The cause of the Great Depression of the 1930s was a massive deflation of the money supply (after a decade-long period of inflation by the Federal Reserve) and an unwillingness by unions (which had become very influential by then) to allow nominal wages to fall to a level at which people could remain employed on the available volume of payrolls with the available quantity of money. The upshot was mass unemployment. With 25% of the workforce unemployable (because they were legally disallowed from competing for jobs by offering their labor for wages that were considered “too low”), the government simply put them on the dole: make-work jobs like WPA, CCC, etc., that produced no benefit to the economy as a whole, and which, in fact, were a net loss, since the remaining 75% that were employed now had some of their productivity siphoned off to support the other 25%.
Interestingly, a depression had occurred earlier, around 1920, and which ended a very short time later, precisely because wages were allowed to fall to the point where they could be absorbed by the volume of payrolls with the available quantity of money. Since there was no mass unemployment, and since workers were not on the dole but were actually producing things at real jobs, the supply of goods was increased (which led to further falling prices for goods), so “real wages” - what workers could actually purchase by means of their money wages (or “nominal wages”) - did not decline.
Although the Federal Reserve began to reinflate the money supply in the 1930s (so that the volume of payrolls would be large enough to absorb those who had been unemployed), unions had expanded enough by then to keep wages ahead of inflation, thus creating a permanent class of unemployed.
What really ended mass unemployment was not WWII. What ended it was the institution of wage and price controls, which forced wages low enough to allow workers to be re-hired with the available quantity of money. This was not a time of prosperity, however. That didn’t occur until after WWII, when we had more inflation from the Federal Reserve, less union influence on nominal wage levels, and an expanded workforce from returning GIs. It was the expanded workforce and the flexibility in nominal wages that led to a great increase in real wages - what a worker can actually buy with a money wage - and hence, that led to post-war prosperity.
See “America’s Great Depression” by Murray Rothbard.
I’m glad somebody finally took the time to post this. Interest rate manipulation by the fed also plays a role.
I wish more people would see the harm in price controls and minimum wage requirements. I wish they would teach us more about economics than supply and demand in school. Everyone is so ignorant about the economy. Most people I know think that the economy means how much money people are making and that’s it. That’s how they measure the economy.