Introduction
The Great Depression was a worldwide business slump of the 1930s. This event ranked as the most horrible and longest period of high unemployment and low business activity in modern times. The Great Depression began in October 1929 when stock values in the United States dropped rapidly. Thousands of stockholders lost great sums of money, and many of them were wiped out. (Bauman, 56-63) Factories, banks, and stores closed down and left millions of Americans out of work and penniless. People started to depend on the government or donations to provide them with food. The Great Depression is said to have many factors that play a role in the striking downfall of the economy. Several causes and reasons are offered for this major event that occurred in 1929. The Great Depression was one of the main reasons why World War II (1939-1945) had to happen. (Amity, 132-136)
This dreadful incident affected almost every nation. It caused a sharp decrease in world trade because each country tried to help its own industries by raising tariffs on imported goods. People were losing their jobs, and their way of life was changing drastically right before their eyes. They needed to rebuild their lives and to get back on their feet again, economically, socially, and politically. The depression caused some nations to change their leader and their type of government. The poor economic conditions of these times led to the rise of the German dictator Adolf Hitler. (Hall, 121-129) The Germans supported him because his plans to make Germany a world leader gave them hope for improved conditions. Hitler took advantage of the people’s low morals and made their big promises.
Causes and Effects of Great Depression
A simple way to explain the situation of the Great Depression is dismal. Entire families were uprooted from the solid foundations that they created several years before. This was a time of immeasurable economic instability, and as many of us have read, the depression started with the atrocious crash of the stock market in 1929.
It is true that the crash was the fire starter for this grave situation, but our countries economic troubles started to crumble throughout the twenties. The whole situation caused many problems for society, such as poverty, hunger, and many questions about our great countries economic foundation. The Great Depression was not only caused by the crash of the stock market, but by expensive tariffs on imported products, surpluses in production and farming, unequal distribution of funds, a laissez-faire attitude by the government, and a panic over the financial situation. (Hall, 121-129)
The unequal distribution of wealth throughout America was the single largest cause of the depression of the 1930s. From the beginning of the twenties, the total income of the U.S. jumped from $74 billion dollars in 1922 to an astonishing $89 billion dollars in 1929. (Amity, 132-136) On paper, this jump looked good, but the gains were so unevenly distributed. Unbelievably, the bottom 40% of American’s income was equal to that of the top 0.1% of American’s income, showing that the gap between the wealthy and the poor was insurmountable. (Rothbard, 39-41) Also, the minute 0.1% of Americans possessed 35% of the nation’s total savings while almost a third of the country had no savings at all. (McElvaine, 211-215) Disposable income was on a hefty raise from 1922-1929, but an already healthy higher class swallowed up the surplus. Even with incomes rising, most families had to spend entire annual incomes on the necessities such as food, water, and other consumer goods. Now, the top 25% of Americans owned more than half of our nation’s income. (Bordo, 190-195). The United States’ growth came from the working-class Americans putting in hours on the assembly lines, creating gains for the rich.
While production rose by 30%, workers only gained an extra 6% on their own income. Profits for businesses increased by a whopping 67%, and, yet, the U.S. (Rothbard, 39-41) government let these huge gains go almost exclusively to the already rich. Overall, the working was going to stay working for the rich population’s profit.
Not only was money unequally distributed, but also tax laws helped rich folks keep their money. Basically, the rich stayed rich, and the poor got poorer. This happened because income taxes were lowered for the wealthy class, and gift taxes, along with inheritances, were protested. America started to become dependent on the wealthy population making expensive purchases instead of proportional price level purchases.
The buying power of the lower and middle-class dollar lowered, creating a larger gap between the opposite classes (Bordo, 190-195).
Noticing the decrease in buying by the lower classes, the government set up a new way to buy essential goods. Their idea was to make it possible for Americans to buy cars, stocks, and other major purchases without paying for them right away. This idea was credit, and Americans took advantage of it by purchasing $1.4 billion dollars worth of consumer items in 1925. (McElvaine, 211-215) In a short four-year span, the debt owed by Americans was almost $3 billion dollars.
People were even allowed to buy stocks on credit. This allowed society to purchase large amounts of stocks and make either huge gains or huge losses off them. When the stocks were worth a lot, they were sold back, and new money was created, making a living comfortably capable again. Debts on stocks rose along with the profits to a handsome $7 billion dollars, but in the three short months, loans increased by $1.5 billion dollars. (Bordo, 190-195) With all these payments due, Americans couldn’t handle the stockpiling bills.
