In economics, a depression is a sustained, long-term downturn in economic
activity in one or more economies. It is a more severe economic downturn than
a recession, which is a slowdown in economic activity over the course of a
normal business cycle.
A depression is an unusual and extreme form of recession. Depressions are
characterized by their length, by abnormally large increases in unemployment,
falls in the availability of credit (often due to some form of banking or
financial crisis), shrinking output as buyers dry up and suppliers cut back on
production and investment, large number of bankruptcies including sovereign debt
defaults, significantly reduced amounts of trade and commerce (especially
international trade), as well as highly volatile relative currency value
fluctuations (often due to currency devaluations). Price deflation, financial
crises and bank failures are also common elements of a depression that do not
normally occur during a recession.
The Great Depression was a severe worldwide economic depression that took place
mostly during the 1930s, beginning in the United States. The timing of the Great
Depression varied across nations; in most countries it started in 1929 and
lasted until the late-1930s. It was the longest, deepest, and most widespread
depression of the 20th century In the 21st century, the Great Depression is
commonly used as an example of how intensely the world's economy can
decline (By Nick Taylor, 2000)
The Great Depression started in the United States
after a major fall in stock prices that began around September 4, 1929, and
became worldwide news with the stock market crash of October 29, 1929 (known
as Black Tuesday). Between 1929 and 1932, worldwide gross domestic product
(GDP) fell by an estimated 15%.
By comparison, worldwide GDP fell by less than
1% from 2008 to 2009 during the Great Recession.[4] Some economies started to
recover by the mid-1930s. However, in many countries the negative effects of the
Great Depression lasted until the beginning of World War II. [1]The Great
Depression had devastating effects in countries both rich and poor. Personal
income, tax revenue, profits and prices dropped, while international trade
plunged by more than 50%. Unemployment in the U.S. rose to 25% and in some
countries rose as high as 33%
Research Methodology
Objectives
- To analyze the causes of The Great Depression on 1929
- To study the effects of The Great Depression on 1929
- To understand the recovery from the recession
Hypothesis
The great depression of 1929 had affected United States of America the most.
Methodology
The method used for research work in the present
project is the doctrinal method of data collection.
Start of the Great Depression
Historians most often attribute the start of the Great Depression to the sudden
and total collapse of US stock market prices on October 29, 1929, known as
Tuesday. However, some dispute this conclusion, and see the stock crash as a
symptom, rather than a cause of the Great Depression. Even after the Wall Street
Crash of 1929, optimism persisted for some time; John D. Rockefeller said that:
These are days when many are discouraged. In the 93 years of my life,
depressions have come and gone. Prosperity has always returned and will again.
The stock market turned upward in early 1930, returning to early 1929 levels by
April, though still almost 30% below the peak of September 1929. Together,
government and business actually spent more in the first half of 1930 than in
the corresponding period of the previous year. But consumers, many of whom had
suffered severe losses in the stock market the previous year, cut back their
expenditures by ten percent, and a severe drought ravaged the agricultural
heartland of the USA beginning in the summer of 1930.[2]
By mid-1930, interest rates had dropped to low levels, but
expected deflation and the reluctance of people to add new debt by borrowing,
meant that consumer spending and investment were depressed. In May 1930,
automobile sales had declined to below the levels of 1928. Prices in general
began to decline, but wages held steady in 1930; but then a deflationary
spiral started in 1931.
Conditions were worse in farming areas, where commodity
prices plunged, and in mining and logging areas, where unemployment was high and
there were few other jobs. The decline in the US economy was the factor that
pulled down most other countries at first, and then internal weaknesses or
strengths in each country made conditions worse or better. Frantic attempts to
shore up the economies of individual nations through protectionist policies,
such as the 1930 U.S. Smoot–Hawley Tariff Act and retaliatory tariffs in other
countries, exacerbated the collapse in global trade. By late in 1930, a steady
decline set in which reached bottom by March 1933.[3]
Causes
There were multiple causes for the first downturn in 1929, including the
structural weaknesses and specific events that turned it into a major depression
and the way in which the downturn spread from country to country. In relation to
the 1929 downturn, historians emphasize structural factors like massive bank
failures and the stock market crash, while economists point to monetary factors
such as actions by the US Federal Reserve that contracted the money supply, and
Britain's decision to return to the Gold Standard at pre-World War I parities
(US$4.86:£1).
