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From the Turn of the Century to the Roaring Twenties and the Great Depression.

by Carole E. Scott

Copyright 1997-2001

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Some have in recent years claimed that the problem with the U.S. is that the federal government has not, and never had an industrial policy. Damned by its proponents is the supposedly laissez faire (hands off) approach it has always taken. This misrepresents what actually happened in the 1920s and 1930s, when the nation took a decided turn away from laissez faire.

According to Joan H. Wilson in her book, Herbert Hoover, Forgotten Progressive, early in the 20th century "an amorphous set of reformist ideas evolved in response to the growing fears of American leaders about 'destructive competition' and 'social anarchy'. This emerging 'corporatism' was thought to be a viable political and economic compromise between state socialism and monopoly capitalism." Both before and after World War I, corporatism was advocated by a variety of people called progressives.

One of these was Herbert Hoover, a Republican. Another was Franklin D. Roosevelt, a Democrat who succeeded him as President of the United States. Roosevelt, in a letter in the early 1920s, recounted that he "had some talks with Herbert Hoover before he went West for Christmas. He is certainly a wonder, and I wish we could make him president of the United States. There could not be a better one." Click here to hear Hoover tell of his concept of America. (You need sound capability to do this.)

New York City shoe repairman

Through a sense of community and social responsibility, progressives thought that industry, agriculture, and labor would form a self-governing and self-regulating partnership which would, on a decentralized basis, work together efficiently in the public interest. Progressive American businessmen believed that efficiency, harmony, and abundance could be brought about by a combination of scientific management and cooperative effort.

Hoover, an engineer widely respected for his very profitable professional accomplishments and his humanitarian work in Europe after World War I, believed that, if laissez faire had ever been America's economic philosophy, it was long dead by 1920. The rise of industry, he observed, had been paralleled by a rise of regulation and social responsibility, neither of which was compatible with laissez faire.

Therefore, Hoover believed in a new economic system based on neither the free markets of Adam Smith nor the socialism of Karl Marx, but on a middle way he thought was achievable through the voluntary cooperation of all economic groups. He believed that he could both make capitalism more equitable (just) and more efficient. Through his program, he believed, "America could have intelligent planning and scientific rationalization without sacrificing the energy and creativity inherent in individual effort and private enterprise."

First, as Secretary of Commerce, and, subsequently, as president, he attempted to put his plan into action. His greatest success was probably in the radio industry which, as secretary of what was then called the Department of Commerce and Labor, he oversaw. To foster cooperation between this industry and the government, he conducted four annual radio conferences attended by representatives of the industry and government. Like the National Recovery Administration created as part of Franklin D. Roosevelt's New Deal for the nation, Hoover's program bore some similarity to the economic policies of Italy's Fascists and Germany's National Socialist Party (Nazis).

The great success of engineers during this period in raising the standard of living, and the success of the huge enterprises that played a major role in achieving this, led many to believe that the methods of science and engineering and business could and should be used to eliminate ethnic conflict, labor unrest, crime, and poverty. One of the earliest managerial organizations, the Taylor society (named for Frederick W. Taylor of time and motion study fame), provided the first home to those who sought to apply the techniques of engineering to society. High hopes, too, were held out for what modern communications could do. Many believed that, by bringing the people of the world into closer contact with one another, radio would cause them to find out that they were all alike and that this would prevent war.

Hoover's Democratic predecessor, Woodrow Wilson, was inclined to believe that radio should be a government monopoly. While his position on the radio industry was largely based on the peculiar nature of this industry, he also believed that when a company got large enough, it began to have responsibilities to the public and ceased to be purely private. One this happened, public control and, perhaps, ownership was appropriate. The radio industry was still in its infancy when the federal government decided to wrest control of the American radio industry from a British-owned, private firm and make America the dominant force in radio internationally. 

According to Owen Young, chairman of both the board of the General Electric Company and its joint-venture subsidiary, the Radio Corporation of America, when the latter was formed in 1919 to provide the American-controlled radio monopoly desired by the federal government, "there are three great factors involved in the electrical industry, each of which we have to keep our eyes on. One is economics, the second is finance, and the third is politics.

Charles P. Steinmetz, a General Electric Company electrical engineering genius, was a socialist who believed that humanity had passed from the age of individualistic competition to the age of collective cooperation. Like some economists, such as John Maynard Keynes, in the 1930s and later, Steinmetz, who died in 1923, claimed that the productive capacity of modern industry had outrun consumption. Therefore, firms had come to compete, not for resources, but for markets. He believed that the industrial corporation had proven its managerial superiority over elected government, and that business would eventually become government and run the nation more efficiently. He advocated a powerful, centralized government of competent men who remained in office continuously. Talent would be self selecting, and a man would rise through the ranks on the basis of talent. 

Eventually, Steinmetz believed, competition would force prices below the costs of production, and this would lead to unemployment and social unrest and conflict. In a logical world, he said, production of essentials during a short, managed workday would meet society's basic needs and allow ample time for personal fulfillment that work had previously provided people. The resulting greater leisure time would stimulate educational interests and man would become a highly informed and much more intelligent and self-expressive creature.

Greatly influenced by Henry Hayek, a native of Austria and leading figure in a school of economic thought called Austrian, in 1938, the well known journalist  Walter Lippmann warned social engineers like Steinmetz that there is nothing in the collectivist principle which marks any stopping place short of the totalitarian state. Pointing to various commodities, he asked how the planners, without price data provided by free markets, could account for buyer preferences within a category--say Fords versus Chevrolets--much less across categories--new cars versus new houses. The only way to get the data to fit any humanly possible model was through coercion: price controls, which had already failed, or rationing at the least. Historian Charles Beard, who became a major figure in his discipline, dismissed Lippman's argument, calling him an apologist for the plutocracy.

For many decades, Hoover was blamed for the Great Depression and criticized for following a policy of doing nothing but making inane speeches about prosperity being just around the corner, while Roosevelt was praised for the many programs adopted during his administration in an attempt to lift the nation out of depression. However, "it was Hoover who embarked upon ambitious public works projects to put people to work. It was Hoover who established the Reconstruction Finance Corporation to lend money to private businesses and banks in financial difficulties. It was Hoover who ran the largest budget deficits relative to GNP." [Atack and Passell]

The Major Events of the Period

The United States' entry into the Great War--the war to end all wars--ended the stalemate the two opposing sides had fallen into and led to the victory of the Allied side and permanently changed America's role in the world, although she was slow to recognize this. As a result of this War, America was transformed from a debtor to a creditor nation. Exports exceeded imports, and Americans received more investment income from abroad than they paid to foreigners. Despite a enjoying a substantial increase in its gold reserves, after the War the price level in the U.S. rose relatively little.

