The Great Depression
While we have spoken about the 20's as a time of great prosperity, it was a tad deceptive. Problems lie under the surface that would not be dealt with by the conservative administrations of Harding, Coolidge and Hoover. With all of this there Hoover announced to Americans that they should "stay the course" that the ship would right itself. After all, Hoover was a self made man, a rugged individualist. By the time Hoover recognized he had to do something it was too little and much too late.
The Great Depression did not begin in 1929 with the fall of the over inflated stock market. In fact the Depression began ten years earlier in Europe. As the depression raged on in Europe American's believed they would be immune to its effects. Isolationist sentiments and conservative doctrine held that the less we had to do with Europe the better. As a result American polices never addressed the possibility of the United States entering a depression as well. Actually American policies actually contributed to our entry into the depression.
The Great Depression did not begin in 1929 with the fall of the over inflated stock market. In fact the Depression began ten years earlier in Europe. As the depression raged on in Europe American's believed they would be immune to its effects. Isolationist sentiments and conservative doctrine held that the less we had to do with Europe the better. As a result American polices never addressed the possibility of the United States entering a depression as well. Actually American policies actually contributed to our entry into the depression.
Causes and Effects of the Great Depression
1. Stock Market Crash of 1929
Throughout this period of time Americans (and it seems this included Harding, Coolidge and Hoover) Truly felt they would be prosperous forever. They didn't see or were unwilling to see the warning signs. With this confidence Americans began to increasingly invest in the stock market. The market began an unprecedented rise in 1928. By September 3rd 1929 the market reached a record high of 381. Then the decline began. Many didn't think it would last but on October 24th panic selling began as 12.8 million shares changed hands. Then came Black Tuesday, October 29th 1929. The market plummeted. By July the Dow reached a low of 41.22. Millions upon millions of dollars had been lost. Many who had bought on margin (credit) had to pay back debts with money they didn't have. Some opened up the windows and jumped to their deaths. The depression had arrived. Many believe erroneously that the stock market crash that occurred on "Black Tuesday", October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars. Even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough and America truly entered what is called the Great Depression.
2. Bank Failures
Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival, stopped being as willing to create new loans. This exacerbated the situation leading to less and less expenditures.Banks that had invested heavily in the stock market and real estate lost their depositors money. A panic ensued as people lined up at the banks to get their money. unfortunately for many the money just wasn't there. As the amount of money in circulation dropped deflation hit. Money was worth more but there was little money to be had. The fed which had the power to put more money into circulation did nothing (this is laissez faire). Workers were fired as thousands of businesses closed down. Unemployment rose to 25-35%. In Toledo Ohio fully 80% of the workers were unemployed! Real estate investments flopped because with deflation a building that was once worth ten million was now worth five. The mortgage and debt stayed the same but the income was gone. Banks foreclosed on loans and took possession of worthless properties that nobody could afford to buy. Between 1930 and 1932 over 9000 banks failed.
3. American Economic Policy with Europe
As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help protect American companies. It raised US tariffs to historically high levels. This piece of legislation was originally intended to help protect domestic farmers against agricultural imports from overseas. Since Europe was in a depression people there weren't buying as much as businesses had estimated. Tariffs raised price levels to as much as 40%. Europe which was already angered at US foreign actions responded with high tariffs of their own. International trade was at a standstill. During World War I, countries outside of Europe increased their agricultural production. Then when the war ended, European producers stepped up their production. Thus massive agricultural overproduction occurred during the 1920s. This in turn led to declining farm prices during the second half of the decade.As a result of World War I America had emerged as the worlds leading creditor nation. Foreign powers owed the United States and its companies about a billion dollars annually. With declining trade in America, a demand for reparation from the United States and the continuing European depression this debt went unpaid.
4. Over Production of Goods and Reduction in Purchasing Across the Board
In the 1920's American economic policy was laissez faire. Businesses were left alone and for sometime things appeared to fine. American businesses reported record profits, production was at an all time high. The problem was that while earnings rose and the rich got richer, the working class received a disproportionally lower percentage of the wealth. This uneven distribution of wealth got so bad that 5% of America earned 33% of the income. What this meant was that there was less and less real spending. Despite the fact that the working class had less money to spend businesses continued to increase production levels.With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed. More and more inventory began to accumulate. The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation. At this point you should be asking the question "If no one buying and companies were increasing production levels, wasn't there going to be a problem?" BINGO!!! The problem is known as overproduction. American businesses were producing far more than could be consumed. The result was lost profits and eventually debts. After a while many companies went out of business. Why would these companies continue to overproduce? There are several reasons. Some were managed poorly. Others were part of holding companies that placed layers and layers of companies, each relying on the others production levels like a pyramid. If one company in the pyramid reported lower production levels the others fell off and it looked bad. In many cases however crooked company owners reported earnings that were higher than they were actually were in order to drive up the stock price.