Recessions and business cycles are thought to be a normal part of living in a
world of inexact balances between supply and demand. What turns a usually mild
and short recession or "ordinary" business cycle into an actual depression is a
subject of debate and concern. Scholars have not agreed on the exact causes and
their relative importance. The search for causes is closely connected to the
question of how to avoid a future depression, and so the political and policy
viewpoints of scholars are mixed into the analysis of historic events eight
decades ago.
The even larger question is whether it was largely a failure on the
part of free markets or largely a failure on the part of government efforts to
regulate interest rates, curtail widespread bank failures, and control the money
supply. Those who believe in a large role for the state in the economy believe
it was mostly a failure of the free markets and those who believe in free
markets believe it was mostly a failure of government that compounded the
problem.[4]
Current theories may be broadly classified into three main points of view.
First, there are structural theories, most importantly Keynesian economics, but
also including those who point to the breakdown of international trade,
and Institutional economists who point to under consumption and overinvestment
(economic bubble), malfeasance by bankers and industrialists, or incompetence by
government officials. The consensus viewpoint is that there was a large-scale
loss of confidence that led to a sudden reduction in consumption and investment
spending. Once panic and deflation set in, many people believed they could make
more money by keeping clear of the markets as prices dropped lower and a given
amount of money bought ever more goods, exacerbating the drop in demand.
Second, there are the monetarists, who believe that the Great Depression started
as an ordinary recession, but that significant policy mistakes by monetary
authorities (especially the Federal Reserve), caused a shrinking of the money
supply which greatly exacerbated the economic situation, causing a recession to
descend into the Great Depression. Related to this explanation are those who
point to debt deflation causing those who borrow to owe ever more in real terms.
Keynesian British economist John Maynard Keynes argued
in General Theory of Employment Interest and Money that lower aggregate
expenditures in the economy contributed to a massive decline in income and to
employment that was well below the average. In such a situation, the economy
reached equilibrium at low levels of economic activity and high unemployment.
Keynes basic idea was simple: to keep people fully employed, governments have to
run deficits when the economy is slowing, as the private sector would not invest
enough to keep production at the normal level and bring the economy out of
recession. Keynesian economists called on governments during times of economic
crisis to pick up the slack by increasing government spending and/or cutting
taxes.
As the Depression wore on, Roosevelt tried public works, farm subsidies, and
other devices to restart the economy, but never completely gave up trying to
balance the budget. According to the Keynesians, this improved the economy, but
Roosevelt never spent enough to bring the economy out of recession until the
start of World War II.
New classical approach Recent work from a neoclassical perspective
focuses on the decline in productivity that caused the initial decline in output
and a prolonged recovery due to policies that affected the labour market. This
work, collected by Kehoe and Prescott, decomposes the economic decline into a
decline in the labour force, capital stock, and the productivity with which
these inputs are used. This study suggests that theories of the Great Depression
have to explain an initial severe decline but rapid recovery in productivity,
relatively little change in the capital stock, and a prolonged depression in the
labour force.
This analysis rejects theories that focus on the role of savings
and posit a decline in the capital stock.
Inequality of wealth and income Two economists of the 1920s, Waddill
Catchings and William Trufant Foster, popularized a theory that influenced many
policy makers, including Herbert Hoover, Henry A. Wallace, Paul Douglas, and Marriner
Eccles. It held the economy produced more than it consumed, because the
consumers did not have enough income. Thus the unequal distribution of
wealth throughout the 1920s caused the Great Depression. [5]
According to this view, the root cause of the Great Depression was a global
overinvestment in heavy industry capacity compared to wages and earnings from
independent businesses, such as farms. The solution was the government must pump
money into consumers' pockets. That is, it must redistribute purchasing power,
maintain the industrial base, but reinflate prices and wages to force as much of
the inflationary increase in purchasing power into consumer spending. The
economy was overbuilt, and new factories were not needed. Foster and Catchings
recommended federal and state governments start large construction projects, a
program followed by Hoover and Roosevelt.[6]
Turning point and recovery
Various countries around the world started to recover from the Great Depression
at different times. In most countries of the world recovery from the Great
Depression began in 1933. In the United States recovery began in the spring of
1933. However, the U.S. did not return to 1929 GNP for over a decade and still
had an unemployment rate of about 15% in 1940, albeit down from the high of 25%
in 1933.
