The Causes of the Great Depression
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The Causes of the Great Depression
Since the beginning of the Industrial Revolution early in the nineteenth century the United States ad experienced recessions or panics at least every twenty years. But none was as severe or lasted as long as the Great Depression. Only as the economy shifted toward a war mobilization in the late 1930s did the grip of the depression finally ease.
Stock prices had been rising steadily since 1921, but in 1928 and 1929 they surged forward, with the average price of stocks rising over 40 percent. The stock market was totally unregulated. Margin buying in particular proceeded at a feverish pace as customers borrowed up to 75 percent of the purchase price of stocks. That easy credit lured more speculators and less creditworthy investors into the stock market. The Federal Reserve board warned member banks not to lend money for stock speculation because if prices dropped, many investors would not be able to pay back their debts. No one listened. The stock market began sliding in early September, but people ignored the warning. Then on "black Thursday" (October 24, 1929) and again on "black Tuesday" (October 29, 1929) the ball dropped. More than 28 million shares changed hands in frantic trading. Overextended investors, suddenly finding themselves in heavily in debt, began selling their stocks. Many found that no one would buy anything at any price. Overnight, stock values fell from a peak value of 87 billion dollars to 55 billion dollars.
The crash was felt far beyond the trading floors. Speculators who borrowed money from the banks to buy their stocks could not repay the loans because they could not sell stocks. This caused many banks to fail. Since bank deposits were uninsured before the 1930s depositors' their money, which in many cases was all that many people had. The stock market crash intensified the course of the Great Depression in many ways. Besides wiping out the savings of thousands, it hurt commercial banks that had invested heavily in corporate stocks. It also caused a loss of confidence in the market prolonging the depression.
The downturn began slowly and almost unnoticeably. After 1927, consumer spending declined and housing construction slowed. Inventories piled up, and in1928 and 1929 manufacturers began to cut back on production and lay off workers. Reduced income and buying power in turn reinforced the downturn. By the summer of 1929 the economy was clearly in a recession.
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Great Depression Commercial Banks Black Tuesday Black Thursday Stock Market Stock Market Crash Stocks Investors Federal Reserve
Although the stock market crash and its immediate consequences contributed to the Great Depression, longstanding weakness in the American economy accounted for its length and severity. Agriculture, in particular, had never recovered from the recession of 1920-1921. Farmers faced high fixed costs for equipment and mortgages incurred during the high inflationary war years. At the same time prices fell because of overproduction, forcing farmers to default on mortgage payments and risk foreclosure. Because farmers accounted for about one-forth of the nations gainfully employed workers in 1929, their difficulties weakened the general economic structure. Other industries also had experienced economic setbacks during the prosperous 1920s. The older industries such as textiles, mining, lumbering, and shipping faltered, newer and more successful consumer- based industries, such as chemicals, appliances, and food processing, proved not yet strong enough to lead the way to recovery.
The nations unequal distribution of wealth also contributed to the severity of the depression. During the 1920s the share of the national income going to families in the upper and middle-income brackets increased. Tax policies contributed to this concentration of wealth by lowering personal income tax rates, eliminating the wartime excess-profits tax, and increasing deductions that favored affluent individuals and corporations. In 1929, the poorest 40 percent of the population received only 12.5 percent of aggregate family income, whereas the wealthiest 5 percent received 30 percent. Many people would spend their entire yearly paychecks on consumer goods. When this stopped the economy was hurt. Once the depression began this unequal distribution of wealth prevented people from spending the amounts of money needed to revive the economy.
President Herbert Hoover blamed the severity of the depression on the international economic situation. The war battered international economy functioned only as long as American banks exported enough capital to allow European countries to repay their debts and to continue to buy American goods. As U.S. companies began to cut back production, they also cut back their purchases of raw materials and supplies from abroad and as a result many European economies collapsed. American financiers sharply reduced foreign investment and consumers bought less foreign goods, debt repayment became even more difficult. As European conditions worsened, demand for American exports fell drastically. Finally, when the Hawley-Smoot Tariff of 1930 raised rates to an all time high, foreign governments retaliated by imposing their own trade restrictions, further limiting the market for American goods especially agriculture products.
The United States was hit the hardest during this worldwide depression. From the height of the prosperity before the stock market crash in 1929 to the depths of the depression in 1932-1933, the U.S. gross national product was cut almost in half, declining from 103.1 billion dollars to 58 billion in 1932. Consumption expenditures dropped by 18 percent, construction fell by 78 percent, private investment plummeted by 88 percent, and farm income, already low, was more than cut in half. During this period 9,000 banks went bankrupt or failed. The consumer price index declined by 25 percent and corporate profits fell from 10 billion to 1 billion dollars. Most shocking was that unemployment rose from 3.2 percent to 24.9 percent from 1929 to 1933.
