The lecture Claude crafted opens with an anecdote based loosely on my family history. My grandfather did go bankrupt in the 1938 recession, but I don’t think that my father and his sister were actually standing and watching inventory being carted away.

Claude guessed wrongly when it wrote “he [my grandfather] kept his accounts in a mixture of English and Yiddish, and he had made, by the standards of the shtetl he had left, a life that a man could be proud of.” My grandmother, who was alive when I was born, spoke only Yiddish, and I suspect that the same was true of my grandfather, who had died years before. Also, his family was decently well off before they had to flee the pogroms.

This is the first of three lectures on the Great Depression. I thought that the issue of what caused it and of the policy response should wait until after a basic recitation of what happened.

America 1929–1945

Lecture 3.1

The Shape of the Fall: American Economic Performance, 1929–1940

Part One: A Store on the North Side

On a morning in the autumn of 1938, on a commercial street on the north side of St. Louis, two men from a creditor’s office carried the stock of a clothing store out onto the sidewalk and loaded it onto a truck, bolt of cloth by bolt of cloth and box by box, while the family that owned the store stood on the pavement and watched them do it.

The store belonged to Saul Kling. He had come to America nineteen years before, out of the Ukraine, in the wake of the pogroms that had run through the Jewish towns of the collapsing Russian empire in the years after the Great War — a season of killing that took tens of thousands of lives while the world’s attention was elsewhere. He had gotten into the United States at almost the last moment it was possible for a man like him to do so, in the narrow interval before the quota laws of the early 1920s brought the great immigration to its end and shut the door behind him. He had settled in St. Louis, opened the store, married a woman named Dina, and raised two children in the rooms above it. He sold work clothes and yard goods to the people of the neighborhood, most of them as poor and as foreign as he was, and he kept his accounts in a mixture of English and Yiddish, and he had made, by the standards of the shtetl he had left, a life that a man could be proud of.

He had made it, however, among people who were not sure they wanted him. The established Jews of St. Louis were German by origin, had come two generations earlier, had prospered, had built their Reform temples in the better parts of town, and regarded the Yiddish-speaking Russians pouring into the north side as an embarrassment and a reproach — coreligionists who dressed wrong, prayed wrong, spoke wrong, and threatened by their very foreignness the standing the older community had worked so hard to secure. The German Jews ran the charities that helped the Russian Jews, and ran the settlement houses that were meant to civilize them, and the aid came down from above with a lesson folded inside it. Saul had been on the receiving end of that arrangement, and had resented it, and had gotten out from under it by the only route available, which was to keep a store and owe no one.

Two of the people on the sidewalk that morning were his children. His daughter Sarah, in her early twenties, had by this time become an ardent Communist, and had found in the Party both a diagnosis of everything that had happened to her father and a set of comrades who did not care that her family had once needed the settlement house; among them was a union organizer named Ralph Shaw, whom she would marry, and to whose cause the two of them would hold for the rest of their lives, through every disillusionment the century had to offer, without ever making their peace with the Russia that flew the flag. His son Merle, younger, had no use for the Party and said so, and would in time marry one of Sarah’s comrades anyway, and would have a son who would grow up to teach a course in which this morning appears.

Here is the fact worth holding onto before any of the rest of it. Saul Kling kept his store open through 1930, and through 1931, and through 1932, and through the winter of 1933 when every bank in the country closed its doors — through the worst four years the American economy has ever endured. And then he went bankrupt in 1938, in the sixth year of the recovery, in a year that the textbooks file under the heading of things getting better. The store came through the catastrophe and failed in the convalescence. Whatever the Depression was, it was not a single event with a bottom and a climb back out. It had a hole in the middle of the recovery, and the hole was deep enough to swallow a man who had survived the catastrophe itself.

The Depression falls into four movements. There was the descent, from the autumn of 1929 to the spring of 1933, when the economy did not so much decline as disintegrate. There was a recovery, from 1933 to 1937, that was rapid by any measure and yet left millions where it found them. There was a second collapse, in 1937 and 1938 — the relapse that took Saul’s store — sharp enough to rank among the worst recessions on its own, dropped into the middle of the recovery from the first one. And there was a long, incomplete climb from 1938 to 1940, at the end of which, a full decade on, the country had still not put its people back to work, until a war came and did in eighteen months what a decade of peace had not.

Two facts run underneath all four movements and want stating at the outset, because they are the things a causal story has to explain and the things the headline numbers most easily hide. The first is that prices fell. Consumer prices in 1933 stood roughly a quarter below where they had been in 1929, and wholesale prices had fallen further, and this deflation is the strange central feature that makes the episode a different animal from an ordinary hard time. It meant that for the majority of Americans who kept their jobs, the dollar bought more each year, and their real wages rose while their neighbors starved. It meant that anyone who owed money — a farmer, a homeowner, a shopkeeper with suppliers — watched the real weight of the debt grow heavier as his income shrank. The second fact is that the fall was violently uneven. It fell on a steelworker and an electrical lineman in ways that had almost nothing in common. It fell on a debtor and a bondholder as opposite fortunes. It fell on the cotton South and the auto Midwest and the wheat Plains by different amounts and for different reasons. The word “Depression,” singular, names an average over experiences that diverged as widely as ruin and comfort.