There is no consensus among economists regarding the motive force for the U.S.
economic expansion that continued through most of the Roosevelt years. According
to Christina Romer, the money supply growth caused by huge international gold
inflows was a crucial source of the recovery of the United States economy, and
that the economy showed little sign of self-correction. The gold inflows were
partly due to devaluation of the U.S. dollar and partly due to deterioration of
the political situation in Europe.
In their book, A Monetary History of the
United States, Milton Friedman and Anna J. Schwartz also attributed the recovery
to monetary factors, and contended that it was much slowed by poor management of
money by the Federal Reserve System. Current Chairman of the Federal Reserve Ben Bernanke agrees that monetary factors played important roles both in the
worldwide economic decline and eventual recovery. Bernanke also sees a strong
role for institutional factors, particularly the rebuilding and restructuring of
the financial system and points out that the Depression needs to be examined in
international perspective.
Economists Harold L. Cole and Lee E. Ohanian, believe
that the economy should have returned to normal after four years of depression
except for continued depressing influences, and point the finger to the lack of
downward flexibility in prices and wages, encouraged by Roosevelt Administration
policies such as the National Industrial Recovery Act. Some economists have
called attention to the expectations of reflation and rising nominal interest
rates that Roosevelt's words and actions portended.
Year
Chart:-I The overall courses of the Depression in the United Stated, as
reflected in per capita GDP shown in the constant year 2000 year dollars, plus
some of the key events of the period.
Gold standard Economic studies have indicated that just as the
downturn was spread worldwide by the rigidities of the Gold Standard, it was
suspending gold convertibility (or devaluing the currency in gold terms) that
did most to make recovery possible. What policies countries followed after
casting off the gold standard, and what results followed varied widely.[7]
Every major currency left the gold standard during the Great
Depression. Great Britain was the first to do so. Facing speculative attacks on
the pound and depleting gold reserves, in September 1931 the Bank of
England ceased exchanging pound notes for gold and the pound was floated on
foreign exchange markets. Great Britain, Japan, and the Scandinavian countries
left the gold standard in 1931. Other countries, such as Italy and the United
States, remained on the gold standard into 1932 or 1933, while a few countries
in the so-called "gold bloc", led by France and including Poland, Belgium and
Switzerland, stayed on the standard until 1935–1936. According to later
analysis, the earliness with which a country left the gold standard reliably
predicted its economic recovery.
For example, Great Britain and Scandinavia,
which left the gold standard in 1931, recovered much earlier than France and
Belgium, which remained on gold much longer. Countries such as China, which had
a silver standard, almost avoided the depression entirely. The connection
between leaving the gold standard as a strong predictor of that country's
severity of its depression and the length of time of its recovery has been shown
to be consistent for dozens of countries, including developing countries. This
partly explains why the experience and length of the depression differed between
national economies[8]
World War II and recovery The common view among economic historians
is that the Great Depression ended with the advent of World War II. Many
economists believe that government spending on the war caused or at least
accelerated recovery from the Great Depression. However, some consider that it
did not play a great role in the recovery, although it did help in reducing
unemployment.
The massive rearmament policies leading up to World War II helped
stimulate the economies of Europe in 1937–39. By 1937, unemployment in Britain
had fallen to 1.5 million. The mobilization of manpower following the outbreak
of war in 1939 finally ended unemployment. America's late entry into the war in
1941 finally eliminated the last effects from the Great Depression and brought
the unemployment rate down below 10%. In the United States, massive war spending
doubled economic growth rates, either masking the effects of the Depression or
essentially ending the Depression. Businessmen ignored the mounting national
debt and heavy new taxes, redoubling their efforts for greater output to take
advantage of generous government contracts.[9]
Effects of the Great Depression
The Great Depression of 1929 devastated the U.S. economy. Half of all banks
failed. Unemployment rose to 25 percent and homelessness increased. Housing
prices plummeted 30 percent, international trade collapsed by 60 percent,
and prices fell 10 percent per year. It took 25 years for the stock market to
recover.
But there were some beneficial effects. The New Deal programs installed
safeguards to make it less likely that the Depression could happen again.