According to economist Murray Rothbard, the solution selected to deal with the competition during the War for resources between the government and private sectors was "a totally planned economy run largely by big-business interests through the instrumentality of the central government which served as the model...for state corporate capitalism for the remainder of the twentieth century." Economists in general agree that the Roosevelt administration's New Deal during the 1930s created what is called a mixed-market economy.

Economic historians disagree regarding by how much in response to greatly increased foreign and government demand the nation's output rose during World War I. (The War began in Europe in 1914. The U.S. entered it in 1917. It ended in 1918.) Those who think output rose a great deal during the War are apt to attribute it to apt government management of the economy.

During the War, the War Industries Board determined priorities, fixed prices, converted plants to meet the government's needs, and, when necessary, requisitioned whatever the government needed. The Lever Food and Fuel Control Act allowed the President to make regulations and issue orders to increase production and control the distribution of food and fuel. The Trading with the Enemy Act imposed controls on foreign commerce and authorized the seizure of assets owned by citizens of enemy nations. The U.S. Railroad Administration took over control of the nation's railroads, and the Capital Issues Committee prevented the private sector from interfering with the government's need for funds.

The Aldrich-Vreeland Act authorized banks to deal with runs by issuing National Currency Association money. As a result of a large trade surplus, gold flowed into the country. Further spurring inflation was the fact that during and after the War the Federal Reserve System (Fed) helped the Treasury finance government spending by keeping interest rates low. Later (1928), however, it turned to a tight monetary policy in an attempt to halt what it viewed as excessive speculation in the stock market.

After accounting for price changes, during the 1920s, the federal budget was about three times what it had been before the War. The increase in the federal government's receipts came mainly from the individual and corporate income taxes. While in 1913 interest on the federal debt accounted for only 2.5 percent of the federal government's expenditures, by 1927 it accounted for about 22 percent. By the end of 1919, the federal government ceased to run a deficit.

During the War, the Allied powers liquidated most of the investments in America that they had built up over the past 125 years in order to be able to purchase the materials and fuel they needed to fight the War. Because this did not produce sufficient funds, more was borrowed from the U.S. government. (After the Bolsheviks took over Russia, they repudiated Russia's war debt.) After the War, the Allied nations except the U.S. demanded heavy reparations from the Axis powers--heavier than they were able to pay. The British and French shocked America by presenting Germany with a staggering bill for $33 billion. This was four times Germany's annual net national product at that time. Because Germany could not raise this much money through taxation, the German government printed so much money that prices ultimately rose at a 300,000 percent clip.

Eventually England became willing to cancel reparations from the Axis powers if the U.S. would cancel its debt to the U.S., but the U.S. was unwilling to do this. After Germany defaulted and fell into hyperinflation and France had taken over its industrial heartland in the Ruhr area, the Dawes Plan was formulated in 1924 that scaled down reparation payments. American investment in Europe provided the funds needed to pay these reparations. These nations were unable to export enough to the U.S. to provide the wherewithal to pay interest and dividends on the securities they issued to American investors. By 1929, the attractiveness of investing in the U.S. stocks had caused American investment abroad to shrink.

In 1929, monetary policy was tight (scarce and expensive money); production in most industries began to decline by the second half of the year; by September the nation was in recession; the stock market began to swoon; and the stock market crashed in October on what was thereafter known as Black Thursday.

Eatonton, Georgia Antebellum Plantation

The South did not share in the prosperity enjoyed by the nation as a whole in the interwar period. The earliest reasonably accurate per capita income figures: those for 1919, disclose that per capita income in the South was about 40 percent below the national average. The Southern economy was a colonial-style economy which mostly shipped farm commodities, raw materials, and semi-finished goods at bargain prices. 

Discriminatory railroad freight rates caused it to be cheaper to ship these goods from the South to the North than vice versa, while it was cheaper to ship manufactured goods from the North to the South than vice versa. In 1919, 62 percent of employed Southerners worked in extractive industries (agriculture, forestry, mining, and fishing), while in New England only 10.7 percent did, and in the Mid-Atlantic states only 14.2 percent did.

By 1920, nearly four million men had been released from the armed forces into a civilian labor market not well prepared to receive them. Many women and retirees who had entered the labor force during the War were forced to withdraw from it. For awhile the economy did well, as it was stimulated by still high government spending, feeding starving Central Europeans, and investment in new industries (automotive, electric power, and electric appliances). A significant milestone revealed in the 1920 Census was that more than 50 percent of the nation's citizens lived in urban areas. Restrictive legislation prevented a resumption of the heavy immigration experienced prior to World War I.

The nation was in a depression from 1920 to 1921. In 1920 the Fed raised the discount rate. While in 1919, only 63 banks had failed, in 1920 155 failed, and in 1921 506 failed. The price level fell dramatically during the 1920-1921 depression. Compared to the 1920-1921 depression, the subsequent 1929-1930 decline in the level of economic did not seem alarming. However, when the economy continued its nose-dive, falling to its nadir in 1932, alarm was widespread. As a whole, farmers did not do well during the 1920s, as the terms of trade (agricultural output necessary to buy industrial output) turned against them.

The unemployment rate was 12.5 percent when Warren G. Harding, a Republican, became president. In 1922, the money supply, which had been allowed to shrink, began to grow, and the economy began to recover. Also stimulating the economy was a series of reductions in the income tax. Only 1 in 500 people paid any income tax, and the wealthiest 2 percent of the people paid 75 percent of the taxes collected. As a result, Democrats complained that the tax cut only benefited the wealthy.

Georgia filling station

The short-lived 1920-1921 downturn was followed by boom years: the Roaring Twenties. In some of these years the yield on industrial stocks exceeded the yield on corporate bonds, and the interest rate on loans taken out to buy stocks was less than the dividends earned on them. Corporate profits were high; a not surprising fact in light of the fact that in manufacturing the number of labor hours necessary to produce one unit fell 40 percent, but nominal wages changed little; and the price level declined by only about 20 percent. Leading the expansion of the economy was the automobile industry, which played the same leading-sector role that the railroads had earlier. (Like the railroads, the development of this industry had substantial backward and forward linkage effects.) In 1920, 26 percent of households owned automobiles. By 1930, 60 percent did.)

