IN 1940, behind our surface appearance of prosperity, there were flaws and weaknesses throughout our entire economy. They showed up in the staggering needs of most of our people—needs not only for proper food, warm clothing, and adequate housing, but also for a decent standard of health, education, and citizenship.

Did we feel insecure in 1940 because we thought we couldn’t produce all the goods and services we needed? Or did our insecurity result from the lack of sufficient income with which to pay for all the goods we were capable of producing? Clearly it was the latter.

In order to prosper, each group among us which produces goods and services must have not only a product which people want, but also customers who can afford to buy it. Every breadwinner is not only a producer but a consumer as well. Whether he is a good customer or a poor one is determined by how much he can earn through selling his own product, whether that product be potatoes, beef cattle, electric turbines, washing machines, haircuts, or his skill as a carpenter or machinist.

In 1940 every group—our farmers, our workers, and our businessmen—suffered from lack of good paying customers for the goods or services it had to sell. Lacking enough good customers, each group found itself financially unable to go on producing to capacity. So incomes remained low and workers were unemployed.

The problem was a bit different with our farmers, but the result was just as bad. In farming, unlike industry, production cannot be stopped when demand falls off. A crop planted in May cannot be “shut down” in June. The cows go right on giving milk regardless of the prices which people can afford to pay, and the job of milking them morning and night is still there.

In 1940, as we have seen, our farmers had incomes two and one half times greater than the incredibly low levels of 1932, but they were still far below the income needed for a decent living. The brief depression of 1937 had provided a fresh reminder of the old lesson that when city incomes fall, farm incomes fall, too, and usually faster. Farm prices fall both because there is too little purchasing power in the cities and also because the farmer can’t turn a switch to keep his crops from getting ripe. His produce has to move to market regardless of price, or rot in the field.

Before the war, in years when crops were poor, farm prices rose to fairly reasonable levels, because there were enough people with high enough incomes to bid up prices for the limited supply of farm production. The farmer’s income remained low, nevertheless, in spite of good prices, because the total volume of produce that he had to sell that year was abnormally low.

When crops were good, he usually found himself in an equally tight predicament. The amount of produce which he took to market increased, but since prices went down for lack of enough customers with money in their pockets to buy his increased production his income usually remained at a miserable level.

Our ability to buy all the goods and services that our workers produced was clearly inadequate in the prewar years. Lack of customers with money to spend meant the holding back of factory production and the lack of jobs for all our workers. The 8 million unemployed in 1940 were tragic evidence that most consumers were too short of cash to pay for all the goods they really needed—goods which those workers might have produced had they been at work.

Business failures, running, as we have seen, over 1000 a month in 1940, added further testimony to the inability of a great many businessmen to find enough good customers to enable them to cover their costs. In addition to these failures, there were over 400,000 other closings of business firms that year, most of them due to discouragement over the never-ending fight to squeeze a living out of what remained in the till when the bills were paid.

All these groups—our farmers, businessmen, and workers—were each others chief and almost only customers. None was significantly dependent on foreign buyers. Each could have had a better income and itself been more prosperous and more secure if the others had been more prosperous and secure.

This was the baffling paradox of the times, the inability of people on every hand to find markets for the goods that people on every hand so badly needed! And this underscored the fact that we were all in the same boat, no group able to advance unless the others advanced, too.

Today the level of factory wages, farm income, and business profits is substantially above that of 1940. But don’t forget that the purchasing power which makes that level possible is due to war expenditures, and the demand accumulated by four years of war-created shortages.

If we are not to go back to 1940, after this backlog of demand has been satisfied, it will be because we do things differently—all of us, and perhaps far differently—than in 1940. To know what must be done differently, we must examine the workings of our economy. We must see what made it work so poorly in the years before the war, and what is needed to make it tick in the future.

To do this it seems to me necessary that we go back and trace, in a general way, the development of the economic sickness from which we still suffered in 1940. I shall not attempt to outline the economic history of America. I propose simply to review in a broad way how depressions like that of the early thirties grew until they could, for years on end, hold our people far below our potential ability to produce, and to live decently, and to achieve the economic security for everyone which must be a major goal of our American democracy.

