The Great Depression: Causes
The Great Depression: Causes
When Herbert Hoover was inaugurated as the thirty-first President of the United States early in 1929, the nation was enjoying unprecedented prosperity. But by the end of the year, the stock market had crashed and the country was headed for the Great Depression. President Hoover tried to fight the Great Depression, but as he neared the end of his term, the American economy was in its worst state yet, and many fearful citizens wanted a leader who would do more to alleviate the crisis. They found that leader in Franklin D. Roosevelt, who promised the nation a “New Deal” and with that promise won the election of 1932. Roosevelt’s New Deal had profound effects upon American history. Although it was intended to restore America’s devastated economy, the New Deal actually did little to encourage prosperity.
Causes of the Great Depression.
Easy Credit. Although the American economy thrived in the 1920s, much of this prosperity was based on easy credit. The Federal Reserve Bank kept interest rates low, making it easy for businesses and individuals to take out loans. This policy encouraged people to go into debt. Many people bought new homes, cars, and appliances on installment plans. Instead of paying the full price of an item at the time of purchase, they made a small down payment and then paid monthly installments over a set period of time. As long as people could buy on credit, factories kept busy and jobs were plentiful.
The stock market. The optimism of the era was nowhere more evident than at the stock exchange on Wall Street in New York City. Most factories were owned by shareholders, people who held stocks in the corporations producing the goods. As businesses prospered in the 1920s, stock dividends soared and many people invested in stocks, driving stock prices higher every day.
Risky investments. Some investors practiced speculation , ignoring the true value of stocks, they tried to buy stock while it was going up and then sell it at higher price. Convinced that they could always sell at a higher price, speculators bought and traded stocks at far above their actual value. Stocks, like consumer goods, could also be bought on credit. Some people speculated on borrowed money, gambling that the stock market would continue to thrive. By paying as little as 10 percent of the price of stock in cash and securing a loan to cover the balance, people could hold stock on margin. Margin buyers hoped to sell at a good enough price to repay their loans and still make a good profit. The combination of easy credit and risky investments set the stage for economic disaster.
The Great Crash of 1929.
Signs of a slowing economy. Prices on the New York Stock Exchange, already at a historic high, began to surge upward in the spring of 1928 and, in spite of a few slumps, continued to climb during the first half of 1929. But the careful observer could have seen signs of a slowing economy. In June 1929, industrial production began to decline. A few stockbrokers and economists warned that many stocks were greatly overpriced, and several major investor decided to sell their stocks before prices began to reflect the decrease in production. But most people seemed convinced that the “bull market” of rising stock prices would last forever.
The stock market crash. By the end of September, stock averages had begun to decline steadily. As more and more people began to sell, prices continued to drop. The stock market crash began on Thursday, October 24, when a massive wave of selling sent stock prices spiraling downward and nearly 13 million share of stock changed hands. During the afternoon, several influential banking houses, including J.P. Morgan’s company, invested large amounts of money in sagging stocks in an effort to quell the panic.
For a few Days, stock prices seemed to stabilize, but on October 29, 1929, remembered as “Black Tuesday,” the bottom fell out of the market. Stock prices plunged downward and a record 16 million shares changed hands. The stock market had crashed. Prices continued to fall steadily; by mid-November, $30 billion had been lost on the New York Stock Exchange. Practically overnight, many investors – big and small, rich and poor – lost everything. The “Great Crash” left many in debt for loans they could not repay.
Bank failures. The stock market crash shut off the supply of credit that had sustained the economic boom of the 1920s. Many banks had invested in the stock market and has lost a great deal of money. Banks began to fail by the scores. More than 4,000 banks closed between 1929 and 1932, destroying the savings of thousands of American citizens. Without banks, businesses could not get the loans they needed to continue operating and consumers could not get the credit they had relied on to buy goods.
Unemployment. In addition to the decline in domestic trade, foreign trade fell off drastically as the effects of the Depression spread throughout Europe. Hundreds of factories, unable to sell their products, had to cut back or cease production and lay off workers. By 1932-1933, the worst years of the Depression, 13 million workers, one quarter of America’s labor force, were out of work. The average yearly rate of unemployment throughout the 1930s was 15%. Many workers who were not laid off had to face a cut in wages.
Government intervention. Although the nation had experienced other recessions and depression in the past, none were as severe as the Depression of the 1930s. One important reason for the severity of the Great Depression was government interference in the free market economy, especially interference by the Federal Reserve System. Throughout the twenties, the Federal Reserve System had kept interest rates relatively low and ha discouraged expansion of the money supply. But in 1930, when an expanded money supply was badly needed to aid banks that could not meet obligations, the Federal Reserve took action to contract the money supply. The result was a multiplication of Bank failures, the loss of the saving of million s of Americans, and a deepening of the Depression. The Feral Reserve System accomplished exactly the opposite of what it was supposed to accomplish.