Henry Ford was the most important of the many men who formed early automobile manufacturing firms. He transformed the society into which he was born by an astute mix of pioneering engineering and paternalistic management. Ford Motor Company and the companies eventually combined to form General Motors turned Detroit into motor city. Via assembly-line production, Ford put what had up until then been a rich man's toy into the reach of the average working man. In 1909, the Ford Model T cost $950. By 1926, it cost only $290. Ironically, the ownership of automobiles by the masses did more than anything else to destroy the old, rural America Henry Ford grew up in and loved. When Henry Ford announced that he was raising the minimum pay at his plant to $5 a day and inaugurating the 8-hour day, it was big, big news. He could have hired workers for only $2 a day. He claimed that he was motivated to pay $5 by social justice. This was also a way to make the cars Ford workers produced affordable for them (sort of a Keynesian concept).

Although it had been around since1807--thought it was rarely used prior to the Civil War--installment credit was still looked down upon when General Motors in 1919 created the General Motors Acceptance Corporation (GMAC), the first automobile finance company. By 1929, 15.2 percent of the households buying an automobile used installment credit. By the end of the 1920s, up to 90 percent of major durable goods purchases utilized installment credit. Durable goods purchases rose from 3.7 percent of disposable income between 1898 and 1916 to 7.2 percent between 1922 and 1929. Accompanying this increase in the relative importance of durable goods purchases was a decline in the personal savings rate. [Sharon Murphy]

The Harding administration favored high, protective tariffs and got them. Farmers agreed to high duties on manufactured goods in exchange for high duties on agricultural products. However, farmers failed to benefit much because the duties on agricultural products did not raise significantly the prices they got for much of their output because so much of it was exported. On the other hand, they were significantly affected by the tariffs on the manufactured good they purchased. By 1923, the U.S. economy had returned to what was called normalcy. Harding died and was replaced by his vice president, Calvin Coolidge, who won the subsequent presidential election.

Coolidge fulfilled his campaign promise to again reduce taxes, and surtaxes on the wealthy were reduced by 50 percent. The gift tax was repealed, and estate taxes were cut in half. About a third of those formerly paying income taxes were no longer subject to this tax. Secretary of the Treasury Mellon's prediction that the rich would pay more taxes at a lower rate proved to be accurate, and the federal government ran a surplus every year during the Coolidge administration. (The government runs a surplus when its revenues exceed its spending.) The federal debt was reduced by about a quarter as a result. Spurred by an easy money policy and the tax reductions, real GDP is estimated to have increased by 8.5 percent in 1925 and 5.5 percent in 1926.

Treasury Secretary Andrew Mellon would today be called a supply sider. (In contrast to English economist John Maynard Keynes, who advocated the government stimulate demand, supply siders advocate they stimulate supply.) While in Mellon's day the federal government did not engage in fiscal policy: manipulating the economy through government spending and taxation, issues relevant to fiscal policy were of concern then. He argued that federal revenues would rise if tax rates were cut because tax rates had passed the level at which they could be collected. Long after Mellon's death, economist Arthur Laffer presented his argument in this way: at a zero tax rate or at a 100 percent tax rate, no taxed would be collected. No taxes would be collected in the latter case because, if they could keep none of it, people would not work; so there would be no income to tax. As tax rates are increased, he argued, tax revenue will not rise beyond some point because people will work less and/or evade taxation.

Not doing well during the 1920s were the cotton textile industry, coal mining, shipbuilding, the shoe and leather industries, the railroads, and agriculture. The economy of New England was in trouble because the textile industry was moving South. The South's economy was in trouble because its still very important agricultural sector was very depressed. Agricultural areas in the Middle West did not do well either. However, the economy as a whole was quite prosperous. The standard of living was rising rapidly. Unemployment was low, and prices were stable.

During the twenties, the trend towards the consolidation of business and the development of mass production and mass distribution continued. During these prosperous years union membership declined. A lower birthrate, better educated women, and the creation of many clerical jobs would have led to a substantial increase in the labor force participation rate of women if many of them had not been forced from their jobs once they got married.

The 1920s were a time of vast labor-saving technological change. Better machinery saved both time and labor; thus producing a revolution in productivity. Between 1923 and 1929, output per manufacturing establishment rose at an annual rate of 3.1 percent. Because the number of workers per establishment fell, output per worker rose by 3.3 percent. Sales of electricity, doubled in less than a decade. Consumption of oil rose even more rapidly. Industrial wages rose by 2.3 percent, while consumer prices rose by only 0.2 percent. Corporate profits rose 7.4 percent, and the stock market boomed.

Kansas housewife churning milk in her kitchen

In 1919, electricity accounted for 55 percent of the power used by manufacturing industries. By 1929, it supplied 82 percent. Because using electricity made it possible to locate equipment anywhere, scientific management was facilitated. Because, unlike water power, electricity could be made available everywhere, its use facilitated the transfer of the cotton textile industry from New England to the South were labor was cheaper. Through home appliances, it revolutionized the job of the housewife. (Living together without marriage was then rare.)

The economic events that gained the most public attention during the 1920s was the great bull market (net buying) in the stock market after the 1920-1921 downturn and the stock market's collapse in 1929which ushered in the Great Depression of the 1930s. An easy money policy was accompanied by falling interest rates that caused stock prices to rise. Farmers complained that their local banks were refusing to make agricultural loans because they preferred to make call loans to stockbrokers in New York.

Call loans are loans with no fixed maturity date. They are due whenever the lender decides to call them. A great deal of stock was purchased by stockbrokers for their customers on margin, that is, borrowed money as well as the customer's money was used to purchase the stock. Sometimes the customer put up as little as 10 percent. The rest of the money came from call loans the stockbroker got from a bank. Whenever the price of the stock declined so as to wipe out what the customer put up, the stockbroker called upon the customer to put up more money. When the market began to decline in 1929, this caused prices to fall even further, as many customers, instead of putting up more money, told their brokers to sell the stock. As a result, banks were unable to collect much of the money they were owed, panicking many of their customers, who at that time were not protected by federal deposit insurance. This is why in the 1930s Congress created the Federal Deposit Insurance Corporation (FDIC) and empowered the Federal Reserve System to set margin requirements (how much banks could lend to stockbrokers to buy stock).