While the collapse of the stock market in 1929 may have triggered economic turmoil, it alone was not responsible for the Great Depression. The depression throughout the nation and the world was a result of a combination of factors that matured during the 1920s
Causes and Consequences of the Great Depression
America had gone through hard times before: a bank panic and depression in the early 1820s, and other economic hard times in the late 1830s, the mid-1870s, and the early and mid-1890s. But never did it suffer an economic illness so deep and so long as the Great Depression of the 1930s.
Economists have argued ever since as to just what caused it. But it’s safe to say that a bunch of intertwined factors contributed. Among them were:
The stock market crash. The stock market soared throughout most of the 1920s, and the more it grew, the more people were eager to pour money into it. Many people bought on margin, which meant they paid only part of a stock’s worth when they bought it and the rest when they sold it. That worked fine as long as stock prices kept going up.
But when the market crashed in late October 1929, they were forced to pay up on stocks that were worth far less than what they had paid for them. Many had borrowed to buy stock, and when the stock market went belly-up, they couldn’t repay their loans and the lenders were left holding the empty bag.
Bank failures. Many small banks, particularly in rural areas, had overextended credit to farmers who, for the most part, had not shared in the prosperity of the 1920s and often could not repay the loans. Big banks, meanwhile, had foolishly made huge loans to foreign countries. Why? So the foreign countries could repay their earlier debts from World War I.
When times got tough and U.S. banks stopped lending, European nations simply defaulted on their outstanding loans. As a result, many banks went bankrupt. Others were forced out of business when depositors panicked and withdrew their money. The closings and panics almost completely shut down the country’s banking system.
Too many poor people. That may sound sort of goofy, but it’s a real reason. While the overall economy had soared in the 1920s, most of the wealth was enjoyed by relatively few Americans. In 1929, 40 percent of the families in the country were still living at or below the poverty level.
That made them too poor to buy goods and services and too poor to pay their debts. With no markets for their goods, manufacturers had to lay off tens of thousands of workers, which, of course, just created more poor people.
Farm failures. Many American farmers were already having a hard time before the Depression, mostly because they were producing too much and farm product prices were too low. The situation was so bad in some areas that farmers burned corn for fuel rather than sell it.
Environmental disasters. The production of vast crops during World War I and the decade that followed resulted in over-plowing of much of America’s farmland. The prairie grasses that held topsoil in place were stripped.
Coupled with one of the worst droughts in recorded history, the unprotected soil turned the Great Plains into what would become known as the “Dust Bowl.” Dry winds picked up tons of topsoil and blew it across the prairies, creating huge, suffocating clouds of dirt that buried towns and turned farms into deserts.
Government inaction. Rather than try to jumpstart the economy by pushing the Federal Reserve System to lend money to banks at low interest rates and pumping money into the economy through federal public works projects, the Hoover Administration did nothing at first, then took small and tentative actions that weren’t enough to head things off.
Whatever the causes, the consequences of the Great Depression were staggering. In the cities, thousands of jobless men roamed the streets looking for work. It wasn’t unusual for 2,000 or 3,000 applicants to show up for one or two job openings. If they weren’t looking for work, they were looking for food.
Bread lines were established to prevent people from starving. And more than a million families lost their houses and took up residence in shantytowns made up of tents, packing crates, and the hulks of old cars. They were called “Hoovervilles,” a mocking reference to President Hoover, whom many blamed (somewhat unfairly) for the mess the country was experiencing.
Americans weren’t sure what to do. In the summer of 1932, about 20,000 desperate World War I veterans marched on Washington D.C. to claim $1,000 bonuses they had been promised they would get, starting in 1946. When Congress refused to move up the payment schedules, several thousand members of the “Bonus Army” built a camp of tents and shacks on the banks of the Potomac River and refused to leave.
Under orders of President Hoover, federal troops commanded by Gen. Douglas MacArthur used bayonets and gas bombs to rout the squatters. The camp was burned. No one was killed, but the episode left a bad taste in the mouths of many Americans.
Thousands of farmers left their homes in states like Oklahoma and Arkansas and headed for the promise of better days in the West, especially California. What they found there, however, was most often a backbreaking existence as migrant laborers, living in squalid camps and picking fruit for starvation wages.