The Negative Effects of the New Deal.
Banking and finances. By 1933, the nation’s financial structure was in critical condition. Scores of banks were failing because of bank runs. Since a bank keeps only a fraction of its deposits on reserve, it is impossible for it to meet demands when all customer demand their money at once. The governor of Michigan had stopped bank runs in his state by declaring a “bank holiday,” closing all banks within the state for eight days. This gave the
banks time to calm the fears of depositors and assure them that their money was safe. Although some banks had failed because of unwise investments, many remained sound. President Roosevelt’s first official act was to declare a national bank holiday, closing all banks in the United States. At the same time, he placed a temporary embargo on the exportation of gold. On March 9, the Hundred Days Congress passed the Emergency Banking Relief Act, which gave the President broad power to control banking policies and to reopen banks as he saw fit.
By late in March, about three-fourths of the banks that had been closed were back in operation, have been declared “safe” by the federal government. Roosevelt’s next step was to take the country off the gold standard. On April 19, 1933, he announced that all privately held gold, except jewelry and coin collections, was to be turned in to Federal Reserve banks in exchange for paper money. Paper money was no longer to be redeemed for gold. Roosevelt claimed that paper money which was backed by the federal government would be as good as gold. Taking the country of the gold standard shook public confidence in the U.S. monetary system. In addition, the abandonment of the gold standard helped create a “managed currency” in the United States.
In 1934, in an attempt to stimulate the economy by creating inflation, the federal government reduced the gold value of the dollar by 59.06 cents, or 59.06 percent of its former value. Now paper currency, which was already unredeemable, was only partially backed by gold. This did even more to spur a lack of confidence in the monetary system. The devaluation of the dollar did not substantially reduce its purchasing power in the short run, but in the long run the value of American currency would be seriously affected.
Regulation of agriculture and business. The New Deal also called for more government regulation of agriculture and business. In May 1933, the Agriculture Adjustment Act became law. Seeking to increase prices for agricultural products by reducing the supply of food, the government paid farmers not to plant crops or graze livestock on pasture land. Many Americans were upset that the government would pay farmers to reduce the food supply at a time when many people could not afford to pay higher prices for food. Also in 1933, the National Recovery Administration (NRA) was established to control wages and prices and to limit competition among businesses while encouraging labor organizations.
Many factories shut down of laid off worker because employers could no longer make a profit. Though these and other efforts to regulate agriculture and business were supposedly intended to combat the Depression, they actually hurt the economy and prolonged the Depression. Some conservatives believed that President Roosevelt and other proponents of the New Deal were deliberately trying to prolong the Depression in order to persuade the American people to accept welfare socialism as a way of life.
Government welfare. Another major task undertaken by the New Deal was the financial relief of the unemployed. The Hundred Days Congress quickly established the Federal Emergency Relief Administration (FERA), which released large sums of tax money to state and local agencies for direct relief of the unemployed. Headed by FDR’s friend and influential advisor, Harry Hopkins, the FERA spent $9 billion on federal relief in five years. The relief programs gave emergency aid to many, and yet they tended to discourage self-reliance and individual initiative; they encouraged people to become dependent upon the government for financial aid. Many ordinary Americans, in spite of losing their regular jobs, fund ways to get through the Depression without receiving government relief. It is interesting to note that in Chinese-American and Japanese-American communities, where cultural background taught that families were responsible to care for their own relatives, there were few applicants for government relief, even in the midst of the Great Depression.
Social Security Act. The Social Security Act established a government fund for unemployment and old-age insurance. This fund was to be financed by a tax on employees’ wages and employers’ payrolls. When a worker retired, he was to receive regular monthly benefits from the Social Security system. Provision was also make for relief of the blind, the crippled, the aged, and other dependents. The Social Security system was introduced as a voluntary program, and the tax on wages and payrolls was small.
But the Social Security Administration soon blossomed into an enormous agency which began to transfer vast amounts of money to welfare programs. As more people were needed to contribute more money to keep the system afloat, Social Security became mandatory for most workers and employers, and the tax increased substantially. By the end of the century, many people would be questioning the practices of the Social Security Administration and doubting its future ability to provide retirement benefits for contributors.
New Deal failures. Under the New Deal, the U.S. government took a big step toward socialism, expanding its power over American business, industry, and agriculture. Many people were alarmed by the remarks of the New Deal politicians like New York Senator Robert Wagner, who proclaimed, “I do not think we will ever have industry in order until we have a nationally planned economy.” The New Deal clearly threatened the American tradition of free enterprise. The New Deal also received criticism for its great cost and inefficiency. By 1939, after six years of government job programs, regulation, and deficit spending, over 9 million workers remained unemployed. The New Deal had done little to help the economy, and in many ways, had even prolonged the Depression. FDR’s New Deal program laid the foundation for a social welfare state by expanding over business, industry, and agriculture, and by making many Americans dependent on the government for their daily needs.