Speculation was rife during the twenties. The 1920-1921 downturn is thought to have been the product of inventory speculation. (As the price level rises, businesses will stock up on inventories, hoping to profit from the rise in price level from the time they buy them until they are sold.) Inventories in excess of what can be sold leads to the cancellation of orders for more. This causes suppliers to reduce their level of production. Later many people lost a lot of money as a result of the collapse of land prices in Florida resulting from speculation in Florida land. A subsequent speculative bubble in industrial stocks burst in 1929, when the stock market crashed in a series of declines starting on Thursday, October 24, 1929.

By 1928, Americans were cutting down on their purchases of German and other foreign bonds to invest in their stock market. By September 1929, Europe was in depression, but little attention was paid to this fact in the U.S., where stock prices were at an all time high. Throughout 1930 Americans pulled their money from Europe. By 193l, foreign trade had fallen to less than two-thirds of its 1929 level. In that year one of the largest and most important banks in Central Europe suspended payments. A bank panic spread through Europe, bringing down banks. Countries began abandoning the gold standard.

Black domestic worker boarding Atlanta streetcar

In terms of both the magnitude of the decline in output and in terms of its length, the depression the nation fell into after the 1929 collapse of the stock market was the worst the nation had (or has) ever experienced. Gross investment, which had previously stood at about 15 percent of GNP, fell to below one percent. Real output fell by 29 percent from 1929 to 1933, and it was five years before it returned to its 1929 level. Over 20 percent of the labor force was unemployed. (Keep in mind that two-wage-earner families were then rare.) The unemployment rate for blacks exceeded that of whites.

Engineer Herbert Hoover gained the presidency promising to run the government on an efficient, business like basis and to put a chicken in every pot and two cars in every garage. When he left office (beaten by Franklin D. Roosevelt) in 1932, shantytowns derisively called Hoovervilles dotted the landscape. "The U.S. Army, with bayonets fixed, sabers drawn, and supported by tanks had dispersed the so-called Bonus Army of unemployed veterans from World War I who had gathered on Anacostia Flats just outside Washington, D.C., to petition the government peacefully for redress of their grievances....It was a decade before some economic indicators had returned to the levels they had achieved in 1929. This period quickly displaced the 1890s in American historiography as the Great Depression." [Atack and Passell]

In 1932, Hoover, a Republican, lost the presidential race to Franklin Delano Roosevelt, a Democrat who, though he criticized Hoover during the campaign for the federal government's expenditures exceeding its revenues, continued them. When Roosevelt became president the nation was experiencing the failure of a huge number of its banks. As a result, one of Roosevelt's first acts was to declare a bank holiday, that is, he required that all the banks close. (This is a way, at least temporarily, to stop bank runs.) Roosevelt was reelected three times, dying in 1944 before completing his fourth term.

Promising the nation a New Deal and following a policy of trial and error, for the first few years of Roosevelt sought to revive the economy; subsequently he turned more to social reform. During the Roosevelt administration an alphabet soup of federal agencies (AAA, CCC, WPA, etc.) were created in an attempt to revive the economy to little effect. Although the economy advanced after 1933, it fell into deep recession in 1937, and it did not really perk up until 1939 as a result of substantial exports to war torn Europe. (Germany was at war with its neighbors again!) The economies of other countries, including Canada, Britain, and France also experienced economic decline in 1937.

In 1933, the League of Nations, which the U.S. had not joined, held a World Monetary Conference whose objective was to secure international cooperation to end the worldwide economic crisis. Roosevelt sent word to it that his government's first responsibility was to restore domestic prosperity, and that he could not enter into any international commitments that would interfere with this. Attendees at the Conference heard some meaningless speeches and adjourned without taking any action.

Economic historians disagree as to the cause of the Great Depression, a worldwide phenomenon, and the views of the bulk of the profession have shifted over the years. Keynesian economists (demand-side economists) attribute it to the decline in investment spending. Supply-side economists blame the passing during the Hoover administration of a high tariff that led to retaliatory high tariffs being levied abroad. Monetarist economists like Milton Friedman blame the depth and length of the 1930s depression on poor monetary policy. Today many believe that, at a minimum, poor monetary policy greatly aggravated it. While Friedman thinks the Fed did too little, Austrian economists think it did too much; thereby preventing the self correction that would have taken place in the absence of Fed intervention in the financial markets. To follow their arguments, you need to know some basic economic principles and theories.

The Great Depression of the 1930s

Picketing strikers in New York City

"After 1933, the American economy was never the same. The terror of that time was burned into our collective memory, and its results were enshrined in the statute books as social insurance and federal responsibility for the poor and unemployed. The nation turned to the federal government for collective solutions to economic and social problems on a scale not known before, except perhaps in the World War I command economy. Faith in unmixed American capitalism was undermined, apparently for good. Even at the top levels of American industry and finance, hope was lost." [Jonathan Hughes]

In just three years--1929 - 1932--a whole decade of economic growth was wiped out as GNP, it is estimated, declined by one third; thus falling to about the level it had been in 1922. It is believed that real gross investment declined 98 percent. As a result, it did not cover depreciation; so net investment was negative. Private building construction fell to one-sixth its 1929 level. In 1933, the price level had fallen about 25 percent below its 1929 level. Interest rates fell to a very low nominal level. (Due to the decline in the price level, they were not so dramatically low in real terms.) People put off getting married and having children. The birth rate fell far below its level in the 1920s. As a result, the thirties generation was smaller than the twenties generation. Factories closed their doors, and unemployment soared.

Money and Banking

The first of three waves of bank failures began in the fall of 1930. While bank failures were common in the 1920s, many more banks failed in the 1930s, and, unlike in the 1920s, there was a large decline in the money supply. Made fearful by the huge number of banks that failed, surviving banks cut back on their lending, and the public reduced their bank balances. Between 1929 and 1933, the nation's money supply declined by over 25 percent. The Hoover administration finally reluctantly began lending money to railroads, banks, and state governments through the newly created Reconstruction Finance Corporation (RFC). The RFC represented the first time the government had assumed any responsibility for relieving the conditions brought about by depression. The federal government also began a program to support the mortgage market and a few public works projects, including the Boulder (Hoover) Dam on the Colorado River. However, government spending amounted to only three percent of GNP. State governments were trying to raise taxes and cut spending.

Economic historians looking for explanations for the Fed's behavior during this period have recently noted that 75 percent of the banks failing between 1929 and 1933 were non-member banks (therefore, state-chartered). However, there is more than one possible explanation for this; so it is not necessarily the case that this means that the Fed was out to eliminate non-member (Fed owning) banks. However, the Fed does appear to have believed that the failure of poorly run banks was not a bad thing. It has also been pointed out that the Fed had conflicting goals during this period in that it was supposed to act as a lender of last resort for the banks and also maintain a minimum stock of the gold that backed the currency it issued. This created a problem if the banks needed additional liquidity when the Fed's gold stock was relatively low..