5. Agricultural Production and Drought Conditions
The early warning signs first came in the agricultural sector. Farmers continued to produce more and more food due to technological advances like the tractor. As production grew farm prices dropped. It was simply a matter of supply and demand. Framers reacted in the traditional manner and boosted production even further. Prices plummeted. Farmers began to default on their loans and the banks foreclosed. To make matters worse the central part of the nation was hit with a terrible drought. Farmers were devastated. The drought turned that portion of America into what was called "The Dustbowl." While not a direct cause of the Great Depression, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves. This was the topic of John Steinbeck's The Grapes of Wrath.
6. FDR and the New Deal
Roosevelt won the office of President of the United States of America in November 1932, by a landslide over incumbent Herbert Hoover. When he took office in March 1933, he wasted no time in following through on his campaign promises. Because of the Great Depression, more than 9,000 banks closed during the 1930s, causing millions of people to lose their life savings. From 1929 to 1933, the U.S. Gross National Product (which is a measurement of how many goods and services are produced in a year) dropped by 33%. FDR’s “First Hundred Days” saw a whirlwind of activity as Roosevelt worked tirelessly, then and throughout his three terms, to pull America out of the Great Depression. The primary effect of the Great Depression was that it caused millions of workers to lose their jobs. Unemployment during the Great Depression rose from 3% in 1929 to 25% by 1933. President Roosevelt’s New Deal programs were designed to tackle the economic crisis on many levels.
While FDR’s New Deal efforts might have helped keep the Great Depression from becoming even worse than it was, only World War II finally healed the economy. War-related exports, as well as America’s own preparation with munitions and ammunition, fired up the factories again and effectively ended the Great Depression, almost twelve years after it began in 1929.
Throughout this period of time Americans (and it seems this included Harding, Coolidge and Hoover) Truly felt they would be prosperous forever. They didn't see or were unwilling to see the warning signs. With this confidence Americans began to increasingly invest in the stock market. The market began an unprecedented rise in 1928. By September 3rd 1929 the market reached a record high of 381. Then the decline began. Many didn't think it would last but on October 24th panic selling began as 12.8 million shares changed hands. Then came Black Tuesday, October 29th 1929. The market plummeted. By July the Dow reached a low of 41.22. Millions upon millions of dollars had been lost. Many who had bought on margin (credit) had to pay back debts with money they didn't have. Some opened up the windows and jumped to their deaths. The depression had arrived. Many believe erroneously that the stock market crash that occurred on "Black Tuesday", October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars. Even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough and America truly entered what is called the Great Depression.
2. Bank Failures
Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival, stopped being as willing to create new loans. This exacerbated the situation leading to less and less expenditures.Banks that had invested heavily in the stock market and real estate lost their depositors money. A panic ensued as people lined up at the banks to get their money. unfortunately for many the money just wasn't there. As the amount of money in circulation dropped deflation hit. Money was worth more but there was little money to be had. The fed which had the power to put more money into circulation did nothing (this is laissez faire). Workers were fired as thousands of businesses closed down. Unemployment rose to 25-35%. In Toledo Ohio fully 80% of the workers were unemployed! Real estate investments flopped because with deflation a building that was once worth ten million was now worth five. The mortgage and debt stayed the same but the income was gone. Banks foreclosed on loans and took possession of worthless properties that nobody could afford to buy. Between 1930 and 1932 over 9000 banks failed.
3. American Economic Policy with Europe
As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help protect American companies. It raised US tariffs to historically high levels. This piece of legislation was originally intended to help protect domestic farmers against agricultural imports from overseas. Since Europe was in a depression people there weren't buying as much as businesses had estimated. Tariffs raised price levels to as much as 40%. Europe which was already angered at US foreign actions responded with high tariffs of their own. International trade was at a standstill. During World War I, countries outside of Europe increased their agricultural production. Then when the war ended, European producers stepped up their production. Thus massive agricultural overproduction occurred during the 1920s. This in turn led to declining farm prices during the second half of the decade.As a result of World War I America had emerged as the worlds leading creditor nation. Foreign powers owed the United States and its companies about a billion dollars annually. With declining trade in America, a demand for reparation from the United States and the continuing European depression this debt went unpaid.
