# **3.1 The Great Depression**

The Great Depression was triggered in the United States by the Wall Street crash in October 1929 and became worldwide. It resulted in a massive loss of income, record unemployment rates and output loss, especially in industrialized nations. In the United States unemployment hit almost 25 percent at the peak of the crisis in 1933.

In the United States during the Great Depression, a large fiscal stimulus package was introduced to increase funds to public works. Noticeably, the Federal Reserve slashed interest rates down to zero in an attempt to manage the negative real effects of the financial crisis. The New Deal used historic spending to fund entirely new categories of forward-looking projects: delivering clean water, electricity, and telephone service to people for the first time; demonstrating mega-project capabilities such as New York City’s Lincoln Tunnel; and reinvigorating the civic commons through projects such as San Antonio’s River Walk and Charleston. Programs such as the Works Progress Administration<sup>5</sup> and the Tennessee Valley Authority were key elements of the government’s economic stimulus. The Works Progress Administration granted state and local government funds to provide work relief and direct relief and to build and maintain infrastructure. The Tennessee Valley Authority provided jobs and electricity to the rural Tennessee River Valley that spans seven states in the South as a part of Depression-era New Deal programs. In addition, Congress passed a series of infrastructure bills to build major bridges, roads, and other improvements such as Hoover Dam in Nevada and the Golden Gate Bridge in California. The bills not only met the needs of modernization but also supplied jobs during the crisis. About 85 percent of the grants were used to hire the unemployed on work relief jobs. These jobs include maintenance activities such as building sidewalks, local roads, schools, and improvements in the local infrastructure (Fishback _et al._ , 2004).

Using data on New Deal Grants to each US county from 1933 to 1939, Fishback _et al._ (2005) estimate how relief and public works spending and payments to farmers through the Agricultural Adjustment Administration influenced retail consumption. They find that an additional dollar of public works and relief spending was associated with 44 cents increase in 1939 retail sales. This implies a weak effect of fiscal policy consistent with results from Romer (1992).

Similarly, Fishback and Kachanovskaya (2011) examine the impact of federal stimulus programs and find that state per capita personal income multiplier with respect to per capita federal grants is around 1.1. In another study, Fishback and Kachanovskaya (2015) estimate that an added dollar of federal spending in the state increased state per capita income by between 40 and 96 cents by using an annual panel data set for the period 1930-1940.

Federal grants had stronger effects on consumption than on personal income, but they had no positive effect on various measures of private employment. The multiplier for wages, salaries, and retail sales is substantially less than one indicating “crowding-out”. The multiplier for farm payments to take land out of production was -0.57 (Fishback and Kachanovskaya, 2011). This implies that the program actually reduced personal income. These results may help to explain why measures of income have recovered more rapidly than measures of employment in the 1930s. Based on these findings, the New Deal spending might have raised the productivity of local producers if it was devoted to building infrastructure that cut transport costs to other areas (Fishback and Kachanovskaya, 2010).

> 5 Renamed as Works Projects Administration in 1939.

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