The Democrat-dominated Congress and the Republican administration agreed that it was necessary to restore business confidence and that this required the government to cease running deficits; so personal and corporate income taxes were raised significantly. Franklin Roosevelt (FDR), who defeated Hoover, in his campaign promised to balance the budget. Promising the nation a new deal, but lacking any specific remedies, FDR won the 1932 election in a landslide.

To deal with the banking problem, Roosevelt immediately declared a bank holiday. (By that time many states had already closed their state-chartered banks. Only those banks that passed a government audit were allowed to reopen, and the Fed was told to be more generous in lending to banks. When the banks reopened, runs on them did not resume. Starting in 1934, individual's bank deposits were covered by insurance provided by the new Federal Deposit Insurance Association (FDIC). This, it was anticipated, would prevent bank runs. Subsequently, the Federal Savings and Loan Insurance Corporation (FSLIC) was created to insure deposits at savings and loan associations.

The price of gold was raised in hopes that by thus devaluing the dollar exports would rise and imports fall. However, other countries doing the same thing prevented this. So that people would not make money off the increase in the price of gold, gold coins and gold certificates (paper money redeemable in gold) were withdrawn from circulation. Because foreigners were still allowed to demand gold in exchange for dollars, the nation was on what is called a gold exchange standard. It was hoped that raising the price of gold would raise prices and that this would cause output to expand. While this didn't happen, the monetary base rose as a result because it did produce trade surpluses that caused gold to flow into the country.

The Fed began to follow an easier monetary policy that raised the level of banks' reserves, but they chose to hold much of this money in the form of excess reserves. (Total reserves less required reserves equals excess reserves. See banking for an explanation of this.) These excess reserves became very large; thus the amount by which they could increase their lending was great. A much larger share of the loans banks did make were to the federal government than had formerly been the case. Up until the Fed ceased its policy of monetary ease by raising reserve requirements in 1937, output expanded, but fell far short of the full employment level. The Fed raised reserve requirements to reduce how much banks could lend in order to make sure they did not ignite inflation. Banks responded to this action by lending less, and the economy collapsed. In 1938, the Fed reversed its course.

Dissatisfaction with the performance of the Fed led to it being reorganized in 1935. The Federal Reserve Board was replaced with the Board of Governors which, unlike it, did not include the Secretary of the Treasury and the Comptroller of the Currency. Control of the System was centralized in the Board in Washington, and the Federal Open Market Committee (FOMC) was established to conduct open market operations, which became the Fed's chief tool of monetary control. (The FOMC affects interest rates and the level of banks' reserves by buying and selling (mainly) Treasury securities.)

Some Important New Deal Legislation

In addition to the legislation already mentioned, there was a large number of other important pieces of legislation passed during the 1930s.

Historians divide FDR's New Deal policies into two parts. During the first years of the New Deal (the first New Deal) most programs were economic in nature and designed to provide relief. Later, during what is called the Second New Deal, most programs' objective was mostly to provide social reform. This shift has been attributed to some to a failure of the economic programs to achieve much. Because unemployment was the most pressing problem when FDR became president, one of his first actions was to establish a Federal Emergency Relief Administration (FERA) that made grants to the states to be distributed to the needy. (On the day he was inaugurated, 25 percent of the labor force was unemployed.) A Civilian Conservation Corps (CCC) was established to employ young men in such endeavors as planting trees. In 1935, a large-scale jobs program, the Works Progress Administration (WPA), was established. It employed many people in a variety of jobs ranging from building roads to painting murals in government buildings and writing history books. 

Keeping a Roosevelt campaign promise, the 18th Amendment to the Constitution (prohibition of alcoholic beverages) was repealed. A campaign promise not kept was keeping "our boys" out of a foreign war.

Workers aligning a turbine shaft at the TVA hydroelectric plant, Watts Bar Dam, Tennessee.

A Tennessee Valley Authority (TVA) was established to build dams both to prevent major floods and generate electricity that was sold at a low price in a very depressed part of the nation. Another electrification project was the Rural Electric Administration (REA), which made low cost loans to rural electric cooperatives. 


Georgia cotton picker

Economic historian Don Reading's test to measure the New Deal's relief and reform (low productivity, racial discrimination, unequal wealth distribution) revealed that there was a much greater dollar commitment to relief than to reform. His work indicates that funds were not passed out on the basis of the best measure of need: per capita income. The nation's poorest region, the South, got relatively little, while its richest, the states in the Pacific region, averaged 75 percent more per capita. It has been suggested that this was a politically motivated decision, as the South could be depended upon to vote Democratic, while the Pacific states could not be.

By changing the structure of the economy, reform legislation could promote economic recovery. Redistributing income by such things as strengthening unions; making income taxes more progressive; and passing a minimum wage law could increase consumption spending because lower income people spend a higher percent of their income than do the rich. (In recent years, because the saving rate has declined; consumer debt has risen; and it is thought that more investment spending would increase productivity, some are advocating the government adopt policies that will promote saving, rather than consumption.)

Cambridge economics professor John Maynard Keynes believed that a downward "stickiness" in wages prevented the economy from adjusting in the way anticipated by Classical economists, that is, via a decline in wage rates, full employment would be restored. Wages did fall during the Great Depression, but unemployment remained high. It has been suggested that New Deal work relief programs, by reducing the labor supply, kept wages from falling enough to achieve full employment.

Some of Roosevelt's programs, such as the National Recovery Administration (NRA), did not pass muster with the Supreme Court. As a result, he unsuccessfully tried to enlarge the Supreme Court so he could appoint more justices. The 1933 Act that established the NRA suspended the antitrust laws so that the firms in each industry could agree on a code of fair competition. These codes went into effect once they were passed upon by the NRA. The codes established prices, production quotas, wage rates, and hours. Firms joining this program displayed a Blue Eagle symbol that was supposed to attract customers to their stores. Through controlling supply, this program was supposed to raise prices and produce higher profits, which would enable firms to pay higher wages. Higher profits were supposed to cause businesses to invest more. Higher wages cause workers to spend more. As a result, output would rise.