Banks all over were repossessing cars, houses, and boats, and now the banks could no longer collect the large amounts of money that were owed to them. Since there was no equity in banks, they were forced to close down, leaving accounts stranded. This lead to the decrease in purchases causing business inventories to triple with no sign of sales increasing any time soon. The snowball effect would be a good way to describe the economic crisis hitting the U.S. (Powell, 97-103)
One other problem was with the distribution of funds unequally throughout the country’s industries. While some industries flourished, some others took dramatic falls. One such industry that thrived was the automotive industry and all other industries that were associated with it. The fields that were positively affected were almost all of the metal industries, along with the rubber market and the glass industry.
While people like Henry Ford were making astonishing gains, the entire agricultural industry took a serious nosedive in 1921. The problem started with an enormous surplus, which leads to a drop in the price of food by 73%. (McElvaine, 211-215) With the prices diving, there was no way for farmers to make any money. No sales meant that there was no way to make profits. The farmer’s average income was almost $500 dollars lower than the average worker’s salary. In turn, this gap made the task of buying essential goods like clothes and food almost impossible to buy (Watkins, 71-78).
Now the nation was faced with unequal distribution not only in society but in the industry too. When you combined that with increasing debts owed by consumers who bought items on credit and overproduction, the result was a drastic decrease in stock prices in the stock market on October 24, 1929. Investors started to panic and sold stocks in enormous amounts, and one week later, over 16.5 million stocks were traded in just one day, causing “Black Tuesday.” (Powell, 97-103) Now the Great Depression was truly upon us and would not go away for almost another decade.
Now our society was faced with many problems that they never had to contemplate before. This was a drastic change, and people were forced to adapt to the new living conditions that were forced upon them. People who were used to living comfortably were now squeezing every penny to the last drop. Unemployment, poverty, sickness, hunger, and other things plagued the U.S. for the next decade.
The Great Depression threw the economy into a downward spiral, which crippled the nation for many years. From the years 1929 to 1933, the gross national product fell $26 billion dollars from its original level of $100 billion dollars. (McElvaine, 38-44) The GNP was not the only thing that fell. Our nation’s factories dropped production by an astonishing %50 to try to counteract the decrease in purchases by consumers. (Rothbard, 39-41)
Now the effects could be seen directly in the closing of business everywhere. The biggest problem that people faced was that banks were closing all over. Over 8,500 banks had closed because they loaned out money that could no longer be collected, and they repossessed large numbers of expensive items from people who had not fully pay them off yet.
Also, people who had money in the banks could no longer access it because there was no money, so this completely wiped out families’ savings. With no one buying anything, factories and shops everywhere were closing. There was no money for anyone to spend, so production was cut almost in half. The demand for consumer products was almost completely demolished. Now people were being forced out of their homes to the streets with only what they could carry. With society’s hands tied, there was nothing that could be done for several years.
With businesses’ closing all over, people were left out of work. This layoff caused the single greatest jump in the unemployment rate in history from 3.1% in 1929 to 25.7% in 1933. (McElvaine, 38-44) There was little work, and many Americans were left jobless for many years to come. Because there were now over 15 million people out of work, new problems arose in America (Duval).
A major problem now facing suburban America was the reality of not having a home. Many families were forced out of their homes when banks had to foreclose, leaving men, women, and children to find any shelter they could. Many people would use any objects that they could find to make a shelter. Old crates and scrap metal were used to create makeshift houses called shanties. These shantytowns were cleverly called “Hoovervilles” because of President Herbert Hoover, who was blamed for the catastrophe. Hoover even refused to allocate any financial aid to workers who were now unemployed, leaving many families with no way to earn any money. Farmers were left with a large surplus, but there was no way to sell them for a profit causing farmers to be in the same predicament as unemployed workers. There were few middles- to lower-class workers with any money to support their families from 1929 to 1933. Getting food to families was an extreme chore during the depression. Parents would try to feed their kids first, but sometimes nobody ate at all. With rising stress levels, people often looked to suicide as the quick answer.
Suicide levels were increasing every year from 1929-1933 in all major cities. This was the only way out for many, but overall, it just left people with more questions and problems. With no money or possessions, people had new virtues of focusing on, such as friendship and family values.
The one question that every person asked in the Great Depression was this: whose fault was it? Some blamed bankers, stockbrokers, and businessmen, but most fingers pointed to Herbert Hoover and his Democratic Party. President Hoover had an economic approach similar to that of Europeans views of the “laissez-faire.” Laissez-faire means to leave it alone, and that is exactly what Hoover did with the economy until it was too late. (Watkins, 71-78) Entire markets had the free reign to do whatever they wanted without the government interfering. With no government control, the business’s set up monopolies, which dramatically cornered markets while consumers could only stand back and watch. Also, business’s set up their own taxes, which allowed them to pay little for what they bought. Plus, many people were saving their money without putting it in the bank. Consumption along with investment was going down dramatically. Now the money differential between the classes was defined, and it kept growing until the depression started.