It seems to me, from this point of view, that we have lived through three periods. In the first period, which ended roughly with the Civil War, our people as a whole were affected only in a minor way by the commercial crises and financial panics that we, in common with the other Western nations, experienced.

In the second period, lasting from the Civil War down to the First World War, we found these crises increasingly frequent and their effects on the average individual increasingly serious. And in the third period since the First World War, we have all been struggling with the difficulties—as well as enjoying the benefits— of a modern industrialized society. Let me try to explain this development as I see it.

The increasing severity of our constantly repeated cycle of business booms and depressions is clearly a result of the machine’s steadily coming of age in America. During our earliest days nearly everyone was a farmer. He built his own house, grew his own corn, raised his own beef, forged his own horseshoes, and hewed his own lumber. His wife carded wool from their own sheep and churned butter from their own cows’ milk. Only a few of our people got fat or thin according to their success in finding customers for the goods or services they themselves had to sell.

When things went wrong it was with our system of credit and banking. The amount of money in circulation wasn’t great and our young banking system was none too sound. When too many bankers gambled on loans too big or too risky, our banking system became stretched beyond its safety limits, creditors became uneasy, loans were called in, mortgages were foreclosed, and our commercial credit collapsed.

When that happened—and this is the important thing to remember—the number of persons affected by the resulting financial “depression” was very small. Nearly everybody could go on quietly working his fields and harvesting his own food and fiber.

Despite the beginnings of industry in the early 1800’s, the great majority of our forefathers were safe from the effects of these periodic financial crises and panics. Right through the first half of the nineteenth century, for the most part, we remained a nation dependent on self-sufficient and, hence, relatively depression-proof, farming. The occasional economic depressions were those in which bankers, speculators, and some of the new settlers on Western lands were badly hurt, but our people as a whole were spared any major economic damage. With the beginning of railroad construction in the 1830s the country was opened up more and more rapidly to trade and to industrial development.

The earlier self-sufficiency of an agricultural economy began to give way to the making of goods for sale. Trading became a regular means of making a living for more and more of our people. No longer could each of us count on personally making all the things we needed. With fewer and fewer exceptions we had to buy at least some of our daily requirements. That took money. How much money we had depended on our ability to find customers able as well as willing to buy the goods which we had made to sell, or the services we were willing to perform for pay.

The self-sufficient homesteading farmer and his family could still consume what he produced. City markets and prices meant little or nothing to him.

But the shoe manufacturer could not eat his shoes. If he and his workers were to prosper, the shoes had to be sold. To him and to those who worked in his factory, markets and prices meant the difference between economic success and failure. And they also began to mean a great deal to the steadily growing group of farmers who had shifted from self-sufficient general farming to the production of crops, such as cotton and wheat, for sale in the city markets or for export overseas.

This dependence on finding a market for manufactured goods and farm produce spread to more and more of our people as the country grew steadily more industrialized. By the middle of the 1800’s the growth of manufacturing in the North had created a cleavage of interest between Northern industry and Southern agriculture which was one of the principal causes of the Civil War.

It took a bloody war to settle the issue as to which interest should prevail in establishing our national policy. The decision was won by the interest—industrialism—which had the weight of the future on its side.

Before the Civil War, there had been only two serious general reversals of our steady expansion, the so-called financial “panics” of 1837 an d 1857, and these, as we have seen, affected only a relatively minor proportion of our people.

Following the Civil War, our industrial development proceeded faster than ever, with a new form of business—the corporation—growing constantly more prominent. Accompanying this rapid spread of industry and trade, the swing from prosperity to depression became more frequent and more extreme. And because by now a large part of our people were directly dependent on our factories for jobs and wages and an even larger proportion of our farmers made their living by producing a single crop for the market—such as wheat, cotton, milk, or corn—these economic swings began seriously to affect all of us.

The unemployment that appeared in the economic depressions of the period following the Civil War was serious, and the suffering among the unemployed workers, the bankrupt businessmen, and the foreclosed farmers was bitter.

This was what led to the Granger and Populist movements of the seventies and eighties and to the militant labor movement of this period. This was the time of turmoil that led to the first anti-trust law and to the clamor for banking reform which culminated in the establishment, in 1913, of the Federal Reserve System.

