Like us, many of you had a loved one that lived during the Great Depression. Many of us have heard stories from our parents or grandparents of the horrific times of the depression; stories that told us how hard it was to find a job, put food on the table, and to provide shelter for the family. Learning how to live without things was a battle all by itself. Hearing the stories made me grateful to be born in a different era. However, each era has it’s own battles to fight that will change the direction of the economy and maybe the world.
Many people feel that we are in a depression. Unemployment rising, business closing its doors, and poverty in the United States on a rise, would make you think that we are in a depression. However, after careful research from articles, books, videotape, and previously conducted surveys, on the main causes of the depression, we realize that the recession that we are in is far from the Great Depression. Our research also uncovered the impacts of the depression that played a role in reforming the economy. Also, our research will show us how Franklin D. Roosevelt solved the depression and got the economy rolling again. Finally, there were many lessons learned by banks, business owners, and the government. We hope that the details of the Great Depression will enlighten you with comparisons on our current recession.
The main causes for the Great Depression were a combination of unequally distributed wealth, the stock market crash, and eventually the bank failures. The unequal distribution of wealth existed on many levels. Money was distributed unequally between the rich and the middle class, between industry and agriculture within the US, and between the US and Europe. This imbalance of wealth created an unstable economy. The excessive speculations kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the unequal distribution of wealth, and bank failures, caused the American economy to collapse.
The distribution of national income became increasingly skewed in the 1920’s. The nations total realized income rose from $74.3 billion in 1923 to $89 billion in 1929. However, the prosperity was not divided evenly amongst all Americans. “According to a study done by the Brookings Institute in 1929, the top .1% of Americans had a combined income equal to the bottom 42%. That same top .1% of Americans in 1929 controlled 34% of all savings, while 80% of Americans had no savings at all. While the disposable income per capita rose 9% from 1920 to 1929, those with income within the top 1% enjoyed a staggering 75% increase in per capita disposable income.”
A major reason for this gap between the rich and the working-class people was the increased manufacturing output through this period. Thus, wages increased 25% as fast as productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant. “In fact, from 1923-1929 corporate profits rose 62% and dividends rose 65%.”
The large and growing gap in wealth made the US economy unstable. For an economy to function properly, total demand must equal total supply. In the 1920’s there was an oversupply of goods. It was not that the surplus of products was not wanted, but those who really needed them, could not afford them.
The federal government also contributed to the growing gap between the rich and middle-class. Andrew Mellon, Coolidge’s Secretary of the Treasury, was the main force behind tax cuts that lowered federal taxes such that a man with a million-dollar annual income had his federal taxes reduced from $600,000 to $200,000. Our textbooks would indicate that the purpose behind this would be that $400,000 would be spent, thus stimulating the economy. Instead, they invested it into the stock market, and lost everything.
The federal government favored the new industries (radio and automotive) as opposed to agriculture. During World War 1, the government subsidized farms and paid higher prices for what and other grains. Because the government was feeding the US and Europe, they encouraged farmers to buy more land, invest in modern methods, and to produce more food. However, when the war was over, the US stopped helping farmers. During the war, the government paid $2 a bushel for wheat, but by 1920, wheat prices fell as low as 67 cents a bushel. Farmers fell into debt; farm prices and food prices tumbled. The federal government left American farmers in the cold.
The problem with having large concentrations of wealth and dependence upon two industries is the economy relies on those industries to expand, grow, and invest in order to prosper. At the time, the main problem with the automotive and radio industries was that they could not expand because people could and would only buy so many cars and radios. When those industries went down, they took the American economy with them.
In 1929, 1,124,800,410 shares were traded on the New York Stock Exchange. From 1928 to 1929, the Dow Jones Industrial Average rose from 191 to 381. This profit was attractive to investors. Company earnings were not important as long as stock process continued to rise, and huge profits could be made. Through the convenience of buying stocks on margin, one could buy stocks without money to purchase them. By mid 1929, the total of outstanding broker’s loans was over $7 billion, in the next three months, that number would increase to $8.5 billion. Interest rates for broker’s loans were as high as 20%!
