The causes and hardships of the Great Depression have been extensively researched. There is a general consensus on the causes of the Great Depression, including banking failures and government short-comings. However, corporations are surprisingly absent from this list. Since corporations are such a major part of the economy, it seems logical that they would be considered one of the causes of the Great Depression. Despite this thinking, corporations were not as tangled in the financial mess that led to the Great Depression as one would think. In fact, many corporations found ways to effectively maneuver through these dark times.

This paper examines why corporations were not a primary cause of the Great Depression and how they maneuvered through it. It will start by discussing the history and major causes of the Great Depression. Next, the general state of corporations going into the Great Depression will be discussed. Lastly, the specific actions of several individual corporations will be highlighted as examples of strategies businesses used to survive the Great Depression.

Extreme Highs to Extreme Lows: Causes of the Great Depression

The Great Depression is widely considered to be the worst economic disaster in U.S. history. It continues to shape U.S. economic thinking and financial institutions. The Depression resulted in a staggering 25% unemployment rate at its peak in 1933^[1] and reduced U.S. GDP from $104.6 billion in 1929 to $57.2 billion in 1933.^[2] Naturally for a disaster of this magnitude, there are a number of theories on what caused the Great Depression. The most consistently supported theories note problems in speculative stock market activity, risky banking practices, and U.S. financial and monetary policies at the time.

Stock Market Gambling – Buying on Margin

The 1920s brought about economic prosperity that U.S. citizens thought would never end. A booming economy made Americans confident in investing anyway they could, believing that they would surely see an easy return on investment. Many investors bought stock “on the margin,” meaning that they would use loans to pay for stocks. If stock prices go up, margin buying increases the potential returns on investment, and investors are able to pay back the loans with the returns from the stocks. However, on Black Monday in 1929, the Dow Jones fell around 13%, wiping out many people’s prospects and triggering a massive flight of investors from the stock market.^[3] This in turn left banks with thousands of loans that could no longer be paid back.

Banking on Good Times – Bank Policies and Failures

Not only were individuals investing through stocks, but many major banks were as well. A major southern financial institution, Caldwell and Company, drained many of the funds from banks they owned due to their own stock market losses.^[4] In response, a number of these banks shut down, leading to bank runs throughout the nation.^[5]

Unfortunately, two banking policies also contributed to a ripple effect from these bank runs that forced further bank closures. First, banks overestimated the reserves they had on hand due to a fault in the system they used to count checks for cash reserves. Since banks counted checks both where they were deposited and where they were withdrawn, banks were double-counting checks. Second, once accurate reserves were determined, it was difficult to get the reserves to banks that were in need. Many banks at the time only kept a portion of their reserves on hand while a larger sum was divided and kept at other banks. This caused delays in getting access to the reserves needed to stave off bank runs.^[6] Additionally, many banks that acted as another’s reserve were faced with their own bank runs further stretching what reserves they had. Several government practices further compounded the problems faced by banks.

Well-Intentioned Mistakes – Gold and Smoot-Hawley

One government policy that placed considerable strain on banks was a strict devotion to the gold standard. The U.S. gold reserves doubled over the course of WWI. However, this rapid increase, combined with economic optimism following the First World War resulted in a large amount of inflation that the Federal Reserve sought to manage through raising interest rates. These high interest rates meant that investors would have to see an even higher return on investment to be able to pay back loans. However, once businesses were unlikely to see a return that could exceed these interest rates, many businesses were unable to borrow at all, causing them to close their doors.^[7]

Another government policy that created economic stress was the Smoot-Hawley Act. The 1930 act sought to protect domestic U.S. industries by raising tariffs. However, this policy resulted in foreign countries placing their own tariffs on U.S. domestic products, further isolating U.S. businesses from potential markets.^[8] These policies forced corporations to rethink their expectations for the future and consider how they could survive these tumultuous times.

Corporate America in Crisis

In combination with a firm belief that the economy could grow forever, a general sense of optimism made individuals and many corporations confident that they would consistently thrive in the foreseeable future. This misplaced optimism can in part be attributed to corporations, as the countless U.S. citizens who felt confident to buy stocks in public corporations were influenced to some degree by corporate signaling.

Insulated from Optimism – Separation of Ownership and Control

Despite the signals companies were sending, they had an effective way to resist diving head first into the speculative hopes of investors: separating day to day control from investor panic. The 1920s’ influx of millions of new investors into the stock market enabled corporations to become more sophisticated in the kinds of equity offerings they provided. Now corporations could tailor investments to a variety of different investors. The new variety of stocks and features attached to them served as a shield to corporations during the Depression. This variety would give rise to the idea of “separation of ownership and control,” reflecting that a broad array of investors with a range of stock interests and powers made shareholder governance difficult.^[9]

Given this separation, boards of directors and associated managers had a much easier time running corporations without interference from shareholders.^[10] Though this power dynamic has some clear drawbacks for shareholders, it proved effective to corporations in the Depression in two ways: 1) reducing external pressure and 2) enabling swift decision-making. The separation of ownership and control allowed corporations to avoid external pressure which can lead to rash decisions. With many people panicking, it could have been easy for stockholders to push for decisions that may have only served their interests at the expense of others. Secondly, because the board did not have to side with the plurality of shareholders, they were able to act swiftly and decisively which is especially important during times of crisis.

