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David Kyvig
David Kyvig

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News Release

Contact: Tom Parisi, NIU Office of Public Affairs
(815) 753-3635

January 7, 2009

NIU historian: Lessons from Great Depression
can help spur economic recovery

DeKalb, Ill. — Here’s a lesson from the Great Depression: Don’t psyche yourself out.

Market psychology and consumer confidence were among the most critical factors that sent a sagging American economy spiraling into the depths of the Great Depression, says David Kyvig, a Distinguished Research Professor at Northern Illinois University.

Kyvig is an award-winning historian and author of “Daily Life in the United States, 1920-1940.” He says lessons from the past provide a roadmap for the future and are already helping the country deal with its current economic crisis.

“We've learned a lot from the Great Depression, including lessons about the value of government regulation in building confidence in the economy,” Kyvig says. “That was one of the great contributions of the New Deal. As soon as government imposed oversight on banking and stock exchanges, confidence in those institutions began to grow immediately.

“In recent years, we had lost sight of the fact that government supervision is necessary for a healthy economy,” he adds.

Crashing confidence

In the 1920s, as in the years preceding the current economic recession, Americans had come to rely on consumer credit. Only a small percentage of people held stock, but with the advent of radio, Americans paid close attention to the ups and downs of the market. They knew fortunes were being made.

They also were well aware when it all came crashing down on Oct. 29, 1929.

“As long as people were confident the economy would grow, they didn't mind having consumer debt. But when they thought bad times were ahead, they retreated,” Kyvig says.

The transition from a time of prosperity to an era of paucity didn’t happen overnight. Like tumbling dominoes, however, the 1929 market crash triggered a series of economic collapses that occurred over months and even years, according to Kyvig.

Fearful consumers stopped consuming. In turn, manufacturers cut production and laid off workers. Meanwhile, as many as a half million highly leveraged market investors were unable to repay bank loans. First, small banks collapsed, then larger ones. These events only fed public anxiety.

A profound quote

Kyvig says Americans finally received a glimmer of hope in March of 1933. That’s when Franklin D. Roosevelt delivered his inaugural address and one of the most recognizable quotes of the 20th century.

“When Roosevelt comes in and says, ‘The only thing we have to fear is fear itself,’ that has a profound impact,” Kyvig says. “But it doesn’t immediately kick start the economy.

“The psychology starts to improve, but it takes a lot of government regulation and spending to get the private economy moving again, and it won’t be until the beginning of war spending (in 1940) that we get up to the level of production that produces a full-employment economy.

“We’ve learned from the past,” he adds. “I think that’s why there’s such concern currently to turn around the psychology by demonstrating strong government support for economic recovery. We didn’t see that sort of response from (President) Hoover. His administration did a number of things, but it was cautious about committing the sort of resources that would make a difference. They counted very heavily on private efforts.”

The Great Depression didn't mean hard times for everyone. At least half of Americans held on to their jobs. And some businesses actually thrived, including the tobacco, oil and Hollywood film industries.

Depths of despair

But the Depression’s ugly side was unprecedented. It reached its depths during the winter of 1932-33. Unemployment rates soared to at least 25 percent, and may actually have been as high as 30 percent. Everyone knew someone who was out of work. Those who had jobs often found their hours curtailed. Employees in a few steel plants, for example, worked as little one day a week.

Unable to pay their rent or meet mortgage payments, many Americans moved in with relatives. A large number of people had no place to go. Shantytowns, sardonically known as Hoovervilles, sprung up and were highly visible near major cities. Young unemployed men took to hopping freight trains, traveling in search of work. Kyvig says a zoo in Toledo actually slaughtered its animals to provide food for the needy.

During the 1920s, government had reduced its size. Kyvig says that also had an adverse effect when hard times hit.

“Government, particularly at the local level, can be an important stabilizer in the economy just by being a substantial employer,” he says. “By the end of the 1920s, government was at a low point in terms of its size and impact on the economy. I think that is a parallel to today, in some respects. We’ve heard so much since the dawn of the Reagan age about how less government and lower taxes are better. We’ve lost sight of having that stabilizer in the American economy.”

New Deal legacy

Not all New Deal programs were successful, according to the NIU historian. But most did work to jumpstart the economy and calm public fears. The creation of the Federal Deposit Insurance Corporation reassured people about the security of their bank accounts, and the Securities and Exchange Commission provided needed regulation to the stock market.

The Social Security system was established in 1935. And a number of public works programs were launched, the biggest of which was the Works Progress Administration, which put people to work on public infrastructure projects. The National Youth Administration provided part-time work for high school and college students, helping to keep them in school and keeping them from competing for jobs in the full-time workforce. In the long run, it led to a better educated populace.

“Indeed, some of the mechanisms created by FDR are still in place and have even helped to rein in the current economic downturn,” Kyvig says.

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