Economy
The economy shrank 50 percent in the first five years of the depression. In
1929, economic output was $105 billion, as measured by gross domestic
product. That's the equivalent of $1.057 trillion today.
The economy began shrinking in August. By the end of the year, 650 banks had
failed. In 1930, the economy shrank another 8.5 percent, according to the Bureau
of Economic Analysis. GDP fell 6.4 percent in 1931 and 12.9 percent in 1932.
By 1933, the country had suffered at least four years of economic contraction.
It only produced $57 billion, half what it produced in 1929. That was partly
because of deflation. The Consumer Price Index fell 27 percent between November
1929 to March 1933, according to the Bureau of Labor Statistics. Falling prices
sent many firms into bankruptcy. The BLS also reported that the unemployment
rate peaked at 24.9 percent in 1933.
New Deal spending boosted GDP growth by 10.8 percent in 1934. It grew another
8.9 percent in 1935, a whopping 12.9 percent in 1936, and 5.1 percent in 1937.
Unfortunately, the government cut back on New Deal spending in 1938, and the
depression returned. The economy shrank 3.3 percent. But preparations for World
War II sent growth up 8 percent in 1939 and 8.8 percent in 1940. The next year,
Japan bombed Pearl Harbor, and the United States entered World War II.
The New Deal and spending for World War II shifted the economy from a pure free
market to a mixed economy. It depended much more on government spending for its
success. The timeline of the Great Depression shows this was a gradual, though
necessary, process.[10]
Political
The Depression affected politics by badly shaking confidence in
unfettered capitalism. That type of laissez-faire economics is what Herbert
Hoover advocated, and it failed badly.
As a result, people voted for Franklin Roosevelt. His Keynesian
economicspromised that government spending would end the Depression. The New
Deal worked. In 1934, the economy grew 10.8 percent in 1934 and unemployment
declined.
But FDR became concerned about adding to the $5 trillion U.S. debt. He cut back
government spending in 1938, and the Depression resumed. No one wants to make
that mistake again. Politicians rely instead on deficit spending, tax cuts and
other forms of expansionary fiscal policy. That's created a dangerously high
U.S. debt.
The Depression ended in 1939 as government spending ramped up for World War II.
That's led to the mistaken belief that military spending is good for the
economy. But it doesn't even rank as one of the four best real-world ways to
create jobs.
Social
The Dust Bowl drought destroyed farming in the Midwest. It lasted 10 years, too
long for most farmers to hold out. To make things worse, prices for agricultural
products dropped to their lowest level since the Civil War. As farmers left in
search of work, they became homeless. Almost 6,000 shanty towns, called
Hoovervilles, sprang up in the 1930s.
Wages for those who still had jobs fell 42 percent. Average family incomes
dropped 40 percent from $2,300 in 1929 to $1,500 in 1933. That's like having
income fall from $32,181 to $20,988 in 2016 dollars. As a result,
the number of children sent to orphanages increased by 50 percent. Roughly
250,000 older children left home to find work.
In 1933, Prohibition was repealed. That allowed the government to collect taxes
on sales of now-legal alcohol. FDR used the money to help pay for the New Deal.
The depression was so severe and lasted so long that many people thought it was
the end of the American Dream. Instead, it changed that dream to include a right
to material benefits. The American Dream as envisioned by the Founding Fathers
guaranteed the right to pursue one's own vision of happiness.
Unemployment
At the beginning of the Great Depression, in the last year of the Roaring
Twenties, unemployment was 3.2 percent. That's less than the natural rate of
unemployment. By 1930, it had more than doubled to 8.7 percent. It skyrocketed
to 15.9 percent in 1931 and 23.6 percent in 1932. By 1933, unemployment was 24.9
percent. Almost 15 million people were out of work. That was the highest
unemployment during the Depression and since then.
New Deal programs helped reduce unemployment to 21.7 percent in 1934, 20.1
percent in 1935, 16.9 percent in 1936 and 14.3 percent in 1937. But less robust
government spending in 1938 sent unemployment back up to 19.0 percent. It
remained above 10 percent until 1941, according to a review of the unemployment
rate by year.[11]
Banking
During the Depression, half of the nation's banks failed. In the first 10 months
of 1930 alone, 744 failed. That was 1,000 percent more than the annual rate in
the 1920s. By 1933, 4,000 banks had failed. As a result, depositors lost $140
billion.