4. Over Production of Goods and Reduction in Purchasing Across the Board
In the 1920's American economic policy was laissez faire. Businesses were left alone and for sometime things appeared to fine. American businesses reported record profits, production was at an all time high. The problem was that while earnings rose and the rich got richer, the working class received a disproportionally lower percentage of the wealth. This uneven distribution of wealth got so bad that 5% of America earned 33% of the income. What this meant was that there was less and less real spending. Despite the fact that the working class had less money to spend businesses continued to increase production levels.With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed. More and more inventory began to accumulate. The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation. At this point you should be asking the question "If no one buying and companies were increasing production levels, wasn't there going to be a problem?" BINGO!!! The problem is known as overproduction. American businesses were producing far more than could be consumed. The result was lost profits and eventually debts. After a while many companies went out of business. Why would these companies continue to overproduce? There are several reasons. Some were managed poorly. Others were part of holding companies that placed layers and layers of companies, each relying on the others production levels like a pyramid. If one company in the pyramid reported lower production levels the others fell off and it looked bad. In many cases however crooked company owners reported earnings that were higher than they were actually were in order to drive up the stock price.
5. Agricultural Production and Drought Conditions
The early warning signs first came in the agricultural sector. Farmers continued to produce more and more food due to technological advances like the tractor. As production grew farm prices dropped. It was simply a matter of supply and demand. Framers reacted in the traditional manner and boosted production even further. Prices plummeted. Farmers began to default on their loans and the banks foreclosed. To make matters worse the central part of the nation was hit with a terrible drought. Farmers were devastated. The drought turned that portion of America into what was called "The Dustbowl." While not a direct cause of the Great Depression, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves. This was the topic of John Steinbeck's The Grapes of Wrath.
6. FDR and the New Deal
Roosevelt won the office of President of the United States of America in November 1932, by a landslide over incumbent Herbert Hoover. When he took office in March 1933, he wasted no time in following through on his campaign promises. Because of the Great Depression, more than 9,000 banks closed during the 1930s, causing millions of people to lose their life savings. From 1929 to 1933, the U.S. Gross National Product (which is a measurement of how many goods and services are produced in a year) dropped by 33%. FDR’s “First Hundred Days” saw a whirlwind of activity as Roosevelt worked tirelessly, then and throughout his three terms, to pull America out of the Great Depression. The primary effect of the Great Depression was that it caused millions of workers to lose their jobs. Unemployment during the Great Depression rose from 3% in 1929 to 25% by 1933. President Roosevelt’s New Deal programs were designed to tackle the economic crisis on many levels.
- At the start of the Great Depression, there were no federal welfare or social programs in place. Out of the Great Depression and FDR’s New Deal, these programs were created: Civilian Conservation Corps (CCC); Federal Housing Administration (FHA); Public Works Administration (PWA); Social Security Act (SSA). (What this did was help job creation for the unemployed through massive public works projects, agricultural assistance for troubled farmers, and manufacturing assistance for troubled industries)
- One of the effects of the Great Depression is that the tax rate changed significantly for the wealthiest Americans. In 1927, the top tax rate was reduced to 25%, which is a large part of what caused the Great Depression. In 1932, in an effort to pull out of the Great Depression, the rate was raised to 63%. In 1936, it was bumped again, to 79%. In 1945, it reached an incredible 91% and hovered at 88% or greater until 1963 when it was reduced to 70%. In comparison, today’s top tax rate is 35%.
- The FDIC was created to insure that people’s money would be safe and protected against bank failures. There were stricter banking regulations to prevent bank failures and investment in the banking system to free up loans and credit for people.
- Changes were made to the stock market to prevent rampant speculation and further crashes, the most notable of which was that people could no longer buy stocks on margin.
While FDR’s New Deal efforts might have helped keep the Great Depression from becoming even worse than it was, only World War II finally healed the economy. War-related exports, as well as America’s own preparation with munitions and ammunition, fired up the factories again and effectively ended the Great Depression, almost twelve years after it began in 1929.