As the Supreme-Court-aborted NRA indicates, New Dealers initially thought that there could be a productive partnership of government and business. Later, however, they came to believe that recovery was being prevented by monopolistic big businesses keeping prices above the level necessary so that consumers could buy enough.

The Securities and Exchange Commission (SEC) was created to police Wall Street. Corporations had to register their securities with the SEC, and in order to get them registered, they had to meet certain requirements, including disclosure of certain information to underwriters and the public. Under the Public Utility Holding Act of 1935, a piece second New Deal legislation, the SEC was assigned the task of supervising the break-up of several pyramided electric utility holding companies. (A holding company is a company whose purpose is to own the voting stock of other companies.) In 1938, the government began more vigorously enforcing the antitrust laws, and motion picture making was separated from the exhibiting of them, and manufacturing Pullman (sleeping) cars was separated from operating them. Also passed in 1935 was the Social Security Act, which was financed by new taxes.

Conditions improved for labor unions even before the New Deal began when, in 1932, the Norris-LaGuardia Act was passed. It prohibited the enforcement of yellow-dog contracts (contracts in which employees promised not to join a union). Another boon for labor unions was the passage of the National Recovery Act, because it required employers to recognize unions and bargain collectively. (To deal with this, some companies began forming company unions, i.e., unions dominated by management.) in 1935, the National Labor Relations Act (Wagner Act) was passed. It guaranteed workers the right to engage in collective bargaining and defined what constituted an unfair labor practice. It established enforcement machinery in the form of the National Labor Relations Board. In 1938, the Fair Labor Standards Act was passed. It established a minimum wage and maximum hours of work and required the payment of overtime. Like many acts of the Second New Deal, it sought both reform and recovery. This, of course, made wages "sticky" downward.

Oklahoma oil field worker

John L. Lewis, president of the United Mine Workers, pressed the American Federation of Labor to organize industrial unions so that workers in the mass production industries could be organization. Lewis took the lead in forming a Committee for Industrial Organization within the AFL to promote industrial unionism. In 1937, this group broke away from the AFL to form the Congress of Industrial Organizations (CIO). As a result of government support and vigorous leadership, the CIO grew rapidly. It had substantial success with sit-down strikes. (This refers to striking workers preventing plants from operating by camping out in them.) There were a number of strikes in the 1930s, and violence was not unusual. Union membership rose from 2,805,000 in 1933 to 8,410,000 in 1941.

Farm relief was a major aspect of the New Deal. The primary objective of legislation affecting farming was to raise the price of agricultural commodities. There were two ways to do this: restrict agricultural output or to guarantee farmers a parity price, that is, a price per unit of output that if farmers couldn't get in the market place, the government would loan them and store their output. They could either not repay this loan, or they could return it to the government and get their crops out of storage for sale, presumably, at a price above the parity price. Parity prices were set at levels that was supposed to provide farmers with an income that bore the same relationship to industrial workers' incomes at they bore during World War I.

The Agriculture Adjustment Act (AAA) of 1933, which was declared unconstitutional in 1936, provided for a mixture of production controls, benefit payments, and government purchases. Meeting the quotas set under this Act required the destruction of crops and livestock. Many consumers objected to this, and this ceased to be done. Subsequently, under the guise of the Soil Conservation and Domestic Allotment Act programs similar to those of the AAA continued. In 1933, the Farm Credit Corporation was organized to restructure existing farm mortgages and channel federal credit to farmers. Aid was provided, too, by the Federal Land Banks established during the Wilson administration. Net farm income doubled by 1934, but it did not reach its 1929 level until 1941. By then, however, there were far fewer farmers; so real income per farm was higher in 1941 than in 1929.

Possible Causes of the Great Depression

A depression takes place when the level of output declines significantly more than briefly. During the Great Depression real output declined by about 25 percent. The dollar value of output is the number of units of output times the average price per unit. Real output is the dollar value of output adjusted for changes in the price level. (The same output would sell for twice as much in one year as in another if the price level was twice as high. So, real output in these two years could be compared either by doubling the number of dollars output sold for in the year when the price level was lower or halving the number of dollars output sold for when the price level was higher.)

Some believe that the Great Depression had a "real" cause; others think it had a monetary cause. If consumers or businesses for some reason(s) decide to buy a lot less, this will cause businesses to subsequently produce a lot less. A depression caused in this way would be one due to real causes. If the money supply declined so that at the existing price level everything produced could not be sold, unless the price level declined, business would subsequently produce less. If the price level does decline, while everything may then be sold, much of it may be sold at a loss; thus forcing many businesses to go bankrupt; so output would subsequently decline. In a competitive, free market, the price level would decline, as it did during the Great Depression.

Total spending, on the final goods and services produced in the country during the year, Gross Domestic Product (GDP), is the sum of consumer spending (consumption), business spending (investment), government spending, plus net exports (exports minus imports). Net Domestic Product (NDP) equals GDP less depreciation, that is, subtracted from GDP is that part of investment spending accounted for by the spending needed to replace the capital goods used up in the production process during the year. Capital goods are goods which, in contrast to consumer goods, are used to produce other goods, that is, tools, equipment, and inventories. (Tools and equipment turn raw materials inventories into, first, semi-finished goods inventories and then into finished goods inventories.) Net investment is total or gross investment less depreciation. Net investment was negative for several years in the 1930s--an extraordinary event.

Consumption spending plus Investment spending plus Government spending plus Net Exports (exports less imports) equals Total Spending. Total spending produces total income. Total Income equals Consumption plus Saving plus Taxes because this is what people do with their income.

In real terms, saving equals investment. (This is because both are defined as that part of current output, investment or capital goods, that is not consumed.)  If, for simplicity, we ignore government and foreign trade, then all output will either be purchased and consumed by consumers or purchased by businesses and used to produce consumer goods and services and capital (investment) goods. In real terms, saving refers to non-consumption. (That part of his corn crop a farmer and his family eats is a consumer good; that part he saves to plant (invest) next year's crop is, just as is a tractor, a capital good. Capital goods will be used in future years to produce consumer and capital goods)

John Maynard Keynes, an English economist famous for writing a 1936 book on economic theory, believed that the Great Depression's cause was under investment (or over saving). Investor pessimism caused investment spending to decline. Because investors spent less, the public's income declined. Because their income declined, they reduced the amount they spent on consumption. Because consumers spent less, business produced less. Because they produced less, they laid off workers or cut their pay. As a result, consumer spending fell to a lower level, and so on and so on.

