John Maynard Keynes observed a world sick with widespread depression which almost ruined trade and brought nations to the brink of bankruptcy. Exports fell, national banks failed, leading countries abandoned the gold standard, foreign debts went unpaid, and workers suffered mass unemployment. The result in Europe was a definite tendency toward dictatorial forms of government, as in Germany, Italy, Austria, and Rumania. The less favored nations, notably Germany, Italy, and Japan, embarked on territorial expansion.
In the United States, against the background of the Roaring Twenties and the legacy of Coolidge prosperity, the air was filled with optimism. Herbert Hoover, president from 1929-33, promised "two chickens in every pot and two cars in every garage." Suddenly, the doomsday of Wall Street prosperity arrived without warning on October 24, 1929. By October 29, 16 million shares had been sold at staggering losses; by November 13th, $30 billion in capital values vanished. By the end of two months, the figure had increased to $40 billion. Just prior to the crash, the total value of stocks had been $87 billion. By March of 1933, it dropped to only $19 billion. This crash triggered the Great Depression for these reasons:
1. Agricultural overexpansion resulted in surpluses.
2. Industry overexpanded with too many factories and machines to meet demand for goods.
3. Labor-saving machines replaced workers and produced more goods.
4. Capital surpluses were created, producing an inequality in income distribution.
5. Overexpansion of credit led to stock market speculation and installment buying.
6. High tariff policies produced a decline in international trade.
7. Political unrest contributed to defaults on foreign debts.
By 1930, in a typical U.S. industrial city, one out of four workers had lost their jobs. In major cities, many workers slept in public parks because they could not afford housing. Residential construction fell off by 95 percent. 1933 saw the turning point, with over 16 million workers unemployed out of a total population of better than 120 million. Stunned like the rest of America, congressional leaders stood helpless, waiting for the new president to take action.
This was the situation when Franklin D. Roosevelt was inaugurated in March 1933. He immediately called a special session, which began emergency legislation under the slogan of "Relief, Recovery, and Reform." Under Roosevelt's leadership the following acts became law: the Emergency Banking Act; Federal Emergency Relief Administration; Civilian Conservation Corps (CCC); National Recovery Administration (NRA); Agricultural Adjustment Act (AAA); Federal Deposit Insurance Corporation (FDIC)—which guaranteed savings deposits in banks; Federal Securities Act, which led to the SEC (Securities and Exchange Commission) to regulate the stock market; Home Owner's Loan Corporation (HOLC); and the Tennessee Valley Authority (TVA), plus a host of other New Deal measures.
Basic to the New Deal philosophy was the concept of "priming the pump" through federal action, which Keynes so ably defended in his major work, The General Theory of Employment, Interest, and Money. The result of the New Deal was that while the measures failed to end the Great Depression, the downward trend of the economy was halted and national confidence bounced back. In a world beset by communism and fascism, FDR saved American capitalism by using the goals and objectives of John Maynard Keynes.
