Why Did the Great Depression Last So Long?
Because of the complexity of the Great Depression, there are several different ways in which you can date the beginning and ending of this immense event. Many people date the beginning from October 1929 with the crash of the stock market. However, if nothing else occurred other than the stock market crash, this one event would probably have caused only a garden-variety recession. What really made the Depression an historically unique event was the partial collapse of the banking system. This collapse started in 1930. So purely for the purposes of this discussion, I will arbitrarily set the beginning of the Depression as the beginning of 1930. If one defines the end as the time when the economy recovered to where the real GDP surpassed its output in 1929, the ending would be sometime in the neighborhood of 1939. This gives us about nine years of recession by this reckoning, or 108 months of recession. Compare this duration with the duration of the 1920-21 depression of 18 months. Yet the government did exactly nothing to end the 1920-21 depression. The obvious questions are: (1) what was different with the Great Depression that it lasted so much longer, and (2) could it be that the actions of government actually prolonged the Great Depression?
The central problem that any economy has is to balance the demand for any good with its supply at a price that is acceptable to both buyer and seller: the equilibrium price of the law of supply and demand. I should note that reference to an “equilibrium price” does not necessarily mean that the economy itself is in equilibrium; it can be slowly changing in time. In many ways the concept of an “equilibrium price” is analogous to the concept of a temperature in a thermodynamic system. Strictly speaking, thermodynamics is concerned primarily with static many-bodied physical systems, but as long as a temperature at any position in the system can be well-defined, the system can be slowly changing with a slowly varying temperature in both time and space. In these conditions it can be described locally as in equilibrium. The same kinds of statements can be made of equilibrium prices. Just as in a thermodynamic system with temperatures, the farther prices are from their equilibrium, the faster prices will change and the more imbalanced (and therefore sicker) the economy is. The process of bringing an economy in recession/depression back to health is a process of undoing the imbalances between supply and demand that created the recession/depression in the first place. Therefore, in judging the effects of government actions in the Great Depression, we will focus on how they affected such imbalances.
During the initial months of the depression, the general belief was that the troubles were caused by “cut-throat competition” between businessmen causing many businesses to fail. As a result the Roosevelt administration’s first attempt to deal with the crisis was to mitigate such “cut-throat competition” with the provisions of the National Industrial Recovery Act  of 1933. This act spawned the National Recovery Administration (NRA). The NRA was empowered to bring government, industrial corporations, and labor unions together to find ways to get rid of “cut-throat competition”. They were to do this by writing codes of fair competition, by setting minimum wages and maximum weekly hours for workers, and by setting minimum prices at which products could be sold. In short, the NRA enabled a lot of price fixing to eliminate competition, generally at prices higher than the free-market equilibrium price would have been. In 1935 the Supreme Court unanimously declared the NIRA Act unconstitutional.
Now, in the light of the law of supply and demand, what do we know about how such actions should affect the economy? If the sellers of a good could actually receive a price above the equilibrium price, the law of supply tells us that they would produce more than the consumers would buy, as told to us by the law of demand. But in a (at least relatively) free economy, the sellers would not produce that amount, but produce only so much as customers would actually buy. However, if government regulations do not allow producers to reduce their prices down to the free-market, equilibrium price, the number of goods bought and produced would be at a lesser quantity than would have been the case at the market price, The effect of the government regulations is to reduce the amount of wealth that the economy produces. It should be no surprise then that the depression lasted beyond 1935 when the NEA was declared unconstitutional.
Other government attempts to boost the economy out of depression were the Work Projects Administration (WPA) and the Agricultural Adjustment Act (AAA). Both were government attempts to give relief to the unemployed. The WPA was an attempt to give useful employment to those laid-off by companies, while the AAA supported underemployed farmers by giving them subsidies not to plant crops and to kill off excess livestock. As a result of the AAA, agricultural production was actually decreased and the costs of food increased for the general population. The WPA, while employing many on projects that were probably of great value to the economy, also employed many on projects that were of doubtful value. Some of the projects built infrastructure such as roads, bridges, schools, courthouses, hospitals, sidewalks, waterworks, and post-offices. However, it also built some things that, while of some value, were probably not the most urgent of needs for an economy in depression. Some examples of these kinds of projects were swimming pools, parks, playgrounds, zoos, fairgrounds, and botanical gardens. To the extent the WPA allocated scarce economic assets away from the most urgent economic needs, and to the extent that the AAA reduced agricultural output, they increased the duration of the Great Depression. How could a free market do better? By allowing Adam Smith’s invisible hand to naturally direct economic resources to their best use.
Other examples of the government retarding economic activity can be found in taxes. (See also here and here.)
What I have written here more than suffices to explain the long duration of the Great Depression as a result of government intrusions into the economy, yet it only scratches the surface. Books have been written on the subject, and if you are interested in learning more, I recommend the following.
Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York. HarperCollins Publishers. 2008
Powell, Jim. FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression. New York. Three Rivers Press. 2003
Folsom, Burton Jr. New Deal or Raw Deal?. New York. Threshold Editions. 2008
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