The Great Depression (32 page)

EDITOR’S NOTE

 

“We can formally and officially announce that the depression of 1929 has ended,” declares Roth on January 2, 1937. Retail stores in downtown Youngstown teemed with shoppers buying new clothes and home furnishings. Gleaming new autos crowded the roads. Youngstown steel mills operated at 80 percent capacity. The town’s commercial real estate rental market was strong, and many personal and auto finance companies had sprung up again, poised to approve new loans for consumers. Plus, the stock market was bullish, enjoying a steady rise since March 1935. Even Roth’s diary writing tapered off after May 1937. When he picked it up again in October, however, he described a very different picture: “I have made no entry for several months because business seemed to be normal,” penned Roth on October 12, 1937. “About six weeks ago, however, the stock market had a bad break and since then it has gone steadily downward with hardly a pause.”

 

Dubbed the “Roosevelt Recession” in the months to come, the thirteen-month period between May 1937 and June 1938 proved to be a rough ride not just for Roth and the American people but for private industry, banks, and the White House as well. Historians and economists offer various theories as to the cause of this episode of severe slowdown after the steady rise in America’s economic recovery. Certainly, the simultaneous combination of unforeseen forces that fostered the new crisis quickly opened America’s old wounds of 1929 that had just barely started to heal.

 

In January 1936 Congress finally awarded three million World War I vets (including Roth) their veterans’ bonuses. The average individual sum was formidable. With amounts exceeding 30 percent of the mean household income for a man of this age group, the vets quickly cashed in their long-awaited bonuses (46 percent would be redeemed by mid-June 1936). The payout represented nearly 1 percent of the annual gross national product, and it substantially stimulated the economy, if temporarily, in 1936. Manufacturers were only too happy to step up production and hire more workers to meet demand. Consumer spending that year (thanks to veterans’ bonuses, high employment, and an increase in average wages) gave the appearance of the prosperity of the Roaring Twenties.

 

Yet 1937 turned out very differently. President Roosevelt needed to raise taxes. Facing a $3.6 billion deficit, Roosevelt needed revenue to pay for the veterans’ bonuses and offset the loss of proceeds from the AAA’s agricultural processing tax that the 1936 Supreme Court had ruled unconstitutional. Although less than 5 percent of the population would actually end up paying federal income taxes in the 1930s, the perceived tax plan slowed personal spending. In addition, payrolls decreased due to a tax levied to finance the Social Security Act of 1935, one of the major parts of Roosevelt’s Second New Deal. Two billion dollars was raised from the earnings of American workers in 1937. But families’ spending became more cautious as they faced a smaller paycheck week after week.

 

The consequence of this sudden expansion and contraction resulted in an all too familiar pattern: By the end of 1938 unemployment had leaped to nearly 20 percent (compared to 14 percent the year prior). Manufacturers had to cut production levels, unload inventories, and let go workers when demand slowed. As Americans once again lost their means to maintain the consumption of goods at their 1936 levels, the economy plunged further. The notion that America was entering another “depression” crystallized in the collective mind-set on “Black Tuesday,” October 19, 1937. That day the stock market traded the biggest volume (7.2 million shares) since 1933, and the slump continued into 1938. By May 1938 the Federal Reserve’s adjusted Index of Industrial Production had lost almost two-thirds of the gains it had made since 1933.

 

Many economists and historians also blame an act of the Federal Reserve Board for hurting the recovery. By late 1935 commercial banks were holding onto $5 billion in excess reserves (compared to $2.76 billion in January 1934) as large amounts of European gold poured into America, due to the escalating turmoil abroad. Banks preferred to keep the gold: The interest rates on government securities were too low to convert this surplus into bonds, plus few loan applications had good enough credit histories to accept. But the Federal Reserve Board wanted to “correct” this bank excess. They feared the reserves would ignite another overspeculative “inflationary boom.” Under the 1935 Banking Act, the Federal Reserve Board doubled the necessary reserve ratio for commercial banks. The unanticipated consequence of this new requirement was dramatic and nearly instantaneous. Banks were forced to liquidate their investments, withdraw from central reserve-city banks (which also needed to meet this new reserve level), and further tighten their lending.

 

President Roosevelt’s sudden shift in spending policy also undoubtedly contributed to the downturn. The president aimed to reduce the federal deficit upon reelection in 1936. The administration drastically and swiftly cut federal spending on his various job stimulus projects such as the WPA. The federal deficit would actually drop below $1 billion in 1937, but at a dismal cost: By September 1937 1.8 million federal jobs were wiped out. Reminiscent of 1932, Roth notes that one-quarter of the nearby Cleveland population was back on relief by April 1938.