The October 1929 crash occurred during the first year of the presidency of the Republican Herbert Hoover, the famous philanthropist who at the end of the Great War had organized a huge relief effort for the starving people of war-torn Belgium. Now it was his turn to do something about a worsening economic picture in America.

In the face of this massive shock to the American stock market, Hoover tended to follow the common wisdom of the Republican Party (which had long dominated American politics) which was simply to follow the central principle of capitalism and let the market correct itself; it was not the government's job to meddle with the nation's economy.

Actually, no!  Not at all!  It is common among most Americans today to refer to how "Roosevelt's New Deal brought us out of the Depression" when contemplating what to do in the face of a new round of economic difficulties facing the nation. This popular myth however is quite untrue.  Certainly, the New Deal helped many idle workers find work.  It certainly built highways, dams, municipal buildings, national parks, rural electrification, new rail services, etc.  Government projects were truly a blessing to many Americans desperate to find work.  But these projects did not solve the problem of the Depression itself.

America has long been a grass-roots democracy not only in the area of government or politics, but also in the very nature of its economy.  Unlike most societies of the world which throughout history have traditionally been driven by the economic wants or goals of the rich and powerful – emperors, kings, aristocrats and priests – the American economy has been built, since its origins in the early 1600s, on the interests of very ordinary people.  There have been of course exceptions to this picture: the slave-holding South prior to 1865 and the Gilded Age of the late 1800s dominated by the captains of industry – or, as some would say, the industrial robber barons.  But in general, the American economic system has been built on the labor, the product, and the economic desires of very ordinary citizens.

What determines what actually gets made in America are the simple interests of the average American – known simply as the American consumer.  These interests of the American consumer register themselves in what is termed the market place or free market.  The matter of what gets made, how much gets made, and what it will cost, are all determined simply by how much interest the American consumer has in a product when it goes to market.  If it is a really hot item, drawing strong consumer interest, it will enter the market place quite pricey – and highly profitable to the producer.  But other producers with a typical American entrepreneurial spirit will want to get into the act and also begin producing this highly profitable product (or – under copyright laws – something somewhat like it) and bring it to market – and themselves share in the blessings of high profits.  But this entrepreneurial urge will eventually be met with a declining consumer interest – as most of the people who wanted these hot items now are in possession of them (radios, cars, tractors, washing machines, etc.).  Unsold items will begin to pile up on the market shelves.  To move these items to sale, producers will attempt to make these same products continue to be attractive – thus the American advertising industry – but ultimately attractive through lower pricing.  Lower prices will help bring some additional consumers to the market – but not at the rate that they were there when the item was hot.

At this point the producer has to make some decisions.  He can continue to make the product, though at a slower rate – which means he is going to have to cut back on production and let some workers go.  He does not need their labor, and anyway, because his products are not selling well and profits are way down, he cannot afford to pay them.

Or – he can switch to a new product, even a new line of products, simply to keep his business going.  This means he has to be inventive, imaginative – and a natural risk taker.  He needs to listen to the market, to the consumer, to sound the consumer out in terms of possible interest in new products.  He can also go to advertising in an attempt to create consumer interest – by letting the consumer know in written or broadcast advertising, in words, song, or even drama, how wonderful life would be if the consumer only had his new product!

But this is how the Free Market works.  The consumer is king.  It's all very democratic.  There is no political authority dictating production or distribution or pricing according to official decrees.  In fact, the American free market system has traditionally been highly suspicious of such governmental interventions into the economic system (commonly termed a "Command Economy") and tolerates only the slightest of such interventions under very special circumstances, and only for a limited time.

For government intervention to go beyond that would be to undermine the whole idea of the Free Market system – and instead produce an economic system in which "enlightened" social authorities decide for the people themselves what they are going to get from the economy and how they are going to get it.  This latter economic system is termed "Socialism" or "Communism" (although Fascism has many of the same characteristics.)

Of course, as with all social systems, this Free Market economic system is not without its problems.  Market saturation such as described above, when most consumers have these products and therefore show a declining interest in them, is one of these problems.  This is a big part of what was happening to the American economy at the end of the Roaring 20s.  The market for consumer products stopped roaring.

Because of this tendency of the market to heat up as new products are brought to market – and then cool down as the market becomes saturated – industrial production, and the economy in general, tends to move in cycles of growth, maturity and decline.  Economists call this the business cycle.  Economists have long attempted to find ways to smooth out the peaks and valleys of the business cycle, to make the economy steadier in its movement.  But the very nature of the Free Market system itself seems to make it immune from such efforts.

The famous English economist John Maynard Keynes put forth the idea in the 1930s that the business cycle could be modulated or smoothed by the government's interventions as the economy goes through the various phases of a business cycle.  He advocated a governmental strategy of loosening money supply (creating more money for the market to work with) during the cooling phase of the business cycle and then tightening that money supply during period of a hot market.

This Keynesian theory seemed to make a lot of sense to a lot of economists – and to a lot of government officials.  In a sense Roosevelt's New Deal moved in accordance with this theory.  But whether it actually contributed to – or simply slowed down – the recovery of the market economies in the 1930s remains even to this day a matter of great debate.

What is not debatable is the fact that what a Free Market truly needs to keep going or get back going if it has slumped and fallen into idleness is new products. New products are what bring the consumer back to the marketplace to do business.