Personal Pocket Protection – Limited Liability

Another element that protected corporations from rapid economic decline was limited liability. This attribute treats the assets of the corporation as separate from the assets of the shareholders.^[11] Limited liability required that a shareholder prove they had been harmed by the corporation before seeking compensation and limited what they could recoup from a loss incurred by the corporation to what they had invested. Given that the cause of the Great Depression had little to do with corporate activity, shareholders would have little standing to seek payment from the corporation. Even if a shareholder was successful in suing the corporation, they could not go after the individuals running the company.

Fortunate Foresight – Corporate Reforms in the 1920s

The successes of the 1920s spurred companies to expand how they handled shareholders. Beyond that, corporations in the 1920s made a variety of critical reforms that assisted them through harsh economic times. Originally coming out of General Motors (GM), a sophisticated new structuring of corporate management bolstered corporate efficiency and resilience.^[12] Continued mechanization was encouraged, and improved production helped corporations maintain supply during economic downturns. GM also created a hierarchy of positions including vice presidents, managers, and associates. This structure helped facilitate clear communication from the top of the corporation to individual offices and factories, allowing for rapid conveyance of decisions throughout the corporation. Lastly, new accounting techniques were created to help assess the current state of the corporation and insulate the corporation from shocks by predicting potential outlooks.^[13]

Battling Uncertainty

Needless to say, corporations’ bottom lines were seriously harmed by the Great Depression. As noted above, the total GDP of the nation dropped nearly 50% before the end of the Depression. By the end, around 86,000 businesses had failed.[14] Despite these challenges, some corporations managed to avoid closure. Looking at some of the nation’s largest corporations reveals some methods that proved useful through these hard circumstances.

Sears

Sears provides an interesting example of how even corporations with practices similar to banks were able to quickly pivot to avoid going out of business. Sears started in the 1880s as a mail order retailer of watches. The business grew rapidly and expanded into the department store space with more than 300 retail locations by 1929.^[15] At the same time, Sears started offering “kit homes” in their magazines that would ship materials and blueprints for homes that could then be built by the purchaser.^[16] The value of these sales reached $12.5 million in 1929 but almost half of the sales came from loans that Sears offered to help finance home purchases. Much like banks during the Depression, these loans  cost Sears millions of dollars as they were forced to foreclose on customers and liquidate the loans.^[17] However, unlike the banks, Sears was able to lean on its core department store business to offset these losses. Specifically, Sears focused on supplying quality staple goods at cheaper prices.^[18] Rather than continuing to provide fashion centric merchandise, the company doubled down on essentials like socks and underwear. The tactic served them well, and by the end of the Great Depression era they had doubled the total number of department stores.^[19]

General Motors

GM had already established several structural reforms prior to the Great Depression, but the sheer success of these tools set them apart from other corporations at the time. This is not to say GM was immune to the harsh economic times. From 1929 to 1932, sales of new automobiles fell 75% and the automobile industry saw a combined net loss of $191 million dollars in 1932.^[20] Nonetheless, GM itself earned a profit during every year of the Great Depression.^[21]

GM’s continued profits can be attributed to the company’s rapid response to the economic downturn. Part of the immediate response included cutting general expenses by mothballing factories and laying off workers. GM also rapidly reorganized their business focus, significantly slashing production on mid-level and high-end vehicles and cutting prices on these cars to reduce inventory quickly. They also merged all of their mid-level sales teams from separate teams for specific models into one unified team. GM rapidly shifted production to their low-end brand Chevrolet and even offered financing since many banks were unable or unwilling to. These rapid changes helped GM gain an additional 15% of the overall automobile market by the end of the Depression.^[22]

Conclusion

Given the hardships faced during the Great Depression, it seems impossible to imagine how anyone could make it through those years successfully. Even more so given the near total collapse of the banking system and a government that was unable to create meaningful change in the near-term. Yet, many corporations were able to recover from the initial shock and find success for themselves. They were able to leverage both innate benefits of their structures and recent reforms. Individual corporations leveraged these advantages and applied them to specific markets. It seems clear that corporations that weathered the storm played the hand they were dealt and, to some degree, prevented a horrible situation from getting much worse.

 

 

^[1] 5 Causes of the Great Depression, Patrick J. Kiger (2023).

^[2] The Great Depression: What Happened, What Caused It, and How It Ended, Kimberly Amadeo (2022).

^[3] 5 Causes of the Great Depression, Patrick J. Kiger (2023).

^[4] Banking Panics of 1930-31, Federal Reserve History (2013).

^[5] Id.

^[6] Id.

^[7] Id.

^[8]  5 Causes of the Great Depression, Patrick J. Kiger (2023).

^[9] The Modernization of Corporation Law: 1920-1940, Harwell Wells (2009).

^[10] Id.

^[11] Characteristics of Corporations, Accounting Tools (2022).

^[12] Ages of American Capitalism, Jonathan Levy (2021).

^[13] Id.

[14] Brother, Can You Spare a Billion?, PBS (2000)

^[15] The Rise and Fall of Sears, Vicki Howard (2017).

^[16] The House Is in the Mail, Jessie Romero (2019).

^[17] Id.

^[18]  The Rise and Fall of Sears, Vicki Howard (2017).

^[19] Id.

^[20] How Automakers Accelerated Out of the Great Depression, David Rhodes & Daniel Stelter (2010).

^[21] Id.

^[22] Id.