Out of Work. Richard K Vedder
in America promoted high wages in a platform document. Ibid., July 14, 1919, p. 11.
31. Ibid., February 7, 1921, p. 2; August 31, 1921, p. 6; November 18, 1920, p. 1; April 25, 1921, p. 15.
32. The Nation, October 12, 1921, p. 389.
33. Herbert Hoover, introduction to Lionel D. Edie, ed., The Stabilization of Business (New York: Macmillan, 1923), p. v. See also Barber, From New Era to New Deal, p. 15.
34. Report of the President’s Conference on Unemployment (Washington: Government Printing Office, 1921), p. 103.
35. For a convenient summary of major economic statistics of this period, see Richard K. Vedder, The American Economy in Historical Perspective (Belmont, Calif.: Wadsworth, 1976), p. 367.
36. Rostow, Stages of Economic Growth, pp. 10-11.
37. See Barber, From New Era to New Deal, especially pp. 27-30.
38. Edward A. Filene, “The American Wage and Efficiency,” American Economic Review 13 (1923): 411–15.
39. See William T. Foster and Waddill Catchings, The Road to Plenty (Boston: Houghton Mifflin, 1928) or their Business Without A Buyer, 2d ed. (Boston: Houghton Mifflin, 1928.) Foster was a forensics expert and college president, Catchings a highly successful Wall Street investment banker.
40. See Stuart Chase, The Tragedy of Waste (New York: Macmillan, 1925), or Rexford Guy Tugwell, Industry’s Coming of Age (New York: Harcourt, Brace, 1927). See also Barber, From New Era to New Deal, chap. 2.
41. Robert K. Murray, The Harding Era: Warren G. Harding and His Administration (Minneapolis: University of Minnesota Press, 1969), p. 98. Harding appointed Andrew Mellon as secretary of the treasury to mollify the old guard with respect to the Hoover appointment.
42. Ibid., p. 193.
43. The standard Austrian interpretation is found in Murray Rothbard, America’s Great Depression (Kansas City: Sheed and Ward, 1963). Professor Roth-bard’s encouragement of our research was a major factor in the completion of this book.
44. For details, see Friedman and Schwartz, Monetary History, appendix A.
45. Historical Statistics of the United States, p. 1003.
5
From New Era to New Deal
The four years from 1929 to 1933 were a watershed in the economic history of the United States. The old order that had existed in some sense from the beginning of the republic began to crumble, and a peaceful but real revolution overtook the polity, bringing with it a dramatic change in the role of the state in American life.
The peaceful revolution that led to the New Deal in 1933 was the lasting consequence of the greatest economic downturn the nation ever witnessed. Hence it is essential to examine the Great Depression from the perspective of unemployment and the labor market. We begin by reviewing the decline in economic conditions and the rise in unemployment between 1929 and 1933. In the following chapters, we show that the banking crisis closely associated with the downturn owed its existence to the labor-market disequilibrium that evolved out of inappropriate public policies, and that the same disequilibrium explains why the recovery from the Depression was so long and anemic.
Economic Decline: 1929–1933
By any meaningful measure, the economic decline from 1929 to 1933 was the greatest in American history, usually by a wide margin. Using annual data and comparing 1929 with 1933, money gross national product fell by an extraordinary 46.4 percent. There is no other four-year period since 1900 (not including any year from 1930 to 1933) where there is any decline in GNP, much less one of 46 percent. From 1892 to 1896, GNP fell by 7 percent, a trivial decrease compared with that of the Great Depression.
Prices fell by anywhere from 22 to 31 percent, depending on the price index used. That decline is smaller than the abrupt drop in prices observed in 1921, but it is still substantial. Real output per capita decreased by 31 percent, far outdistancing any other decrease. Auto production in 1932 was fully 75 percent below the 1929 peak, and similar sharp reductions in output occurred for virtually every major consumer durable good.1
Unemployment broke all records. Of the seventeen years of double-digit unemployment in the one hundred years for which data are available, ten were during the Great Depression. Prior to the Great Depression, the peak unemployment rate was 18.4 percent in 1894. During the thirties, that record was exceeded in five years; for four consecutive years, the unemployment rate was above 20 percent, and for ten consecutive years, it was greater than 10 percent.
Even these statistics do not fully portray the incidence of unemployment. Annual average statistics disguise periods of unemployment in excess of those averages, as will be demonstrated shortly. Beyond that, however, the burden of unemployment varied considerably between various demographic groups and geographic areas. For example, it has been estimated that unemployment among female blacks in the city of Detroit in January 1931 was around 75 percent, at a time when the national rate was probably about 14 percent. Similarly, teenage unemployment in 1937 was estimated at 36.5 percent, more than double the national rate. Moreover, the average duration of unemployment was substantial. For example, of unemployed men in Massachusetts at the beginning of 1934, a large majority (62 percent) had been unemployed for one year or more.2
The misery created by the Depression was so substantial that it is hard for Americans under the age of sixty to imagine. With the absence of a comprehensive governmentally provided safety net, it is undeniable that millions of Americans suffered a great deal. At the same time, however, the distribution of the burden of the Depression was very unequal, and millions of Americans lived normal, even prosperous lives. Sales of cars in 1937 were the second highest in history, and more radios and refrigerators were sold in 1935 than in 1929.3 The tragedy of the Great Depression derived as much from the distribution of the fall in income as the size of the decline itself. While the decrease in agricultural income is one reason for the unevenness of the distribution of the misery, the single most important problem was unemployment. Many Americans suffered little or no income loss, while others had their income fall drastically to near-starvation levels.
Monthly Estimates of Unemployment Rates
The annual data on unemployment disguise important intrayear variations in the incidence of joblessness, and fail to give us details on the timing of the downturn and subsequent recovery. Unfortunately, monthly or quarterly data were not collected until the Depression was nearly over.
To deal with this data inadequacy, we have developed monthly estimates of unemployment, which are presented in table 5.1.4 The procedure for constructing the estimates is straightforward. First, we formed a regression model of the annual unemployment rate for the 1923–37 era, utilizing as explanatory variables manufacturing