In a sense the New Deal produced new products – but products desired not by the individual consumer, but collectively by the society, sometimes termed infrastructure items.  These items are vital to the society as a whole … but beyond the scope of any individual or even group of individuals to produce or sell (or even finance).  The New Deal produced highways, parks, public buildings, etc., social items certainly desired by the average American – but products that no one single consumer would have ever been able to buy.  So in that sense the New Deal worked.  Government-funded projects certainly met important infrastructure needs of American society.

But even here part of the problem was that the New Deal suffered from its own version of market saturation.  Under the New Deal a great number of national highways were built.  But once built, Americans did not need new ones to replace them right away.  Highway building slowed down.  New dams were built at the most likely spots where energy could be cheaply generated.  After that, dam building became much less cost effective.  Dam building slowed to a halt.  Parks were built – until the need for park building was greatly reduced.  In short the government as producer was facing the same problem that the private producer had faced at the end of the 1920s: market saturation for government or social products.  By the late 1930s, with the government forced to slow up in its building projects, unemployment began to rise again in America.

Government intervention into the economy certainly had taken up some of the slack in an idle American economy during a good part of the 1930s.  And it had brought good things to America.  But it had not solved the basic problem of the Depression.  The American economy simply seemed to have no urge to take off again on its own.  That's because new personal consumer products were needed to bring the American consumer, the bedrock of the American economic system, back to market.

But coming up with a new line of products to go to market with is not easy.  It takes discovery, new technologies, changing circumstances – many things that are not automatically brought into being.  And during the entire 1930s there really was no such development of new product lines by private industry.

Some blame the New Deal itself for the failure of new products, new technologies, to develop during the 1930s.  They claim that scarce investment funds were all used up by the government to push its own economic agendas.  Financial capital that was needed to back up new inventions and new production was simply not available to the private entrepreneur because it was all flowing to the government. Perhaps this was true.  But perhaps not.  Clearly there was another factor involved that unquestionably shaped the way the private industrial system was to behave in the 1930s.

The New Deal put money in the pockets of the workers that built all these New Deal products.  But what did the worker do with this money?  In general, the worker put it away in a safe place.  The old adage is that he put it under his mattress!  Actually, he most likely put it in a savings bank.  Thanks to Roosevelt's FDIC insurance of bank deposits, a savings bank was finally a safe place to put one's money.  In any case he was not going to put it in the stock market any time soon.  He was still too frightened about what might happen if he put his money there.  So, workers' wages were of little help in producing a revival of the capital market which financed the business ventures of private manufacturers.

The banks where he deposited his money were of no help to the capital market either.  And it was not just because banks too had been scared away from involvement in that market.  Actually because of the Glass Steagall Act of 1933 it was illegal for such commercial or depository banks to enter the capital market. Only banks licensed as investment banks were permitted to trade in the capital market.  These were not the banks where the worker placed his savings. Investment banks were not permitted to do this simple kind of business.  They were the banks you went to if you wanted to buy or sell (or borrow – though with new limits) corporate stocks, bonds or other kinds of corporate securities.  Thus it was that workers' wages did not usually translate themselves into new inputs into the capital markets vital to the recovery of private industry.

In short, the average American wage earner now suffered from the economic disease of lacking consumer confidence in the market place.  He earned his money – and then put it away, where it would go unused in stimulating new market demands.  And thus the market continued to sit quietly while little happened in the private economic sector.

World War Two finally brought America out of the Depression.  In the end what brought America out of the Depression was not the New Deal – but was World War Two, which the country embarked upon only at the very end of 1941.  The war, and the war alone, proved to be the factor that would put America back to work.  New products (uniforms, guns, fighter planes, bombers, tanks, trucks, cannons, battleships, carriers, submarines, etc.) would be needed in vast, virtually unlimited quantities.  Every American that was not in uniform would be needed to support the war on the home front – in particular even young women working in the production and assembly plants where these products were manufactured.

And there was no danger of market saturation – at least until the war was over. Such products were quickly destroyed in the action of war and thus immediately called forth replacement products.

In the American economic system, the government did not make these products. Private industrial manufacturers did.  Of course, the finished product did not need to go to market.  The government was the market – under contract to buy the product as soon as it came off the assembly line.  But as with the New Deal economy, the average American was the financial underwriter of the war economy.  Part of this support was in the form of taxes paid to the government – which Americans were quick to offer because this was their war – not just their government's.

But taxes were not sufficient to cover the huge government expenditures involved in this business of war.  The government needed to go into deficit spending – borrowing money now with the promise to pay it back later, when the emergency of the war was over.  And who was the lender to the government?  The American people themselves.  They lent to the government huge amounts of their personal industrial earnings (created by war production) – in the form of war bonds: contracts or certificates issued by the government which promised the American lenders that they would be repaid in the future, with nice interest earnings added. Purchasing war bonds turned the average American into a capital financier lending to the government.  The possibility of guaranteed interest earnings was part of the motivation.  Besides, what was a person to spend his or her money on anyway? Automobile manufacturers had turned to the business of making army trucks and tanks.  No automobiles were manufactured during the war.  Except for war goods there wasn't much of anything to spend your money on anyway.  Everyone was under rationing so you couldn't even go on a food-spending splurge.  So putting your money away in the form of war bonds made natural sense.  Besides, it seemed to be one's patriotic duty.

And that's how the American economy came back to life.  World War Two, not the New Deal, brought America finally out of the Great Depression.