Economic Review Supplement 16 (1926): 17–53, and Alvin H. Hansen, “Factors Affecting the Trend in Real Wages,” American Economic Review 15 (1925): 27–42.
23. Alvin H. Hansen, “The Outlook for Wages and Employment,” American Economic Review Supplement 13 (1923): 37. Hansen’s views on the wage-unemployment relationship changed dramatically in the late 1930s. For an excellent analysis of economic thought during this period, see William J. Barber, From New Era to New Deal (Cambridge: Cambridge University Press, 1985), especially the first two chapters.
24. New York Times, February 2, 1919, section 3, p. 1.
25. On this point, see Joseph Dorfman, The Economic Mind in American Civilization, 5 vols. (New York: The Viking Press, 1946–59), vol. 4, chap. 2.
26. Ibid., pp. 33-34.
27. The anti-interventionist nature of the Unemployment Conference and Hoover’s dominant role in its creation and operation have been extensively documented. See, for example, Barber, From New Era to New Deal, pp. 27-28.
28. New York Times, July 29, 1921, p. 2.
29. Ibid., April 25, 1919, p. 24; May 14, 1919, p. 12.
30. The Federal Council of the Churches of Christ 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