These were the issues of the day, the curbing of rampant corporations, the prevention of monopoly, the reform of banking. And in dealing with these problems our people were seeking to make an economy that plainly ran badly and unfairly if left alone, ran better and more nearly in the interest of all of us.

As early as 1873, a depression had hit the country which lasted six long years. It was our most serious depression up to that time, the first of the new industrial era. It was followed by a succession of lesser setbacks and by the more serious depressions beginning in 1893 and again in 1907. There could be no mistake about it—along with all the opportunities for better living that were developing with our growing industrialism, a staggering new problem had been created. More than ever before we made progress, not steadily, but through a series of economic ups and downs. And while the downs were usually less than the ups, they represented, nevertheless, a growing threat to the security and welfare of every one among us.

How the Boom-and-Bust Cycle Was Born 

The reasons why the business cycle of a “boom” followed by a seemingly inevitable “bust” develops in an industrialized country such as ours are quite simple.

In our modern, industrialized economy a large part of our productive efforts must be focused on the expansion of our factories and the building of new machinery and other equipment which makes additional production possible. Still more must go for increased government services such as highways, libraries, and schools. As our economy grows from year to year, more and more of our total output consists of tools, machines, and public buildings.

That brings us to an extremely important point about our economy which we must understand above all else if we are to learn how to keep it running on all cylinders.

The production of a million dollars’ worth—or one hundred million dollars’ worth—of goods or services— whether it be overcoats, rompers, shoeshines, machine tools, or mining equipment—must always provide an exactly equal amount of income to the people who produce them. This income may be in profits, wages, salaries, or most likely in a combination of all three.

As long as all this income is spent in one way or another to buy the goods and services which others produce, we will have no trouble. The workers who produced the million dollars’ worth of goods may spend their share of this total income on food, rent, and clothing—or they may save some and put it in the bank, which in turn may loan it to others to spend for the building of new homes or the buying of new equipment.

The businessmen who own the plant may spend part of their profits on repairs or in adding a new wing on the factory, and pay the rest out in dividends to stockholders, who in turn will either spend it directly or put it in savings which will be loaned to other investors. Our government may spend the part it collects as taxes in building roads, dams, schools, or battleships.

This is one essential economic fact which we can never afford to forget. All the money which we receive in the way of wages, salaries, or profits must be spent by someone—ourselves, our families, our bankers, our businessmen, or our government—if we are to go on producing at top speed. Our total spending must always equal our total production if our markets are to be cleared of all available goods and services at prices that on the average cover all costs plus a profit.

You might think it would be natural for spending and production to keep automatically in balance.

The difficulty here—the reason for the ups and downs of the business cycle—becomes apparent only when we examine exactly how business and government spend their share of our income for new factories and new equipment, for roads and public buildings, and how all of us consumers spend our share for food, clothing, recreation, and household equipment

Most of us make our essential purchases on a more or less regular basis. An automobile worker in Detroit, an insurance clerk in Hartford, or a miner in West Virginia each needs three meals a day. He needs a certain amount of clothing which wears out at a fairly steady rate. He needs a roof over his head for which he pays rent regularly.

We don’t decide not to eat one week or to skip buying clothes one year or to close up our apartment and sleep in the park for the summer. Day in and day out, if we have the money, we buy the essentials of life according to a pattern that changes only slowly.

But investment spending on the part of business is altogether different. There is nothing regular about it. The amount spent each year is determined not by a man’s daily needs, but by how business sizes up the prospects ahead.

Nothing is more uncertain than prospects. They depend not only on facts but on human judgment —judgment that is affected by thousands of factors both real and imagined. A new plant may be begun this month or postponed a year. A board of directors may decide to spend a part of the company’s profits on a new turbine now or to wait a few months to see what a new design promises in the way of greater efficiency. A thousand and one things may cause the postponement of business investment spending—or may cause it to be speeded up.

This plainly means that at any time the total amount of spending in our whole economy may suddenly fall off, because the net result of all the decisions of our tens of thousands of businessmen has been to invest less money in plants, equipment, and improvements than they had been investing previously.