Prices had been dropping since September 3, 1929, but people were still optimistic. Hopeful investors continued to flock the market. Then on Monday October 21, 1929, prices started to fall quickly. The volume was so high that the ticker fell behind. Finally, investors were afraid! Knowing that prices were falling but because the ticker was behind, they could not tell how far they had fallen, so they started to sell quickly. This caused the collapse to happen faster. The market stabilized for a few days, and then on Monday October 28, 1929 prices started dropping again. By the end of the day, the market had fallen 13%. On Black Tuesday, October 29, 1929, 16.4 million shares were exchanged.
Although many were disturbed by the stock market crash, few realized that the Great Depression was ahead. The Bank Failures would make the near future of the US economy clear.
Trying to benefit from the investment boom, like many investors, banks tied their money (customer deposits) up in the stock market. When the market collapsed, brokers began calling in margin accounts, many banks were forced into bankruptcy – closing their doors to depositors.
Failures of individual banks generated runs on other banks as depositors became nervous about the security of their accounts. A high rate of insolvencies hit the banking industry and the nations stock of money in circulation plummeted. These developments prompted a rapid tumble of the GNP that was the defining characteristic of the Great Depression.
This speculation and the resulting stock market crashes, acted as a trigger to the unstable US economy. More jobs were lost, more banks went under, and more factories closed. Unemployment would grow to almost 13 million by 1932. The Great Depression had begun.
Impact of the Economy
There were many psychological, cultural, and political repercussions of the Great Depression. These impacts played a major role in reforming the American economy for the future that was to come. During the horrific times of the depression, everyone in America got a glimpse, whether short or prolonged, to how the United States would be under an economic crash. As you can see from the main causes of the depression, numerous amounts of people lost their jobs, the prosperity rate significantly increased, businesses failed, and the overall condition of America was faced with pure turmoil and suffering.
Among each major impact that the depression had on the American economy, the most extravagant circumstance was the rapid decrease in overall business. For instance, there were more than 100,000 businesses that failed as an impact of the depression. By 1933, more than 5,000 banks had failed. Not only did this affect the government, but the general public and the entire economy felt the “hit” also. Within every bank that closed, there were public savings and checking accounts that were also demolished. With no type of security in place to protect their investments and or savings, peoples money and sometimes even life savings, were gone. This decline created a continuing affect that spread throughout the economy. As a result, the national income fell by 54 percent. Close to 90 percent of industrial production ceased. The foreign trade decreased by 70 percent, and new investment in plants and equipment had plummeted by 98 percent. Hundreds of thousands of home and farm mortgages foreclosed, and there was no decent food, clothing, or shelter to be purchased. Obviously, due to the circumstances, business was put on hold for what seemed like “forever” to the American economy.
Consequently to the many business failures that occurred during the depression, along with the steadily decreasing income and tremendous rise in unemployment, many people were forced to live in horrible, strict, confined, and discouraging circumstances. People were living on the streets of America striving to survive. As a result, starvation and malnutrition was a major factor that affected the general public. Thousands of people starved in the streets while unsold food piled up or went bad on the nation’s farms, due to the need for profit. More than 2 million Americans moved from cities to farms in the hope of being able to at least feed themselves. Despair overcame millions of people who survived the distress but could not find work for months or even years. Others were forced to work in fields in order to make the little money they could.
Family tensions increased as many people lacked jobs, resulting in a major increase in mental health problems, and family violence. The loss of money and personal belongings resulted in the number of relatives in one household or apartment, doubling within a short amount of time. These situations developed very confined living conditions resulting in unhealthy and unhappy circumstances. Many children had to leave their schools because they lacked clothing or the local school boards simply could not afford to maintain buildings or pay teachers. Children were forced to provide for themselves, and their family. Uncertainty and unhappiness increased over the years. The overall living conditions of the depression were very unstable and unsatisfying to the American public. Feelings of distrust towards the government and the economy emerged from every single individual.
