Real GDP by year (BEA data), Kent State macroeconomics lecture
- FDIC history, Cambridge, Banking Panics of the Great Depression, Encyclopedia.com, Banking 1929 to 1941, ushistory.org, A Bank Holiday
- History.com, Hoover's response, Equitable Growth, Hoover's fiscal policy, Reconstruction Finance Corporation
- Cato, FDR and gold, Executive Order 6102, Gold Reserve Act, AEA, Eggertsson and Egiev chart
- Britannica, National Industrial Recovery Act, The Daily Economy, Blue Eagle, Knowledge Problem, Cole and Ohanian summary
- Living New Deal, Agricultural Adjustment Act, ushistory.org, The Farming Problem
- Recession of 1937 to 1938, FEE, Depression within a Depression, Fireside Chat on the Recession, 1938
- Christina Romer, What Ended the Great Depression?, Gauti Eggertsson, Great Expectations and the End of the Depression
Method: the story text follows a published argument that the New Deal prolonged the Depression, and adds figures from the sources above. Annual unemployment uses the Lebergott series, with Darby's lower count shown beside it. The 1937 to 1941 charts use the NBER monthly series, which differs slightly from the annual figures. The price-rule chart uses invented numbers and says so. Gold dates follow the record: off gold in April 1933, price reset in January 1934.
Photos, all via Wikimedia Commons (author and licence are on each file page): soup kitchen, NARA, Hooverville, Hoover, bank run, Blue Eagle, dust storm.
You were told a simple story
A president did nothing. A new one acted fast. The country was saved. But by 1939, about 1 in 6 workers still had no job. So what really happened?
First, how bad was it?
Unemployment went from 3% in 1929 to 25% in 1933. About 13 million people had no work. Roosevelt took office at the very bottom.
Hoover did not do nothing
Federal spending rose from $3.1 billion to $4.7 billion. He started the RFC and raised taxes. It still was not enough.
The banks: the New Deal at its best
About 9,000 banks had closed. A short bank holiday, a new law and deposit insurance stopped the panic.
Then he changed the dollar
Roosevelt took the country off gold in 1933 and reset the price in 1934. Each dollar became worth less gold, and prices stopped falling.
Then he tried to stop price cutting
The NRA let industries set minimum prices and wages. Shops that followed the rules flew the Blue Eagle.
Here is the catch
Cole and Ohanian say these rules kept firms from hiring. Six years on, output was still 27% below normal and hours worked 21% below.
Farmers were paid to grow less
Six million pigs were slaughtered. Farm income rose 50%, but tenant farmers often got nothing.
Output came back. Jobs did not.
By 1936, total output was above its 1929 level. In 1937, 9 to 14 in every 100 workers were still jobless.
Then, in 1937, it fell apart again
Unemployment went from 11% to 20% in under a year. Economists still argue about why.
It ended in 1941
Unemployment fell from 10.5% to 3.4% in eight months, as America geared up for war.
So, a savior of capitalism?
Critics say no: some reforms helped, others slowed the recovery. Defenders say money and gold did the heavy lifting. Both agree part of it helped.
The whole case on one board
Use "Read as one page" for the full text and sources.