What does this mean to the rest of us? The number of new plants going up is cut off sharply. All across the country bricklayers, carpenters, electricians, and other construction workers are thrown out of’ their jobs. The lumber mills feel it, too. Output and employment and payrolls in this industry begin to go down.

But that is not the end of the story. If no new plants are going up, there is no need to purchase equipment for them. As a result, blast furnaces in Pittsburgh go out, machinery and machine-tool factories in New England close down. So, too, in the iron mines of Minnesota and Alabama and the coal mines of Pennsylvania and West Virginia, operations go on short shifts. Many workers are told they are no longer needed.

But there is still more damage to come. The men who have been laid off in all these industries, and in hundreds of lesser ones, are forced to tighten their belts and reduce their own spending. When there is a slimmer pay envelope—or none at all—on Saturday, that means less meat on the table and less milk for the youngsters. So the corner grocer finds food stocks backing up on his shelves for lack of buyers. He cuts his prices to his customers in order to hold up his volume of sales, but for that very reason he cannot afford to pay as much to the wholesaler, who in turn bids down the price to the farmer, which means less income and less consumer spending all along the line.

In past depressions, before 1933, state, municipal, and Federal governments usually added to our troubles by cutting their own expenditures as tax returns declined. Teachers’ salaries were cut, government employment was reduced, public building slowed down or halted. The result was further to reduce the money available for spending in the stores, and hence further to reduce production and employment.

In a modern industrial country like ours this cycle of steadily decreasing income for all of us, which begins with a decision on the part of businessmen in general to reduce their building of new factories and the buying of new production equipment and machinery, rapidly fans out through the whole economy until everywhere we find shrinking demand of goods in the stores, falling prices, decreasing production, and rising unemployment. All of us are hurt, and most of us are badly hurt.

Unless something is done to prevent it, this process continues until the spending of all of us as consumers has been brought down to bedrock levels. As we have seen, our daily spending for essential goods and services cannot wholly disappear, as business spending for new factories and equipment can and sometimes does. Even in the worst depressions, most people have some income (some even have a great deal) and others are able to draw on their savings to feed and clothe their families. This provides a bedrock level of spending that will finally bring any depression to a halt. Then it is a question of how soon business spending on plants, equipment, and repairs will revive and set the swing on its way upward once more, to result in high income and high production for a brief period before the seemingly inevitable downswing again gets under way.

This is the way our modern industrial economy has always worked in the past. This is the way it always will work in the future unless we get together and plan it otherwise.

The Story Behind Our Worst Collapse

We emerged from the First World War the leading industrial nation of the world. As our experience for the past century had demonstrated, we had long been subjected to the ups and downs of the business cycle. As our statute books demonstrated, we had tried to do something about it. The Federal Reserve System, in fact, had been acclaimed as though it alone could mean the end of depressions.

As the world’s leading industrial nation, we affected other nations far more by our economic policies than they affected us by theirs. Everybody recognizes that this is true today. Although it was true only in lesser degree after the First World War, it was then but little understood. If at that time we had recognized the fact of our new industrial world leadership, we might have adopted other policies than those we followed in the twenties.

Be that as it may, in turning to an examination of our experience in the period following the First World War, I shall disregard for the moment factors arising outside our own country. I do so, not because these foreign developments were not important, not because they did not have any effect upon us, but because the essential story of that period can be told in terms of what happened to our own people.

The center of gravity of the world economy had shifted to the United States and what happened there largely determined the course of economic events in other lands.

Inside the United States, important developments had taken place. By the twenties three significant changes had occurred which make it necessary for us to distinguish this period from that which preceded it.

First, there was a fundamental change in the manner of our growth. For generations, we Americans had made our plans with the great open West a very real and tangible part of our economic environment. Although America was growing in all its sections, the West was the ever-present symbol of the growth yet to come, as well as a practical escape valve for Easterners who wanted to improve their lot or to make a new start.

With a flood of new citizens joining us each year from overseas, and with a high birth rate, the bedrock demand for additional food, clothing, and shelter necessary to meet our minimum living requirements had grown at a rapid pace.

Shortly before the First World War, we reached the end of our physical frontiers. Our last continental territories, Alaska alone excepted, had been admitted to the Union as states. As we faced our new postwar world, we were all conscious that the old geographical elbow room was gone.