The depression had a major impact on not just the current situation, future thoughts and actions were affected as well. Along with distrust from the public towards the economy, grew an extreme realization of poverty and distress for American society. The experience brought about a change in the viewpoints toward many aspects of life and business. Everyone was forced with making critical decisions that would forever change life situations. Ultimately, there was not one industry, bank, agricultural, or government aspect that was not noticeably affected by the depression. The impacts were felt at home in our society as well as across seas in other countries. Everyone’s living standards and situations suffered due to the depression. There was no true understanding of how these circumstances could have begun, and no knowledge of when it would end.
Solving the Depression
“During the early years of the depression in the United States of America, President Herbert Hoover and his administration believed, as did many bankers, economists, and financial leaders, that left alone, the economy would eventually right itself. Business leaders operating through the spirit of competition would restore America’s prosperity and economic vitality. When the economy, during the depression, did not improve during Hoover’s administration, Americans began looking for a new leader, a leader who would take decisive action against the economy. The people found a new leader in Franklin D. Roosevelt in 1932, when they elected him president in a landside election.”
Roosevelt believed that the federal government should take bold steps to improve the economy. He blamed financial leaders and big business for America’s economic (depression conditions) and recommended government regulation of banks and industry.
President Roosevelt had many accomplishments during his term of president during the time of the depression. Some of his accomplishments were:
·”Social Security Act” provided for state-administered, federally funded unemployment insurance, welfare benefits, administered old age, and survivor’s pensions. Prior to this passage few states provided old age pensions and un-employment insurance.
·”Relations Act (Wagner Act)” gave new life to the National Industrial Recovery Act. That act gave workers the right to collectively bargain and established the National Labor Relations Board to supervise union elections and investigate unfair labor practices by companies.
·”Revenue Tax Act” increased income taxes on the wealthy and on corporations.
·”Banking act of 1935″ gave the federal government additional control over the Federal Reserve System.
·”Public Utility Holding Company Act” placed power, water, and other utility companies under the regulation of the newly created Securities and Exchange Commission.
·”The Farm Act” came in three stages. First the administration was empowered to adjust farm production to effective demand as a means of restoring the farmer’s purchasing power. Second was an accompanying authorization to refinance and readjust farm mortgage payments. Third the part of the act was the power for controlled inflation.
·”Emergency Farm Mortgage Act (1993)” funded loans for farmers in immediate danger of losing their farms.
·”Wagner-Steagal Housing Act” gave 500 million in loans for low-cost housing.
·”Youth Administration” was established to equalize opportunity for youth. It was setup to give economically disadvantage youth opportunities that were previously denied them.
·”Tennessee Valley Authority Act” Aubrey Williams stated “Major Problems in the Rehabilitation of the South,” address to the Southern Tenant Farmers’ Union and the United Cannery, Agricultural, Packing, and Allied Workers of America, Memphis, Tennessee, September 26, 1937″. This act provided federal funding for the development of the Tennessee Valley.
·”Rural Rehabilitation Division of FERA” later called Resettlement Administration funded work-study jobs, teacher’s salaries, free lunch program and construction of new schools.
·”Works Relief Act” provided immediate increase in employment and corresponding stimulation to private industry by purchase of supplies.
·”Works Progress Administration (WPA)” put 3.5 million jobless Americans to work on roads, parks, and public building. Moreover, the WPA provided jobs for artists, writers, musicians, and authors as well as laborers.
·”National Recovery Act” encouraged business leaders to work together to create codes that would control wages and prices.
·”Gold Reserve Act” was signed on Roosevelt’s birthday. This gave the Treasury greater control of credit and currency.
In 1933, Roosevelt pushed toward a three-month period called “Hundred Days” when Congress enacted the most sweeping program of reform. Fifteen major laws went on the books; they dealt with banking, the gold standard, relief, mortgages, hydroelectric power and regional planning, the stock market, and reorganizing industry and agriculture.
