The Surprising Benefits of the Great Depression
There’s no debate that the Great Depression in the U.S. was in important respects an economic disaster. Bank failures and a broader financial crisis coincided with an 87 percent decline in real gross private domestic investment from 1929 to 1932. Double-digit unemployment for more than a decade represented a terrible waste of human and other resources, and untold hardship for millions of people.
And yet the Depression years were also a triumph of American ingenuity and hard work. Scientific and organizational advances expanded the capabilities -- the potential output -- of the economy. They helped the U.S. win World War II and set the stage for a quarter century of postwar prosperity.
This expansion in potential -- and, when demand conditions permitted, actual output -- resulted from three developments.
The first was the maturing of a privately funded research-and-development system that had begun with Thomas Edison in Menlo Park, New Jersey. Then, as now, most private-sector R&D was carried out in manufacturing. Surveys conducted by the National Research Council show R&D employment increasing to 10,918 workers in 1933, from 6,274 in 1927 -- despite four of the worst years of the Depression. In 1940, after seven years of double-digit unemployment, that number stood at 27,777. Data on spending and on the number of labs established paint a similar picture, indicative of the wide range of technological opportunities ripe for exploitation at the time.
The second development was the government-funded construction of the surface road network. The U.S. produced more than 4 million passenger vehicles in 1929, a level of production not reached again for 20 years. The growth of vehicle registrations outran the capabilities of the infrastructure.
A strong political coalition pressed for better roads. Farmers wanted them, complaining that their French counterparts moved grain at half the cost. Bicyclists wanted them. The auto industry and its suppliers (plate- glass makers, tire makers, steel makers) wanted them, as did the petroleum, asphalt and motel industries. Truckers wanted them. So did, perhaps surprisingly, railroads, which saw themselves as evolving a symbiotic relationship with truckers, in which the railroads would be the senior partners.
But the location of a national road network was a contentious business, because it would mean the making and breaking of many local communities. State highway departments had to agree with each other and the federal authorities over what routes would be national. By November 1926, a treaty had been negotiated, its terms reflected in the publication of a detailed map showing the proposed U.S. route system.
The country then started building or improving streets, highways, bridges and tunnels. Just looking at the data for such expenditures, it’s hard to tell the country had a depression. (There were moderate declines in spending, relative to the late 1920s, in 1933, 1934 and 1935.) By 1941, the U.S. route system was complete, and, because of its growth, productivity in transportation as well as wholesale and retail distribution had risen dramatically.
Finally, some businesses, notably the railroads, underwent significant rationalization and standardization during the Great Depression. True, progress toward unlimited freight interchange had begun with gauge standardization in the 1880s and continued during World War I. But although the U.S. had a national rail network by the late 1920s, it consisted of individual lines owned and operated by private firms.
Developing uniform procedures and tariffs governing interline transactions allowed huge efficiency gains in the 1930s. The number of employees, locomotives, freight cars and passenger cars each dropped by between a quarter and a third from 1929 to 1941. Yet revenue freight ton-miles in 1941 were slightly higher than in 1929, and passenger miles were almost as high. These ratios translated into significant productivity gains.
The effect of these three developments? Real output in 1941 was 33 percent to 40 percent higher than it had been in 1929 (depending on what output measures are used). Yet private-sector labor hours and physical capital inputs had hardly grown. All of the increases in output can be attributed to what we call total productivity growth, a measure of technological and organizational progress in this truly extraordinary period.
(Alexander J. Field is the Michel and Mary Orradre professor of economics at Santa Clara University and the executive director of the Economic History Association. He is the author of “A Great Leap Forward: 1930s Depression and U.S. Economic Growth,” published by Yale University Press in 2011. The opinions expressed are his own.)
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