Actually, of course, there was then, as there still is today, ample room in all parts of the country for pioneers of a new type. But that wasn’t the way most of us felt. We had begun to feel cramped. The new laws restricting immigration were an indication of our attitude. In that atmosphere, business necessarily lost some of the old boldness, which had been based on the knowledge that a business expansion might be a couple of years too early but couldn’t be wholly wrong in a country growing like the U. S. A.

Second, the sorts of things that we consumers spent our money on had changed significantly. In the nineties, our purchases had been limited almost exclusively to articles of food and clothing and a roof over our heads. It took only a minor fraction of a family’s income to buy the stove, the washing tub, and the old-fashioned icebox that constituted the so-called “consumers’ durable goods” of that day.

How different the situation in the twenties! The automobile, the radio, the electric refrigerator, the washing machine, the vacuum cleaner, the toaster, and all the host of appliances that today millions of us take for granted had appeared for the first time as a part of many family budgets. An increasing fraction of the family’s income came to be spent upon these items.

What is significant about this change is that the need for these new items, unlike the need for food and clothing, was postponable. A man must eat every day, but he can postpone buying an automobile or an electric clock. A major part of the spending of all of us as consumers was becoming more and more like the spending of our businessmen for new factories and new equipment. More and more the total amount which each of us spent each year was beginning to depend on our prospects for the future—our job, the likelihood of advancement, the prices which we received for our crops.

When men lost their jobs or saw others losing theirs and feared for their own, that was quickly reflected in a reduction of their family spending for the new refrigerators, automobiles, home furnishings, and vacation trips—spending readily adapted to such postponement. At the same time, therefore, that business investment spending turned down, and for much the same reason, the total of all our consumer spending also turned down with greatly increased abruptness.

We went on buying essential food and clothing— although in reduced amounts. But millions of us stopped buying completely the new appliances and home equipment which had begun to make life easier. And this new development meant not only a sharper drop in the total amount of goods and services which we produced and hence in our total national income and employment. It meant, too, that depressions were bound to go much further and become much deeper before the bedrock of absolutely essential, non-postponable purchases was finally reached and the decline in production in income was brought to a halt.

Third, there was the greatly increased ability of our workers to turn out more goods for each hour of effort. This factor had always been present, as machines became more widely used and constantly improved from year to year. After World War I, however, it became very much more important than in earlier years.

Now, one might think that a rise in the factory output of each individual worker for each hour of effort, resulting from improved machinery, better management, and increased skills, would mean more goods and more income for everybody and a steadily rising standard of living for us all. Of course, that’s exactly what it should do. But unfortunately, as we shall see, it hasn’t always worked out that way in the past. In the twenties, for instance, people came increasingly to talk about “technological unemployment.”

This could mean only one thing. The increase in our ability to produce was not being reflected in a corresponding increase in our weekly pay checks. In many industries the total factory output, instead of moving upward, stayed the same while the number of jobs in the industry was reduced because of the more efficient machines. If wages for those remaining at work had increased rapidly enough, the total of all wages paid out in such industries might have been at least held steady. But the increases, when they came, were usually small, and as a result the total purchasing power generated by these industries was reduced.

The significance of all these developments lies in the fact that each tended to make our economy more likely to experience a sudden loss of purchasing power and more likely to remain depressed when the slump really came. With the loss of our old reliance on rapid national expansion to float a firm or an industry out of a questionable investment in new factories or equipment, with our consumer spending in the stores taking on some of the ups and downs of business spending, and with the total income of all of us as consumers increasing far more slowly than our ability to turn out the goods, we could expect future depressions to be even worse than those we had known.

The real proof of the growing dangers, however, was postponed for several years. Our next depression, although costly and wholly unnecessary, stemmed from somewhat different causes. Blithely assuming that the end of the war in 1918 meant the end of inflationary dangers as well, we pulled off the few wartime controls that had been imposed and let rents and prices go free. After three months of hesitation they started up through the roof. In the year and a half following the armistice we came close to doubling the amount of price inflation that had occurred during the four years of war. In 1920 and 1921 we paid the penalty, suffering one of our sharpest and hardest depressions.