People were stunned to find out that banks had used their deposits to invest in
the stock market. They rushed to take their money out of the bank. These bank
“runs” forced even good banks out of business. Fortunately, that rarely happens
anymore. Depositors are protected by the Federal Deposit Insurance Corporation.
FDR created that program during the New Deal.
Stock Market
The stock market lost 90 percent of its value between 1929 and 1932. It didn't
recover for 25 years. That's because people lost all confidence in Wall
Street markets. Businesses, banks and individual investors were wiped out. Even
people who hadn't invested lost money. Their banks invested the money from their
savings accounts. [12]
Trade
As countries' economies worsened, they erected trade barriers to protect local
industries. In 1930, Congress passed the Smoot-Hawley tariffs, hoping to protect
U.S. jobs.
Other countries retaliated. That created trading blocs based on national
alliances and trade currencies. World trade plummeted 65 percent as measured in
dollars and 25 percent in the total number of units. By 1939, it was still below
its level in 1929. Here's world trade for the first five years of the
Depression.
1929: $5.3 billion
1930: $4.9 billion
1931: $3.3 billion
1932: $2.1 billion
1933: $1.8 billion
Deflation
Prices fell 30 percent between 1930 and 1932. Deflation helped consumers, whose
income had fallen. It hurt farmers, businesses, and homeowners. Their mortgage
payments hadn't fallen 30 percent. As a result, many defaulted. They lost
everything and became migrants looking for work wherever they could find
it. [13]
Here are the price changes during the depression years.
1929 0.6%
1930 -6.4%
1931 -9.3%
1932 -10.3%
1933 0.8%
1934 1.5%
1935 3.0%
1936 1.4%
1937 2.9%
1938 -2.8%
1939 0.0%
1940 0.7%
1941 9.9%
Analysis
Comparison Unemployment Rate between
The Great Depression (1929) & the Recent Global Meltdown
[14]
Chart:-II A linear graph of the unemployment rate from 1920 to 2010
The Great Depression is started from the late 1929s. In 1920s the unemployment
rate was 5.2%. For the Great Depression, the unemployment rate was increased in
1930 & the rate was 8.7%. The unemployment rate of 1950 is less than the
unemployment rate of 1930. It is explained that the Great Depression is almost.
Then all developed country faced this depression. All developed country was
taken to overcome this depression almost 30 years.
The main dark phrase of the
Great Depression was 1940 because the peak of unemployment rate is the highest
(14.6%). The unemployment rate of 1950 is 5.3%. The unemployment rate of 1960
and 1970 are respectively 5.5% and 4.9%.We can easily say from the above the
chart that in 1980s a small depression is spread in business world because the
unemployment rate is 7.1%. The unemployment rate of 1990 is decreased from the
unemployment rate of 1980.
In 2000 the unemployment rate is the lowest (4%) from
the all previous years. After 2000, the unemployment rate is also increased. The
unemployment rate of Recent Global Meltdown (2010) is 5.9% less than the Great
Depression (1930). It is clear that the effect of the Recent Global Meltdown is
less than the effect of the Great Depression. The difference of the unemployment
of the Recent Global Meltdown is 2.8% from the Great Depression
(1930).[15]
Investment in Different Sector (government, household and private corporate)
from 1920 to 2010
Chart:-III The dramatic changes that have taken place
in India's investment.
The share of investment in GDP, which used to hover around 25%, has gone all the
way up to 40% of GDP. Under normal circumstances, this bodes well, for high
investment presages high GDP growth. But there is a problem. Investment, and
particularly private corporate investment, is highly unstable in all market
economies. Fluctuations of investment are a key source of business cycle
fluctuations.[16]
The three components of investment -- government, household and private
corporate -- are expressed as percent of GDP. We see that for the first time in
India's history, in recent years, private corporate investment has exceeded that
by the government. Government investment is based on the budgetary process, and
does not change much from year to year. Household investment is also relatively
stable. Private corporate investment moves around substantially, based on the
optimism of the private sector about India's future. [ibid]
Private corporate investment was at around 5% when Narasimha Rao and Manmohan
Singh unleashed the reforms of the early 1990s. This gave a rise in investment
to 10%. Then the business cycle downturn came about, and it fell back to 5%.