One caution belongs here, and it is a caution this whole series takes seriously. The numbers that describe the 1930s are, to a considerable degree, reconstructions — assembled after the fact by statisticians working from fragments, because the country of 1930 did not yet measure itself the way the country of today does. The single most-quoted figure of the whole decade, the unemployment rate, depends on a choice nobody at the time was forced to make: whether to count the millions of men working on federal relief projects as employed or unemployed. Count them one way and unemployment in 1938 was around nineteen percent; count them the other and it was closer to twelve. Both numbers appear in respectable books. The firmest ground, and the ground this account stands on wherever it can, is physical: tons of steel, bushels of wheat, vehicles off the line, cars of freight loaded onto the railroads. A quantity does not need a price index to be believed.

[ PAUSE FOR QUESTIONS ]

Part Two: The Descent, 1929–1933

The crash of the stock market in October of 1929 is the event everyone remembers, and it is the wrong place to put the weight. The market had been the most spectacular thing in the country and it came apart most spectacularly, the industrial average falling from its September peak of 381 to below 200 within seven weeks. A great deal of paper wealth vanished, a great many speculators were ruined, and the country, taken as a whole, walked into 1930 with a bad recession on its hands and no particular reason to think it would become anything worse. The nation had weathered a savage slump in 1920 and 1921 and come out of it inside two years. Sober men expected the same.

What turned the recession into the Depression was not the crash. It was a sequence of blows to the banking system, spread across three years, each one a separate event with a separate cause, that between them destroyed the machinery by which the country turned savings into activity. The first came in the autumn of 1930, when a wave of failures ran through the banks of the agricultural South and Midwest and reached, in December, all the way to New York, where an institution with the grand and misleading name of the Bank of United States went down with two hundred million dollars of deposits and the savings of some four hundred thousand people, most of them immigrants — the largest bank failure the country had yet seen. The second came in the spring of 1931. The third and heaviest came that autumn, and it came from abroad: the failure of the great Creditanstalt in Vienna in May set off a chain of collapses across central Europe, Britain abandoned the gold standard in September, and the Federal Reserve, to keep the United States on gold and stop the gold draining out of the country, raised interest rates into the teeth of the worst depression in its history. The final blow fell in the winter of 1932 and 1933, when the banking panic became general, state after state declared banking holidays to stop the runs, and the whole system seized. By the time a newly inaugurated president closed every bank in the nation in March of 1933 and reopened only the sound ones, something on the order of nine thousand banks had suspended in three years.

The depth of what happened in those years is best taken in physical terms, because there the numbers are not in dispute. The production of steel, the truest single gauge of an industrial economy, fell to a quarter of its 1929 level — a collapse of roughly three-quarters, mills standing cold across Pennsylvania and Ohio and Indiana. The automobile industry, the engine of the 1920s, sold better than five million vehicles in 1929 and fewer than one and a half million in 1932. The railroads loaded barely more than half the freight they had loaded three years before. Industrial production overall was cut in half. Behind these quantities stood men: something between a fifth and a quarter of the workforce was without work by 1933, the exact figure depending on the accounting choice named earlier, and no accounting choice makes it anything other than catastrophic.

And through all of it, prices fell. This is where the deflation did its cruelest work. When the price level drops by a tenth in a single year, as it did in 1932, the real cost of borrowing rises by that tenth on top of whatever interest the lender charges. The safest corporate bonds in the country, the triple-A names, carried a stated yield near five percent in 1932; measured against the falling price level, the real cost of that money was around fifteen percent. The next tier down, the medium-grade borrowers — the ordinary sound companies, the firms a growing economy is built out of — paid a real cost that reached nineteen percent. No enterprise is founded and no factory is expanded at a nineteen-percent real cost of capital. The credit machine had not merely broken; it had reversed, and was now pulling money out of enterprise instead of feeding it in. A man like Saul Kling, who owed his suppliers and carried his customers on credit, felt this as surely as any bond trader, though he would never have put it in those words.

By the summer of 1932 the market that had peaked at 381 touched 41 — down eighty-nine percent, three years of American accumulation erased. That was the bottom. It is worth sitting with the fact that the bottom, when it came, was not the crash that everyone remembers but a slow strangulation three years long, administered in stages, by the failure of the humblest and least glamorous institution in the economy: the local bank.