Hoover’s attitude towards the economy left the markets to spark their own sales and production, but nothing close to that happened. The basis of the laissez-faire view was that business would heal its own wounds naturally. Jobs would be created, and people would have money to spend, leading to more production and business. This idea was so far from what was really happening. When the nation’s economic situation started to go downhill, Hoover thought that if he balanced the budget and cut spending by the government, things would even out. By cutting government spending, he cut off much-needed money that was going into the economy, leaving the money supply even weaker.
Right before the depression started, people realized that banks had little money. President Hoover tried to give emergency loans to banks, but there was no use because the countries economic structure was about to crumble.
With so many problems looking America in the face, a change was in order, and it occurred when Franklin Roosevelt took over the presidency in 1932. With a fresh face in the office, the winds of change began.
Roosevelt enacted a set of acts that comprised the New Deal. These mostly set up new agencies to regulate troubled markets.
One such agency set was the Civilian Conservation Corps, which put a focus on keeping our environment clean and plush. This system was run by the Army and took young men off the streets and put them to work cultivating our country. Their jobs were often general but well worth it because it was a paying job, and that was something that these men hadn’t seen in a while. (Watkins, 71-78)
Another act that was set up by Roosevelt was the National Industrial Recovery Act. This set up series of codes to regulate prices and the production of industries. The act was not only looking at the well-being of the industry but also the workers and its consumers. When a business would cooperate, rewards are given out by the government, like suspending antitrust legislation. Roosevelt also set up many other acts and agencies such as the “Emergency Banking Act, Emergency Farm Mortgage Act, Agricultural Adjustment Act, the Public Works Administration and the National Youth Administration.” (McElvaine, 38-44) All of these acts and agencies targeted most problems in America like unemployment, banking, rebuilding the stock market, and creating security and confidence in Americans. This New Deal was a huge factor in bringing the U.S. out of its “slump” because its impact affected everyone almost immediately. Now the country was on the rise, and even though there was one more year of recession to hit America in the ’30s, the future was looking brighter. (McElvaine, 38-44)
Can the Great Depression happen again?
The thought that the Great Depression won’t happen again is that of Keynes, as they always believe that the government will always induce a multiplier, either through the monetary policy (through the Reserve Bank) or fiscal policy. Though there are many that are opposed to the Keynesian way of thinking, and these people look to Japan currently to point out the view that an increase in government spending (decreasing the interest rate, increasing the money supply within the economy) does not always induce the multiplier effect. I believe it is a cultural trait that is stopping Keynesian economics from working within the Japanese economy. Due to the low-interest rate, the rate of return on savings is inexcusably low, though the Japanese consumer will still save rather than invest, as they are more reluctant to take on risk and more tolerant to harsh economic conditions than consumers from other countries such as Australia, and America. Hence the average Japanese consumer is more likely to sit on their hands and save money rather than invest large sums of borrowed money.
Conclusion
The Great Depression was a time of crisis in America. Never had so many things fallen apart at one time, and it left Americans scared and in bad shape. People were faced with problems like losing houses, hunger, and unemployment. Yet, without many material things, people turned to things like family values and friendship. While Hoover was in office, the economic situation was bleak and fell deeper and deeper in “the hole” until it could no longer fall anymore. A new face showed up in the office, Franklin Roosevelt, and he sparked economic growth immediately in 1933. Although America was not completely out of the depression, the end was near. World War II came along in 1939 and created an economic boom by creating jobs and new funds due to increased production in America. With America jumping out of its hole, the Great Depression finally died.
Works Cited
Amity, Shlaes. The Forgotten Man: A New History of the Great Depression. Publisher: HarperCollins, 2007: 132-136.
Bauman, John F., and Thomas H. Coode. In the Eye of the Great Depression: New Deal Reporters and the Agony of the American People. De Kalb: Northern Illinois University Press, 1988: 56-63.
Bordo, Michael D., Claudia Goldin, and Eugene N. White, eds. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Chicago: University of Chicago Press, 1998: 190-195.
Hall, Thomas E., and J. David Ferguson. The Great Depression: An International Disaster of Perverse Economic Policies. Ann Arbor: University of Michigan Press, 1998: 121-129.
McElvaine, Robert S. The Depression and New Deal: A History in Documents. Oxford University Press, USA, 2000: 38-44.
McElvaine, Robert S. The Great Depression: America 1929–41. New York: New York Times Books, 1984: 211-215.
Powell, Jim. FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression. Three Rivers Press, 2007: 97-103.
Rothbard, Murray N. America’s Great Depression. Publisher: Ludwig Von Mises, 2000: 39-41.
Stein, Conrad R. The New Deal: Pulling America Out of the Great Depression. Enslow Publishers, 2006: 144-150.
Watkins, Tom H. The Hungry Years: A Narrative History of the Great Depression. New York: Henry Holt, 1999: 71-78.