“Unemployment in the sense of distress is widely disappearing. . . . We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poor-house is vanishing from among us. We have not yet reached the goal, but given a change to go forward with the policies of the last eight years, and we shall soon with he help of God be in sight of the day when poverty will be banished from this nation. There is no guarantee against poverty equal to a job for every man. That is the primary purpose of the economic policies we advocate:
—Herbert Hoover, speech accepting the Republican nomination, Palo Alto, California. August 11, 1928
Government has an important role during economic depressions.
Economic downturn is again facing citizens of the United States for the second time in 12 years. American’s put the Great Recession of 2008 out of their minds and the class of 2020 hoped to graduate into one of the greatest job markets of the century. As of April 2020, it has all come crashing to a halt because of Covid-19, a coronavirus better known as a respiratory infection. As Americans always do in times of crisis, they beat down the door of historians looking for answers about the future by examining our past. Historians have a unique role to play in current events, as they answer such questions as what caused the great depression, how did America recover, how long did it last, and how can we avoid it from happening again? Bad news, there is no simple explanation for the great depression, only a complicated one is not definitive. However, this article will still examine the 1920s as it relates to the Great Depression to look for some signals in America society and how Americans responded.
Some might say that the above quote from soon to be president Herbert Hoover is baffling. Some say he had to eat his words just several months later. Others point to his political party as the cause of the Great Depression and slam him for not putting the right amount of resources into its mitigation. As the late 20s turned into the 30s, the American people placed the blame firmly on his shoulders, even naming the shantytowns A.K.A Hooverville’s after him. Hoover deserves criticism, however, it is far too easy to place blame on Hoover and walk away. The 1920s had been an excellent period of economic success after the short-lived downturn between 1920-21. The United States economy was booming for many reasons during the 1920s. World War I had brought put many allied countries in debt to the United States, the Treaty of Versailles forced huge sums of money out of the German economy into the United States indirectly, and agricultural exports were at an all-time high as American farms fed Europe. Manufacturing was solid, and the stock market was successfully trending upward, so much so that people were betting on stocks. So what happened? Some historians point to the agricultural downturn of 1925 onward. The expansions and financing of local farms to create larger and more productive products came a need for the demand to remain high to pay off these debts. However, famine or agricultural decline is only part of a dynamic problem that crossed into many parts of the economy. Some economists, such as Lee Ohanian, argue that a multitude of factors prevailed over the period, but it was primarily a breakdown of supply and demand economics.
The supply and demand were a problem in labor terms, not product availability. Workers during the 1920s had jobs that paid well, even as the labor market began failing in 1929. Wages were too high, and the market did not adjust appropriately. As layoffs continued throughout the country, workers around the US continued to receive pay far above what the market should have demanded. In this example, Ohanian’s dataset provides a 30% overpayment of workers compared to what was being requested from the unemployed. It made this dataset by the high demands of the labor force who sought jobs during the period. The unemployed bookkeeper for example would post an advertisement, hold a sign, or otherwise market himself as a ” 30-year-old bookkeeper looking for 5 dollars a day” hoping to find a job. They compared these data to wages common in the period to discover the large contrast in wages. Consider this, a factory during the great depression could have replaced its entire staff saving 30% payroll but did not. Ohanian argues that this inelastic wage was a primary problem.
Another issue to look at entering 1929 was the Hoover administration’s handling of the economic downturn. Hoover sought to protect wages and keep earnings as high as possible for those employed. Hoover took an active role in the above problem, which ultimately proved to be the wrong direction in managing the disaster. Hoover met the large firms and the labor unions to look for a solution to the widespread layoffs that were coming, worried that a strike from the unions would cripple America. He convinced the firms to keep employment wages high and stop laying off employees reinforcing the problems that were already present. This satisfied the labor into agreeing not to strike but dooming the economy for years to come with high wages and low employment. This thinking is rational, seeing as that a business could not afford to hire enough employees to expand or be adequately staffed. Although these problems were just part of a larger failure as noted by Hoover in his memoirs where he candidly stated that the depression was well out of anyone’s control.
There are many reasons the Great Depression occurred from the collapse of the different industries, stock market collapse, or the response from the government. This article has not mentioned the popular responses, such as the Keynesian economic model of the 1930s, but has illuminated another such possibility for the entrance of the United States into economic collapse. While Hoover may have been wrong about his response to let free trade work itself out, it important to note this was the leading view on how industry and the market should exist. This view failed and has since been replaced because government does have a direct and important role in reestablishing a collapsing economy. These views are seen in the modern stimulus packages of the George W. Bush administration and under the Trump administration, with the Trump administration approving even more radical intervention. Where the line is drawn between government intervention and depression will likely be another popular topic worth examining.
Mowry, George. “The Memoirs of Herbert Hoover: The Great Depression, 1929-1941 Herbert Hoover.” Pacific Historical Review 22, no. 2 (1953): 187–189.
Nash, George H. “Herbert Hoover versus the Great Depression: After the Crash of 1929, Hoover Took Steps That Were Vigorous, Creative, and Even Radical – If, Alas, Ultimately Unavailing.” Hoover Digest, no. 3 (2016): 181.
Ohanian, Lee E. “The Economic Crisis from a Neoclassical Perspective.” The Journal of Economic Perspectives 24, no. 4 (2010): 45–66.
———- “What – or Who – Started the Great Depression?” Journal of Economic Theory 144, no. 6 (2009): 2310–2335.