In that collapse, factory wage-earner employment alone was slashed 3 million—31 per cent. Factory payrolls were cut 44 per cent. Business failures jumped to more than 20,000 a year. Corporation profits turned to losses, with 11 billion dollars lost on inventories alone. Farmers’ prices dropped 52 per cent, and nearly half a million farmers lost their farms during the next five years through foreclosures.

Sharp as was the collapse, the recovery, thanks to a huge backlog of demand for all kinds of goods which had developed during the war, was almost as rapid. Beginning in 1923, indeed, we entered a period of prosperity almost without precedent in our history. This was the period which at the time was characterized by many enthusiasts as the “New Era.”

Prosperity of the Twenties in the Making

What accounted for the prosperity of the middle and late twenties? On this, most economists and students of the period are agreed. There were four major factors.

First, there was a tremendous upswing in the construction of new homes. During that war, just as during this one, housing construction had been curtailed in order to free men and materials to meet the demands of our war machine. The growth of population and the increase in the number of families during the war, coupled with the wearing out of existing dwellings, left the country at the end of the war with a crying need for more housing.

It was this backlog that supported the housing boom which at its peak in 1925 and 1926 saw the building of nearly a million dwelling units a year, and the employment of nearly 3 millions of workers in actual construction and 1.5 millions more in the manufacture of construction materials and house furnishings.

Second, there was the gigantic expansion of the automobile industry. Before the First World War the motorcar was a plaything of the rich. In the twenties it became a family necessity. In 1914 only one half million cars were produced. In 1929 production had grown to 4.5 million.

This great development had an effect not only on every aspect of our daily living, but on our entire economy as well. To build the plants and supply the materials necessary to produce these cars and to operate them, a dozen new industries had to be born and hundreds of established industries had to double and triple their output. There is hardly a county in the land whose prosperity was not increased by the rise of this great mass-production industry.

Today we take the petroleum industry, the rubber industry, the production of sheet metal and plate glass so much for granted that we don’t realize how powerfully the automobile contributed to making them what they are today. Service stations, roadside stands, and playgrounds far from urban centers—all these, too, we take for granted, but all came to life with the development of automobiles priced within reach of our millions.

Third was the need for highway construction. During the twenties, surfaced highways in the United States increased from 300,000 miles to 660,000 miles. The highway construction of this period matched the railway construction of the seventies. Farmers were “got out of the mud,” villages were linked with cities, our urban centers were joined closely together. The whole country, from East to West and North to South, was provided with a network of modern highways over which, as the automobile hit its stride, there rolled an increasing proportion of our transportation.

These roads were in large part made necessary by the development of the automobile industry. It is equally true to say, however, that they made possible the mass production of automobiles. This again underscores the interdependence of all the parts of the economy. The roads were built by government. The automobile industry was built by private business. Each was necessary to the other. It would have been a sad day if we had depended on government to develop the automobile. It would have been just as sad a day if we had waited for individuals or corporations to develop roads for private profit. But with industry and government each doing the job it was cut out to do, the combination was irresistible.

Fourth, the utility industries, electrical utilities in particular, embarked on a program of expansion that called for a huge amount of job-producing investment. Central plants were built and provided with the most modern equipment. Giant towers were built to carry thousands upon thousands of miles of transmission lines which spiderwebbed out to all parts of the country. Transformer stations dotted the landscape.

During these years our electric-power capacity was increased from 15 million kilowatts to 32 million kilowatts. Annual output of electric energy climbed from 40 billion kilowatt hours to 60 billion kilowatt hours.

Electricity carried more and more of the burden not only of industrial toil but of household drudgery. While the quantity and size of installed industrial electrical machinery expanded year after year, American homes acquired a host of electrical appliances, large and small. Like the automobile industry, the electrical utilities carried other industries with them in this broad expansion.

These four factors, it seems to be generally agreed, were the basic reasons for the high level of prosperity and employment which we shared in greater or lesser degree in the middle and late twenties. Each created the need for more and more workers, thus tending to cover up the steady drop in employment in those industries where the increasing efficiency of the machines outstripped the ability of us consumers to buy an increased amount of the product. Each helped to maintain our total national purchasing power, which otherwise would have steadily diminished.