Keynesian economists believe that, due to the rise in the incomes of the average household, savings as a percent of income was much higher than in the past. On the other hand, there was not the demand for funds to invest like there had been earlier because there were no new industries like the railroads and electric industry being created at this time. They believe this led to investment falling short of savings. As a result the level of income fell. Because consumption spending is largely a function of the level of income, consumption spending then declined, further reducing the level of income. In contrast, Keynes claimed, investment spending is largely autonomous, that is independent of the current level of income. While investment in inventories is related to current income because it largely determines current consumer demand, investment in things like manufacturing plants is determined by expected future consumer demand and, therefore, future income and the cost of capital (interest rates on borrowed funds and the yield demanded by stockholders). So, Keynes envisioned a downward spiral of income set off by inadequate investment spending accounted for the Great Depression

Keynes postulated that wages were very rigid downward and that many employers could keep their prices from falling by reducing supply. (Labor unions and a minimum wage law which did not exist in the U.S. when the Great Depression began make wages rigid downward. Lack of competition makes prices rigid downward.) Keynesians believe that big businesses that can control their prices can obtain economies of scale; workers are subject to a money illusion, that is, if their wages decline, but this is offset by a decline in the price level, they will still feel poorer and spend less; and rich people save a much higher percent of their income than do poor people. According to Keynes, investors are motivated by animal spirits, that is, they are either unreasonably optimistic or pessimistic.

Due to the beliefs summarized above, Keynesians believe the federal government should have run deficits (spent in excess of tax collections) and that, if they had been large enough, the country would have risen out of depression. Contrary to what actually happened, Keynes advocated that when the economy is doing well that the debt incurred pulling the nation out of depression should be eliminated by the government running surpluses. Keynesians advocate for both economic and social reasons a progressive income tax, that is, the higher your income, the greater is the percent of it paid the government . Keynesians also support a minimum wage law.

Modern Keynesians do not consider deficit spending to be capable of returning an economy to full employment unless it is created by a spending and taxation policy that would result in the economy reaching equilibrium at below full employment. (If a deficit causes the level of employment to rise, income and tax collections will rise.) On this basis, they consider the deficits run by the Roosevelt administration to have been inadequate.

Austrian economists believe that if the government, through the Fed, had not manipulated the money supply and striven, as it did during the Roosevelt administration, with far from total success, to keep the price level from falling, that the economy would have self corrected and, as a result, not have declined so much or stayed in depression so long.

During the Great Depression, Keynes believed, monetary policy, which could only revive the economy, he thought, by lowering interest rates, would be ineffective, as under existing alarming conditions, people would not borrow and spend. Most economists today are skeptical of what Keynes called a liquidity trap. According to Keynes, interest rates could not be pushed below a certain level because further increases in the money supply after this level was reached would not further reduce interest rates because people would simply hold onto the additional money.

The Equation of Exchange "says" that the money supply times the velocity of money (number of times each dollar is used to make a purchase) has to equal the average price per unit purchased times the number of units of output purchased. (See banking.) Clearly, if the velocity (rate of turnover) of money does not change; nor does the number of units purchased, if the money supply declines, so must the price level and vice versa. Even if velocity and the number of units does change, they may not change enough to offset the impact of a change in the supply of money. If the price level declines after businesses have purchased their inputs, they may lose money because the prices they sell their products for fails to cover the cost of producing it.

The United States was on the gold standard when Roosevelt took office. (He took us off it.) This means that the money supply consisted of gold coins, paper money (National Bank notes) redeemable in gold coins, silver coins and one dollar (Treasury-issued) bills redeemable in silver coins, token coins (non-specie such as copper pennies), and checking accounts. Bank reserves consisted of gold coins and their deposits at the 12 district Federal Reserve Banks (Fed). (The public could obtain gold by cashing checks, and banks could obtain gold by drawing down their deposits at the Fed.) Banks could create money (by making loans) because ours was a fractional reserve banking system.

In a free trade environment (no barriers to trade such as tariffs), if a nation runs a trade surplus, its price level would rise because its stock of gold would rise. If a nation ran a trade deficit, the opposite would occur. Therefore, if nation A was running a trade surplus with nation B, A's surplus would disappear and so would B's trade deficit, because A's citizens would buy more from B than before, and B's citizens would buy less from A than before. This is because A's goods would be more expensive and B's less expensive. (See trade.)

The United States did not allow this process to take place. The Fed prevented the inflow of gold into the United States as a result of it running a trade surplus causing the money supply to rise. This prevented the price level from rising during the 1920s. It did this by sopping up bank reserves (gold) by selling government bonds. During the Hoover administration tariffs were significantly raised. Other nations retaliated by raising theirs. This undoubtedly played a role in the fact that total imports of 75 nations declined from an average of $2,858.0 million a month in 1929 to $1,122.0 in 1932. Some believe that the choking of foreign trade was a prime cause for the depth and length of the Great Depression. Total output, however, fell more than did foreign trade.

Supplementary reading:   

Go to an article about an attempt to create a union for farmers.

Go to an article about the role of entrepreneurs in the development of the radio industry.

Go to an article about the fight to equalize railroad rates across the nation.

Source Notes

Jonathan Hughes, American Economic History, 1990, p. 465.

Jeremy Atack and Peter Passell, A New Economic View of American History, 1994, p. 641.

Jeremy Atack and Peter Passell, A New Economic View of American History, 1994, p. 583.

Sharon Murphy, "The Advertising of Installment Plans," 1997,

Don Reading, "New Deal Activity and the States, 1933-39," (1973) Journal of Economic History, pp. 794-795.

Explanatory material linked to the above material.

"Industrial policy" refers to government direction of industry. The government determines which industries should be expanded or created and which should shrink and takes steps to encourage and facilitate the necessary transfer of resources. Tax breaks and subsidies are methods by which this can be done. The rapid recovery of Japan after World War II that catapulted it into the developed country status, the first non-Western country to achieve this, has often been attributed to government direction of its economy short of the nationalization of private industry. Some, however, largely attribute the prolonged economic hard times Japan experienced in the 1990s to government intervention into the economy.

Frederick W. Taylor is considered to be the father of scientific management. He believed that by applying scientific methods in analyzing the tasks performed by a worker that the one best (most efficient) way to do a job could be found. He first gained fame recommending changes that improved the efficiency of men using shovels based on what he learned by considering both the kind of shovel being used and noting workers' every movement and timing it. While employers greeted his work with enthusiasm, workers were often hostile, believing that the objective of Taylor's time and motion studies was to make them work harder.

