The Great Depression and New Deal: Causes and Responses

The Origins of the Great Depression

The Great Depression was caused by the stock market crash of 1929. The 1920s had been a roaring good time for Americans: credit was easy and investments were rising. The decade's prevailing financing mechanism was known as the Installment Plan, and "enjoy while you pay" was a popular expression used to lure buyers who could not otherwise afford to be consumers into the market. Credit was used for everything — including stock purchases. However, when credit expands in the form of shoddy loans, a credit bubble is created. That bubble popped in 1929 when the market recognized that no more credit would be pumped in, owing to the sheer volume of loans extended to borrowers who could not pay them back.

With the market correction came margin calls, and accounts had to be liquidated to repay the loans that had covered stock purchases. Liquidation through selling further pushed the market down; market psychology then took hold, panic ensued, bank runs occurred, global trade collapsed, and Black Tuesday became a defining moment in history. Credit restriction became a staple of local economies, keeping the market in a depressed state throughout the 1930s.¹

The bursting of the bubble revealed the actual state of the American economy — one propped up by credit and driven by unregulated banking. In the wake of the Federal Reserve Act of 1913, the banking sector effectively held significant influence over the Republic through its control over the money supply, printing currency and then loaning it to the government at interest. This created a system of debt that could never be fully repaid. What was instituted in response was a "kick-the-can-down-the-road" economic philosophy — essentially Keynesian economics — that would come to dominate the twentieth century and continue into the present. In reality, America never fully escaped the Great Depression; it simply learned to defer the problem with greater urgency each passing year, as steadily rising national debt levels make clear.

The social impact of the Great Depression produced a call for greater centralization, oversight, and economic relief. The Glass-Steagall Act of 1933 was passed to prevent banks from acting as market speculators — an act that was repealed shortly before the housing bubble that contributed to the 2008 financial crisis. Roosevelt took office in 1933 and pledged federal support through a series of Alphabet Programs designed to put Americans back to work.

Social Consequences of the Crash

Yet mass migration followed, as the underlying social ills of the era went unaddressed. Roosevelt, for instance, did nothing to confront the injustices of Jim Crow, the epidemic of lynching in the South, or the theft of land from African Americans. Millions of workers poured into urban areas alongside migrants from Europe. Crime rose and unemployment remained stubbornly high despite the New Deal. Escapist fantasy became a cultural staple, with Hollywood epics such as Gone with the Wind debuting to great fanfare.

President Hoover, Roosevelt's predecessor, had attempted to contend with the Bonus Expeditionary Force² — the so-called Bonus Army, a disaffected assemblage of veterans gathering in Washington to seek relief amid worsening Depression conditions — by unleashing the military on them. This did not win Hoover any allies, and Roosevelt won the subsequent election by presenting himself as a genuine friend to the American worker.

The American worker would not truly recover from the Depression until he was distracted by war. World War II served to energize what has come to be known as the military-industrial complex (MIC) — the nexus of defense industry and government that President Eisenhower famously warned the public about in his farewell address. The MIC put Americans back to work by producing instruments of war for nations around the world, profiting from conflict, and ensuring that war remained, as General Smedley Butler wrote in the 1930s after retiring as one of the most decorated servicemen in American history, "a racket."³

The Rise of the Military-Industrial Complex

"Class war" also became a pressing concern during this period. As Jeansonne notes, labor polarization reached a flashpoint in states like Minnesota: "The Minneapolis truckers' strike appeared a prelude to class war because the local Teamsters' union was led by a Trotskyite faction of communists," with businesses opposing the unions and threats of violence breaking out in cities.⁴

Ideas of wealth redistribution began to spread as communists and redistributionists appealed to mass audiences. Father Coughlin's radio program attracted millions of listeners, and while he was initially supportive of Roosevelt, he later turned sharply critical. Race continued to be a flashpoint, as riots in Harlem during the 1930s failed to receive adequate governmental response. The Great Depression should have served as a genuine reset for America in more ways than one, but all that resulted was more of the same — with the country poised to enter an expanded welfare state, the Social Security Act of 1935 being a notable example.

The New Deal consisted of a great number of initiatives that evolved throughout the 1930s as economic, political, and ideological forces took shape under Roosevelt. These included the Agricultural Adjustment Act (AAA), which paid farmers to reduce production; the National Industrial Recovery Act (NIRA), which set minimum wages and maximum working hours; the Public Works Administration (PWA), which provided aid to the unemployed and shored up the industrial sector; the Civil Works Administration (CWA), which created seasonal employment; the Civilian Conservation Corps, which organized jobs in reforestation and conservation; the Works Progress Administration (WPA), which directed billions of dollars into roads, bridges, and public buildings; and the Federal Emergency Relief Administration.