[ PAUSE FOR QUESTIONS ]

Part Three: The Recovery That Did Not Feel Like One, 1933–1937

From the trough in the spring of 1933 the economy turned and climbed, and it climbed fast. This is the part of the story least present in the popular memory, which tends to imagine the whole decade as a flat gray plain of breadlines, and it deserves emphasis precisely because it complicates every simple picture. In the four years after March 1933 the physical output of the country grew at rates that would be called a boom in any ordinary decade. Steel production more than tripled from its low. Automobile sales climbed back above four and a half million. The reflation of prices, which followed the abandonment of the old gold parity and the raising of the dollar price of gold from twenty dollars and sixty-seven cents an ounce to thirty-five, lifted the crushing real weight off debtors for the first time in four years. By 1937 the physical measures of production had regained, and in several cases surpassed, their levels of 1929.

And it did not feel like a recovery, because the hole was so deep that even a rapid climb left the country far short of the top. Growth expressed as a percentage is measured against wherever you start, and the economy of 1933 started so low that four strong years still left it with unemployment near fourteen percent on the higher of the two accountings — better by ten points than the abyss of 1933, and still worse than the worst year of most recessions in American history. The recovery was entirely real in the tonnage of steel and entirely inadequate in the lives of men, and both of those things were true at once, for a reason that is one of the genuine curiosities of the decade. The economic historian Alexander Field has argued that the 1930s were, measured by the productivity of the economy as a whole, the most technologically progressive decade of the twentieth century — a paradox on its face and less of one on inspection. Even as output sank and payrolls emptied, the owners of the plants went on installing machines that did the work of hands. Automatic machinery took over the blowing of glass for electric light bulbs, a craft that had employed skilled glass-blowers by the thousand; automatic machinery took over the rolling of cigars, which an army of hand-rollers had performed a decade before. The plant that survived grew steadily more productive straight through the depression, so that when production regained its 1929 level it did so with meaningfully fewer workers, and the difference showed up as steel on the loading dock and as a man still idle on the corner.

The high-water mark was 1936. It was an election year, and it carried an incumbent to the largest victory in modern history, and it was lifted by a particular piece of arithmetic: over the president’s veto, Congress had voted to pay the veterans of the Great War the bonus they had been promised, and better than a billion and a half dollars went out into the hands of former soldiers and, through them, into the tills of merchants across the country. Output surged. By the early months of 1937 a reasonable observer, looking at the tonnage and the car-loadings and the payrolls, could believe that the Depression was substantially over and that the country was closing the last of the gap. That belief was about to receive one of the rudest corrections in the economic history of the United States.

Part Four: The Relapse, 1937–1938

Beginning in the middle of 1937 the American economy fell off a cliff, and it fell in the fifth year of a recovery, with no bank panic to explain it and no crash on the exchange to point to, and the suddenness and the timing of it have puzzled people ever since. Over roughly twelve months, industrial production dropped by a third — a decline as steep as any single year of the original descent. Automobile sales were cut nearly in half from their 1937 level. Steel, which had climbed back above fifty million tons, fell to less than thirty. Unemployment, which had been grinding downward, jumped back toward nineteen percent on the Lebergott count. And the price level, which had been recovering, tipped over into deflation again, so that the real cost of credit rose once more and the medium-grade borrower found himself, briefly, back in the trap of 1932.

This was the year Saul Kling’s store went under. A small retailer lives on a thin cushion — the credit his suppliers extend to him, the credit he extends to his customers, the slender margin between the two — and a man who has spent his cushion surviving one catastrophe has nothing left when a second one arrives unannounced. The store that had come through the Great Contraction, that had kept its doors open while nine thousand banks closed theirs, did not come through the recovery’s relapse. The creditors’ truck pulled up to a shop that had survived the impossible and been finished off by the merely difficult.

The sequence of events that preceded the relapse can be set down as fact, whatever one later concludes about cause. In June of 1936 the veterans’ bonus had been paid, a one-time stimulus that would not repeat. Beginning in the summer of 1936 and continuing into the spring of 1937, the Federal Reserve doubled the reserves that member banks were required to hold, in three deliberate steps, out of a fear that the banking system’s idle cash might one day become inflationary. Late in 1936 the Treasury began sterilizing the gold flowing in from a frightened Europe, holding it aside so that it would not expand the money supply. In January of 1937 the new Social Security payroll taxes began to be collected, pulling money out of paychecks before the system paid out a dime in benefits. And the federal budget, which had run a substantial deficit in the bonus year of 1936, swung by more than four billion dollars toward balance by 1938 as the bonus ended and relief spending was cut. Whether these things caused the relapse, and in what proportion, and whether the fault lay with the central bank or the Treasury or the Congress or with none of them, is a question for the next lecture. That they happened, and that the economy collapsed immediately afterward, is not in dispute.