Exports is the term applied to what a country sells to foreign countries. Imports is the term applied to what they buy from foreign countries. One country's exports are another country's imports. If a country earns more than enough from exporting goods and services to foreign countries to pay for what it imports from them, this means that foreign countries are not earning enough money from exporting goods and services to this country to pay it for the goods and services it imports from it. This means they go into debt to this country. They become debtor nations, while it becomes a creditor nation. 

The first use of radio was as a means of communication like the telephone. As a result, financing it was no problem. If you wanted to transmit a message to somebody, you had to pay the company that provided this means of communication. Radio broadcasting was a different story. A telephone company can deny you service if you do not pay. Automobile manufacturers can keep you from using their autos by denying them to you if you do not pay. Radio broadcasters did not have a like ability. However, the government, through the power to tax, can force radio listeners to pay for the services of a broadcasting station. The long time government radio monopoly in Great Britain, the BBC, was so financed, and until somebody thought of trying to finance broadcasting in the U.S. with advertising, many thought that for broadcasting to exist, the government would have to finance it. 

Charles Beard is most well known for his belief that up until the frontier disappeared, the character of the nation was determined by its existence. Its absence, he thought, would send the nation in a new direction. 

Adam Smith is often called the first great economist. A keen observer and analyst of the market system developing in his day in Great Britain, he observed that in a market system it isn't others concern for your well being that causes them to supply you with the things you need, it is their self interest that motivates them. They produce it because they can make money selling it to you. In a market economy, he said, it is as though there is an indivisible hand (not the visible hand of government) directing people to produce the things consumers need. 

Karl Marx is considered to be the father of communism, the most extreme form of socialism--the complete absence of private property and, therefore, of markets.

Inflation refers to a persistent rise in the price level, that is, while the price of some goods and services may decline, this is offset by increases in the prices of other goods and services so that the average person finds that it costs them more to buy the things they consume than it did in the past. Economists agree that if there is a rapid enough increase in the amount of money "chasing" after goods and services that this will cause this phenomenon.

There are two ways to make money by purchasing corporate stocks: 1) dividends (payment of corporate profits to its owners (stockholders) and 2) capital gains (selling stock for more than was paid for it). A speculator purchases stock simply because, for whatever reason, he or she thinks the price of the stock will rise in the future. 

A call loan is a loan with no fixed maturity date. It is due whenever the lender decides to call upon the borrower to repay it. Few borrowers can tolerate this situation. Stockbrokers can because they can very rapidly sell (liquidate) some stock to get the money to repay the loan. In a declining market, however, they may take large losses on the stock they sell.

A bull market refers to when the stock market is dominated by people who expect the price of stocks and dividends on them to rise in the future. Therefore, they increase their holdings of stock. In a bull market people's belief that stock prices will rise causes them to rise. A bear market is the opposite type of market. People think stock prices will fall, so they reduce their holdings, causing prices to fall.

When the National Income Accounting System was devised in the 1930s because the government needed this information to measure the impact of the Great Depression and steps it took to bring about recovery, the monetary value of the goods and services produced annually was called Gross National Product (GNP). This differs from Gross Domestic Product in that it includes only the output of facilities located in the United States, while GNP did not include the output of foreign -owned facilities in the United States, but it did include the output of American-owned facilities abroad.

The government's budget refers to its revenues and spending. Its revenues are obtained through taxation. It can spend more money than it collects by borrowing. If it borrows, its budget is in deficit. If it collects more than it spends, its budget is in surplus. If what it spends equals what it collects, it is said to have a balanced budget.

Tariffs serve two functions: 1) provide the government with revenue and 2) make foreign-produced goods less competitive with domestic-produced goods. The latter is true because foreign producers have to raise their prices to cover the cost of the tariff. If the objective of imposing a tariff is to gain revenue, it is called a revenue tariff. If the objective of imposing a tariff is to protect domestic producers from foreign competition, it is called a protective tariff. All tariffs, of course, serve both functions regardless of what is the reason for imposing them. The higher a tariff is, the more it protects domestic industry. 

When you purchase something on a credit basis, agreeing to pay for it in the future by a series of payments to the seller, this is called installment credit. Prior to World War II it was relatively rare for merchants to sell on a credit basis.

In a colonial-style economy a country or a region of a country is primarily an exporter of raw materials (lumber, minerals, etc.) and commodities (wheat, corn, potatoes, etc.) and an importer of manufactured goods.

Per capita income refers to total income divided by population.

The building of railroads had extensive backward and forward linkages. The creation of a railroad created a demand for ties, rails, cars, engines, fuel, etc. The potential for making money by producing and selling these things to railroads caused firms to be created to produce them. These are backward linkages. Forward linkages include such things as firms of all types that are created because a railroad now exists to transport necessary inputs to them at a reasonable cost and transport to market at a reasonable cost their outputs.

Because what takes place in a market economy is determined by the plans of independent producers, a market economy is not a planned economy. A planned economy is a centrally-directed economy. The most extreme example of a planned economy is a communist country. There all decisions as to what is to be produced and how it is to be produced are made by the government. 

A mixed-market economy refers to one where the government intervenes in some markets to prevent a free market result. Rent control is an example of how some cities' governments intervene in the market for apartments to keep rents from reaching the level they otherwise would, that is, cause rents to be lower than they otherwise would be. Subsidies provided by the federal government to encourage the production of alternative fuels to gasoline is another example of government intervention. Price support programs for crops is another.

English economist John Maynard Keynes believed that one of the causes of the Great Depression of the 1930s was that when businesses responded to falling sales by laying off workers, this caused sales to fall further because the laid off workers reduced their purchases. In short, when fewer workers have jobs, collectively workers cannot afford to buy as much. So, when for whatever reason consumers buy less and employers respond by laying off workers, because workers cannot afford to buy as much as before, consumer spending declines further. This is somewhat analogous to the claim that Ford reduced the number of cars he could sell, not by hiring fewer workers, but by paying them relatively little compared to the price of his cars. One can question this line of reasoning. Suppose you operate a filling station, paying your employees $1,000 a month. Can you expect to make a lot more money if you pay them $10,000 instead because of all the additional gasoline they can now afford to buy? Some argue that what Ford gained was a lower turnover rate. This saved him money because it costs money to hire and train new workers. (Workers are less likely to quit the higher their wages are.)

The picture at the top of this page was taken in Detroit early in the nineteenth century. Pictures on this page come from the American Memory Collection of the Library of Congress.

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