After this, the reforms of the Vajpayee government from 1999 to 2002 were able
to reignite confidence, and private corporate investment went back up to 16% of
GDP. The numerical values seen in the investment pipeline today are simply
enormous. The extent to which it is translated into actual investment spending
is of essence to the new logic of Indian business cycle fluctuations.[17]
If the recent upsurge of private corporate investment reverses itself, we could
see a drop from 16% of GDP to 6% of GDP. Each percentage point of GDP, today, is
Rs.50, 000 crore, so we are discussing massive numbers. A ten percentage point
decline of private corporate investment is a decline in investment demand of
Rs.500, 000 crore.[18]
Production and Import of Capital Goods from 1920 to 2008
Chart: IV Production and Import of Capital Goods from 1920 to 2008
The above chart shows that the production and import rate is fall down in 1920 &
1930. The production rate and import rate are slowly grown up till 1970s.In
.1980s; all industry faced a short depression. After 2000, all business falls in
the recession. It is still running.
In 1929, all level employees of the industry faced problem for the depression.
All developed country faced the same problem because they are depended on US.
But in the recent global meltdown has fallen the effects on the top level
managers.[19]
Conclusion
The Great Depression was steeper and more protracted in the United States than
in other industrialized countries. The unemployment rate rose higher and
remained higher longer than in any other western country. As it deepened, the
Depression had far-reaching political consequences.
The Depression vastly
expanded the scope and scale of the federal government and created the modern
welfare state. It gave rise to a philosophy that the federal government should
provide a safety net for the elderly, the jobless, the disabled, and the poor,
and that the federal government was responsible for ensuring the health of the
nation's economy and the welfare of its citizens.
The stock market crash of October 1929 brought the economic prosperity of the
1920s to a symbolic end. For the next ten years, the United States was mired in
a deep economic depression. By 1933, unemployment had soared to 25 percent, up
from 3.2 percent in 1929. Industrial production declined by 50 percent,
international trade plunged 30 percent, and investment fell 98 percent.It can be
concluded that the Great Depression affected America the most.
Bibliography
Books:
- Managerial Economics by Karam Pal & Surendra Kumar
- The Grapes Of Wrath by John Steinbeck
- The Forgotten man by Amity Shales
- The Children of Great Depression by Russel freedman
- The Great Crash 1929 by John Kenneth
- Dancing in the dark by morris dicks
- Bombay Stock Exchange journal1953
Papers:
- A Short History of the Great Depression, by John spencer The Journal of
Economic Abstracts, Vol. 2, No. 2 (Mar., 1964), pp. 188-192
- By Nick Taylor, the author of “American-Made” (2008), a history of the
Works Progress Administration
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- Robins, Lionel. The Great Depression. Auburn: Ludwig von Mises
Institute, 2010.
- Smiley, Gene. Rethinking the Great Depression. Stamford: Cengage
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End-Notes:
- The Great Crash, 1929 Book by John Kenneth Galbraith page 12-14
- A Short History of the Great Depression, The Journal of Economic
Abstracts, Vol. 2, No. 2 (Mar., 1964), pp. 188-192
- The Forgotten man by Amity Shales , page 24-25
- The Children of Great Depression by Russel freedman
- The Great Crash 1929 by John Kenneth
- Causes of the Great Depression by Mikayla Bell in Ms. GordonHumanities
2/611/20/12
- Managerial Economics by Karam Pal & Surendra Kumar page 96-99
- Dutt & Sundaram 2006 Indian Economy Delhi: S.Chand Page 2-4
- Sarkhel. Jaydeb 2007 Macroeconomic Theory Kolkata: Book Syndicate
Private Limited.Page 111-112
- Economic and political weekly/the great depression
- What was the Great Depression by Janet b
- Bombay Stock Exchange journal1953 page 13-18
- Deflation and economy by Robert Benjamin Marin 1967 {Us}page 55
- Economics graph.com/great depression
- Smiley, Gene. Rethinking the Great Depression. Stamford: Cengage
Learning, 2009
- The Effects of the Great Depression Marcus Dior LylesSummer Course page
44-45
- The Children of Great Depression by Russel freedman
- By Nick Taylor, the author of “American-Made” (2008), a history of the
Works Progress Administration
- America’s Great Depression page 47
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