Roosevelt throughout his term during the depression years encouraged cooperation and optimism with his speeches, fireside chats, and press conferences, which made a powerful impression on many Americans.
The Great Depression caused enormous hardship for virtually the entire industrialized world. As we look back over the many causes of the Great Depression, there were many lessons to be learned. The depression started because of the unequal distribution of wealth and the extensive stock market crash. The economy was affected by the failure of a large portion of the nation’s banks, businesses, and farms.
There were many lessons learned in the financial aspect of the depression. First, there was massive government protection to banks in the form of the Reconstruction Finance Corporation and the Federal Deposit Insurance Corporation. This was brought on by the turmoil that was felt in the banking sector. By implementing government protection the banking institutes were insured against withdrawals and the suspension of convertibility. In addition, the Federal Deposit Insurance Corporation’s main benefit was having the central bank as the ultimate guarantor of the insurance system.
As a result, during a pending financial collapse the bank removes any element of discretion about the behavior of its policymakers. Therefore, the central bank learned lessons regarding the function of the lender of last resort for short-term stabilization of the financial system. The reasons that stemmed government protection was noticeable bank weakness, poor depositor discipline, the unwilling of private associations to protect solvent banks from the threat of unwarranted runs, and the favorable agreement to have deposit insurance on economic grounds.
Second, there was failure of the interwar gold standard. There were certain countries that caused the world money stock to decline substantially and rapidly. This brought about the fixed exchange rates and full currency unions.
The gold standard of the interwar was referred to as a gold exchange standard and its main purpose was to establish and maintain a system of fixed exchange rates.
Third, there was international trade and tariffs. Trade and payment policies were becoming very close and began to intertwine. In addition, when tariffs began they usually ended with trading blocs, bilateralism, and exchange controls. The lesson learned in this situation implies that deflation effects international trade through its impact on the real value of tariffs.
Another lesson learned involved worldwide catastrophes. There was the use of cheap foreign labor to lower cost and improve profits, which drove imports of foreign made products and pushed labor offshore. There was a decline in domestic employment and it intensified the problems of the depression to the point in which caused a backlash. Then that is when the start of labor-union protectionism began. The lesson in this situation indicated that the 1930s protectionism assisted in the destruction of globalize.
Eventually, the depression transformed national politics by vastly expanding government, which was increasingly expected to stabilize the economy and to prevent suffering. In order to create a stabilized economy, new plans, and policies for Social Security, unemployment insurance, and federal family assistance were established.
In sum, the Great Depression was caused by the stock market crash, in which led to a poor banking system, causing low interest rates, brought on by an ineffective Federal Reserve policy.
Therefore, knowing and understanding these lessons listed and many others, it is safe to say that as far as our current policies today, deflation is extremely costly and a gold standard is very dangerous.
The experience of the Great Depression brought about change in how we conduct business. For many people the depression brought on distrust in banks and our government; a trust that our government set out to regain in many years to come. Our government implemented federal laws and banking regulations that would stabilize the economy for many years. Reorganizing industries, the stock market, and agriculture provided stability that lead to trust.
Each era has had its own battles that has shaped and reshaped America into what it is today. Learning from battles such as racism, terrorism, and recessions will continue to form America into a better place.
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James, Harold. The End of Globalization: Lessons From The Great Depression. Cambridge; London: Harvard University Press, 2001
Jeffries, John W., Nash, Gary B., Segrue, Katherine L., “The Great Depression and WWII, 1929-1945.” Encyclopedia of American History.
Kutler, Stanley I. Dictionary Of American History. Third Edition. Charles Scribner’s Sons, Inc. May 2003.
Kutler, Stanley K., Dallek, Robert, Hollinger, David A., McCraw, Thomas K., Kirkwood, Judith. “The Great Depression, 1929-1939.” Encyclopedia of the United States in the Twentieth Century. Volume III.
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