Depression, Great

OF ALL THE HISTORICAL events that shaped the internal structure of America, three stand out above the rest: the War of American Independence, the Civil War, and the Great Depression. The Depression years were a time of great hardship and sweeping change. Prior to the Depression, Americans enjoyed progress and growth with only brief interruptions. There had been crises in the past, but this one was both more severe and enduring. The intensity and duration of this crisis created a desire for fundamental change.

The years leading into the Depression were good for most Americans, and outstanding for a few. Most of the rising income inequality during the 1920s came from investment income during the financial boom, rather than from labor income.

President Herbert Hoover found far less success than his two Republican predecessors. This could have been because of significant differences between his policies and those of Calvin Coolidge and Warren Harding. The Hoover administration was marked by the start of the worst economic period in U.S. history. Initially Hoover declared, “We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us.” He could hardly have been more wrong in this prediction.

The economy began to slow after Hoover entered office. This was not because of his policies. The Federal Reserve Bank (Fed) fueled a boom with an easy credit policy. In the summer of 1927, leaders of major central banks met in New York City. New York Fed Governor Benjamin Strong succeeded in pressing for a cheap money policy at this conference. By the end of the year, the Fed had lowered the discount rate from four percent to 3.5 percent and increased open-market purchases from 385 to 704 million. The stock market soared during late 1927 and 1928. This boom continued into 1929, but Fed policy began to change. In October 1928, Strong died. Illness prior to his death had left him ineffective. Strong's successor was more of a consensus builder than a leader. Concern over the stock market led to increases in the discount rate. Rates began edging up in 1928 and reached six percent before the crash. On October 24, 1929, the market began its decline. There were a few temporary rallies in stocks in the days that followed, yet the general trend was downward.

The stock market crash was a symptom rather than a cause of the Depression. Changes in monetary policy had slowed industry well before the crash. Employment in many industries peaked in early to mid-1929, and the economy slipped into recession during the summer of 1929. Yet few recognized the deterioration of economic conditions until the stock market crash on October 24, 1929.