There were many other factors of lesser importance, and so closely are the various parts of our economy intertwined that it is not always easy to say where one factor of expansion ends and another begins. But the important thing is that the total amount of investment in new housing, new industries, new factories, and new equipment was high and sustained year after year. For the late twenties as a whole the volume of business investment spending—spending which provided jobs and purchasing power—ran to nearly 18 per cent of our total production.

It was this sustained high level of business investment spending, and the employment and payrolls that it provided, which kept the dollars flowing through all the channels of trade and production and consumption, across the counter of the corner grocer, into the cash register of the filling station, the treasury of the cereal manufacturer, the pockets of the farmer and his hired help, into the wallets and the bank accounts of all who furnished goods or services of any and all description.

Throughout these years we had high employment and briefly we even touched full employment. And it was wonderful! So comparatively healthful did conditions seem, so general and high the prosperity created by this flood of investment spending, that people talked confidently of an era in which depressions would forever be unknown.

Yet suddenly, with warnings that only very few people were able to read at the time, that golden age came to an end. On Tuesday, October 29, 1929, the bottom dropped out of the market and the crash echoed in every headline.

The panic which began in the stock market that day spread rapidly throughout the length and breadth of the land. Everywhere orders were canceled, everywhere men were thrown out of work as plants closed down and new construction came to a halt. The economy did not rally from that crushing blow. Nineteen thirty—1931-1932. For over three years economic activity steadily dwindled and unemployment grew and grew to frightening proportions.

This was nothing temporary, nothing minor. Month after month and even year after year, the purchasing power of our people steadily declined and the economic outlook for all of us grew more and more bleak. We were engulfed in the greatest depression of history—a depression that created tens of thousands of bankruptcies and foreclosures, that left 15 million workers walking the streets in search of nonexistent jobs, that reduced farm income by 70 per cent.

Why did it happen? What caused this sudden plunge from the golden heights of the “new era” to the abyss of bankruptcy, unemployment, hunger, and despair?

Our Poorly Divided Economic Pie

The Hoover Administration at Washington, newly elected in 1928 to continue established policies, was as well disposed toward business as were its predecessors during the previous eight years, as well disposed as any administration ever has been. Business could not have asked for a more favorable political climate.

Nor can high taxes be blamed for the catastrophe. Taxes were not only low; they had been steadily lowered throughout the period and no increase had even been proposed.

The budget was balanced. Indeed, the national debt was being rapidly reduced.

There was no harsh “regimentation” or onerous government control. There was no bureaucratic “snooping” into the finances of corporations which might make them hesitate to expand their facilities. Clearly the cause of the crash and of the continuing depression must be sought elsewhere. Beneath the surface prosperity which most of us enjoyed in the twenties, behind the surging investment in new plants and facilities, and behind the booming stock market, the forces of depression had been gathering year by year. These were not visible to men of that day, but they seem clear as crystal now as we look back upon that period.

I touched upon these developments some pages ago. Let us now look into them more carefully. Throughout the twenties the output of each factory worker per hour of effort rose steadily. Between 1923 and 1929 output per man-hour in the manufacturing industries increased by approximately one quarter— 24 per cent, to be exact.

On the other hand, the average hourly earnings of our millions of workers—the wages being paid out by industry—increased at no such rate. Over the same six-year period the increase in the average hourly earnings was only 3% per cent! And what was true in manufacturing was equally true in related industries. In mining, the increase in output per man-hour was 27 per cent, while average hourly earnings actually decreased 10 per cent. In the new electric light and power industry output per man-hour went up 39 per cent, while average hourly earnings rose only 6 per cent.

All across the nation the purchasing power being distributed to our wage earners, who with their families constitute the great majority of the nation, was falling further and further behind the incomes that were necessary to buy the steadily increasing amount of goods we were capable of producing. Nor was the gap between the rapidly growing output of our average worker and his lagging wages made up by a decrease in the average prices which he was asked to pay in the stores. The cost of living over those years remained roughly the same.