By the spring of 1938 the administration reversed course, asking Congress for renewed spending, and the Federal Reserve and Treasury undid the tightening they had done. The economy found its bottom in the middle of that year and began, once more, to climb. But the second climb, like the first, would prove unable to close the gap on its own.

[ PAUSE FOR QUESTIONS ]

Part Five: The Unfinished Climb, 1938–1940

The recovery that resumed in the summer of 1938 was genuine and, in the physical measures, impressive. By 1940 steel production stood above its 1929 level, electric power output stood more than fifty percent above its 1929 level, freight was moving, and automobiles were selling at nearly the old volumes. The productive plant of the United States, considered as a machine for making things, had not only recovered but grown.

The men, again, told a different story. In 1940, eleven years after the peak, unemployment still stood near fifteen percent on the Lebergott count and near ten on the Darby count — either way, a level that any earlier American generation would have regarded as a crisis in itself, persisting quietly into its second decade as though it had become a permanent feature of the landscape. A whole cohort of the young had come of age without ever holding a steady job. A whole generation of small enterprises that would have been founded in a normal decade had never been founded, and the industries they would have grown into did not exist. The productive plant had healed; the labor market had not; and the gap between those two facts is the central unsolved puzzle of the decade’s end.

What closed the gap was the war. From 1940, orders for armaments — first from a rearming Britain and France, then from the United States itself — poured into the idle factories, and the effect was immediate and total. The unemployment that a decade of peacetime policy had failed to cure fell away in eighteen months, not because anyone had finally understood the disease, but because a government at war became a buyer without limit and a builder of new plant on a scale no private economy in depression would attempt. The Depression ended. It ended in a manner that resolved the question of output and left almost every other question exactly where it had been, and the fact that it took a world war to end it is itself among the things that continue to unsettle anyone who looks closely.

Part Six: What the Numbers Do and Do Not Say

The facts, laid end to end, establish a shape, and the shape is the beginning of understanding and not the end of it. Four movements: a three-year disintegration administered through the banks; a rapid recovery that could not catch up to itself; a violent relapse dropped into the middle of that recovery; and a long final climb that healed the factories and left the workers behind, until a war ended the argument about production. Two facts running underneath: a deflation that rewarded the employed and destroyed the indebted, and an unevenness so extreme that the single word “Depression” conceals more experience than it conveys. Steel fell by three-quarters while the electric utilities lost barely a seventh of their output and went on growing through the whole decade. The farms produced as much as ever while the prices they received were cut in half, so that the agricultural catastrophe was a catastrophe of prices and not of harvests, except in the counties where the drought and the dust took the harvest too. A quarter of the workforce stood idle while three-quarters worked on, many of them living better each year as prices fell. Every one of these is a true statement about the same country in the same year.

Two of these figures rest on choices worth naming out loud, because they move the story. The unemployment rate depends on whether the men on federal relief are counted as working, and the honest thing is to carry both numbers and let the gap between them stand as a measure of our uncertainty. And the most familiar aggregate of all, the real output of the economy, rests on dividing the dollar value of everything by a price index for a decade in which prices were doing violent and uneven things — a division so fraught that the tonnage of steel and the count of automobiles deserve more of our trust than the polished aggregate does. Where this account has leaned on quantities, it has leaned on the firmer thing.

What the numbers do not do is explain themselves. They do not say why an ordinary recession in 1930 became a disintegration by 1933 while the sharp slump of 1920 had righted itself in eighteen months. They do not say why a rapid recovery could not finish the job. They do not say why the economy collapsed again in 1937 in the middle of that recovery. They do not say whether the men in Washington and New York who made decisions across those years — at the central bank, at the Treasury, in the Congress, in the White House — made the catastrophe worse or held it back from being worse still. Those are the questions the shape poses and cannot answer, and they are the work of the lectures that follow.

Return, at the end, to the sidewalk on the north side of St. Louis, where the truck is pulling away with the stock of a clothing store, and a family stands watching its livelihood driven off. Saul Kling and his wife Dina will begin again, older and with less, as immigrants who have survived worse know how to do. Their daughter Sarah and her organizer will give their lives to a movement that promises to abolish the whole arrangement that put the truck at the curb, and will keep that faith through every betrayal the movement inflicts on them. Their son Merle will want no part of it and will be drawn into its orbit regardless, by the oldest force there is. And a mile away, and a thousand miles away, most of the country is at work this morning, a little better off than last year on account of the falling prices, reading in the papers about a recovery that the family on the sidewalk would find a strange thing to call it. Within three years the factories that are running short-handed this autumn will not be able to find enough hands, and the men on the corners will be gone into the plants and the services, and the longest economic catastrophe in the nation’s history will be over. Why it came, why it stayed, and whether anything anyone did helped or harmed — these the country argued about then, and argues about still, and they are where we turn next.

[ END OF LECTURE ]

End of Lecture 3.1

Share

Subscribe now