In the early 20th century (around 1900), the economy shifted to what historians call a “consumer” economy. The engine of growth came from making goods purchased directly by consumers: New technologies like refrigerators and radios, as well as makeup, perfume, soap, cars, movies, curtains, and plumbing fixtures.
But in the mid-1920s, an economic meltdown began in western Europe in the mid-1920s, and soon spread to every part of the globe. The event we now call the Great Depression landed in the U.S. c. 1930 in the form of massive numbers of home and farm foreclosures, bank failures, and bankruptcies. In 1932, Americans elected Franklin Roosevelt as president, hoping he would fulfill his promise of a “New Deal” to repair and rebuild the economy.
The New Deal was designed to “prime the pump”; to put money back into people’s pockets so they could get back to buying shoes, furniture, and clothes. Its programs can be divided into two main groups (this is a rough generalization). One set of programs rebuilt and strengthened the structural underpinnings of the economy.
Examples include Social Security and the Federal Deposit Insurance Corporation (FDIC), both of which are still with us. The FDIC, for example, protects money people have in bank savings accounts. If the bank fails, you still have your money, and you can participate in the consumption that keeps the economy going. Social Security was originally designed to provide a way for older Americans to retire with an income, so that even after they stopped working, they would spend money and contribute to the consumer economy.
The second set of programs were aimed at the nation’s immediate crisis: Unemployment. The logic was simple. When businesses fail, they lay off workers; those workers can no longer spend money on things like shoes and furniture.
So the federal government began using tax revenues to create jobs.(*1) The jobs were offered and created by New Deal agencies such as the Public Works Administration, the Works Progress Administration, and the Civilian Conservation Corps. These agencies hired Americans to build dams, repair bridges, paint murals, landscape public parks. People went to work every day, earned a paycheck, and thus were able to buy food and other goods.
And the projects produced tangible results: new roads, new dams, and so forth. The Tennessee Valley Authority, for example, generated thousands of jobs for workers who built a massive hydroelectric system that brought electricity to millions of rural Americans who didn’t have it.
Next up: the American economy after the Great Depression.
*1: That, by the way, is why the president and Congress moved so quickly to legalize beer even while Prohibition was still in effect: brewers would contribute huge amounts of badly needed tax dollars.