Very little of the fruits of our increased productivity of those years went to our millions of wage earners. Where, then, did they go? The record on profits makes the answer clear. Between 1923 and 1929, while industrial production increased 25 per cent, corporation profits before taxes in our manufacturing industries increased by 57 per cent. For the railroads, and for the utilities, the increase in profits was even greater, coming to 59 and 156 per cent, respectively.

This high level of profits largely explains the surface prosperity of the twenties. It explains the lush spending at resorts and night clubs, the booming stock market. It explains, too, why that prosperity could not last and why the crash finally came.

If our wage earners had received a higher share of the growing national income to spend for additional goods and services, and if our stockholders had received a lesser share, everyone, including our stockholders, would have been vastly better off.

In the light of our previous discussion, you might well ask how our economy could possibly have kept going so long at a relatively high level of prosperity. With our ability to buy an increasing amount of consumer goods held back by the failure of our individual incomes to keep pace with our rising ability to produce, how could our businessmen find any reason year after year for the building of more and more facilities with which to produce more and more of such goods? The answer is largely to be found, I think, in the stock market and in the broad illusion of growth and prosperity which speculation built upon it.

With profits increasing so rapidly, it was not long before the prices of corporation securities began to move up. This increase in stock-market prices soon generated a momentum of its own, as more and more people were drawn into the stock market in hopes of getting rich quickly. Everyone remembers the developments of that day. Everyone remembers the dopester sheets, the hot tips that were passed along by cab drivers to their passengers, by secretaries of bigwigs to their boy friends.

As I say, the rapid rise in the stock market stemmed initially from the rapid increase of profits. On the other hand, the rise in the stock market itself pushed the level of profits still higher. Most of those who had money were making more money, lots of money, on any security and every security they might choose to buy. There was the illusion that everything they touched would turn to gold.

Money made on the stock market was used to finance the construction of hotels, of office buildings, and even of factories. On the other hand, the money being made by the owners of the hotels and of the office buildings and of the factories was being poured back into the stock market, pushing the prices of stocks higher still. The boom fed upon itself.

The important thing to remember is that much of the investment of those years in new factories and equipment was not made with a rational eye on the long-range profitable market for the product which the new factory was to produce. Many businessmen had long since quit asking questions of this sort. Almost any project, no matter how far-fetched, no matter how impractical, found a backer. In fact, it often found ten backers where one was sufficient.

Let there be a rumor that a real-estate boom was in the making, as in Florida, and thousands of speculators with hundreds of millions of dollars were on their way to Florida to get in on a good thing. Let there be a rumor of a corporate merger, and stocks skyrocketed on the assumption that this was simply the first move toward bigger and better profits.

Few were concerned that most of these mergers were simply reshufflings of existing properties whose earning capacity had already been vastly overvalued. Few bothered to unravel the complicated structure of holding companies and subsidiaries, to see what was going on. It was enough that everything was going up.

When we look back on that period in the light of what we now know about the fatal lack of sufficient purchasing power in the hands of our millions of everyday citizens, the thing that is surprising is not that the “New Era” came to an end, but that it lasted as long as it did.

As long as the profits were actually flowing into new construction, and into loans to pay for goods shipped overseas, high employment was maintained. But because of the low purchasing power of our workers and the high prices resulting from antiquated building methods, the market for new homes began to dry up as early as 1926. By 1928 new factory construction had clearly run ahead of our ability to buy the increased supply of goods which the new factories produced. Starting in 1928 the buying in American markets, financed by our own loans to nations overseas, diminished as our bankers became fearful of European instability.

It was these slowly accumulating forces in the investment markets which finally tipped the scales toward depression. But it was lack of sufficient money in the pockets of Mr. and Mrs. Average Citizen which underlay our whole basic problem.

If ever it has been demonstrated that prosperity cannot continue unless enough income is being distributed to all of us—farmers and workers as well as businessmen—to buy the increasing products of our increasingly efficient system, it was demonstrated in the twenties. If we need any demonstration of the fact that our economy can choke itself to death on too many profits, the twenties provide that demonstration.

Even with the most business-minded administration in our history, even with falling taxes and a government surplus, even with everything that businessmen thought they needed to insure continued prosperity, we could not duck that basic issue for more than a few short tinsel-decorated years.