Causes of the Great Depression (1929-1939)

During the Great Depression, Franklin D.Roosevelt stated, “The only thing we have to fear is fear itself.” As World War I ended and the 1920’s boom in the industry deteriorated, the Great Depression developed and the result was dreadful. The crash affected millions of people and lasted for about a decade. United States was in a state of despair, as banking systems failed, many people were unemployed, and prices drastically fell. War-producing factories shut down, farms/homes were lost to possession of land, and people starved to death. Lasting for almost a decade, it was known as the longest period of depression in the United States history. It started in the United States, and this alone had the capability of influencing most of the world. The negative impacts of this era resulted in recession and demobilization. The Great Depression had changed the way people think/behave and sometimes, for the worse. People in the United States and all over the world were highly affected by a numerous causes: financial crisis, bank failures, government actions, overproduction in agriculture/industry, and discrimination.

By the 1920s, the new ideas of artists, writers, manufacturers, musicians, and technological advances positively influenced the American culture. Businesses thrived and manufacturers invented new goods that would be useful for the people. However, on October 29, 1929, referred to as the height of the market or also known as Black Tuesday, was one of the worse days in history of stocks. The market was growing faster than it should have and stocks became overvalued; this meant that they were worth more than their definite values. (TeachTCI) There was a lot of risky activity in the stock market because many people had a “get rich quick” attitude. Americans saw that there was a growth in the economy and started buying as many shares as they could afford to invest in stocks. Speculation were one of the biggest ways that investors used to buy stocks with their money on credit, and then used those stocks to buy more stocks. Another way that people bought stocks was by buying on margin. This allowed investors to buy stocks with their own money for a fraction of it and then borrow money for the rest. Buying stocks in thriving times is exceptional when the economy is high. When stock prices downturn, the borrowed money completely collapses and is no longer accessible. During the Great Depression, companies who took part of the crash had lost everything they saved. Prices dropped and businesses/companies were highly affected. Americans had to pay off their debts, so they sold their properties, such as homes and cars. The domino effect took place and more people started to sell their stocks as well. To put this in another way, “Over 16 million shares were traded on Black Tuesday. This record volume of shares was not broken for nearly 40 years.” (Ducksters).

With this in mind, there was a large number of bank failures that occurred during this era. People deposited money in which they did not need for day-to-day expenses. On the other hand, banks did something erroneous. The banking system was not necessarily ready for recession, as there was no economic planning or agency that would help monitor the United States’s economy. The government failed to take actions at the right time to keep banks moving. They lended money to other businesses in order to earn interest. Bankers owed money to stockbrokers, but they could not repay the loans. Hence, the loans piled up and banks were reckless about keeping other people’s money safe. People panicked and went to banks to withdraw their funds. During 1930 and 1931, large numbers of people lost confidence in depositing money to local banks and so, banks ran out of cash and had to shut down. “An appalling 3,800 banks failed in 1931 and 1932, one-fifth of the banks that were in business in the United States in 1930 had gone out of business, and millions of people had seen their savings vanish.”

During the Great Depression, the government did very little to address the issues. In 1929, Herbert Hoover was elected as the president of the United States. Hoover was most qualified as a president. He was born at a time when poverty was a very notorious thing, so he knew how it felt. Hoover was very talented and used his great skills to make a change in government service. He had a belief in that economic recovery depended on the business community. During World War I, he was the head of a relief agency located in Belgium and was also the head of the Food Administration. However, at his time of presidency, Hoover faced great challenges with the economic crisis, as he was not prepared with what was occurring at the time. As the economy worsened, Hoover’s solutions were not strong enough to get rid of the economic crisis. Hoover tried to deal with failing banks by establishing an agency known as the RFC (Reconstruction Finance Corporation), to provide loans to banks, businesses, and farmers. Hoover’s attempt, however, declined the number of bank failures in a year. Although many criticized him for indirectly helping the needy by boosting economic growth, the corporation never invested enough money to save all the banks. Another step that was taken by Congress was the Federal Reserve System. It managed the nation’s money supply and decided how much money is available among investors and producers and consumers. Following the stock market crash, the system kept interest rates very low and made borrowing easier. Instead of concentrating on expanding the money supply after the crash, the system allowed money to be spent. As the stock market crash was on the rise, taxes on American people increased drastically and put a lot of people in a state of debt. In 1930, United States raised taxes to 50% on imported goods. Increasing the demand resulted in massive unemployment. Factories shut down and created a type of a worldwide depression. After World War I, European countries owed United States banks a lot of money as their economies were ravaged due to war and had no ideal way to pay the money back. However, the American government refused to lower the cost and insisted their allies to pay the money. Then, in 1930, United States imposed the Smoot-Hawley Tariff Act in 1930, where high taxes/tariffs were placed so that Europeans were not able to sell products in United States markets and make money. This allowed the United States to protect industries by raising the cost of goods being imported from European countries. This affected United States negatively by stopping trade with other countries and slowed down their economy. In addition, homeless people built shacks and named them “Hoovervilles,” as a sarcastic thing, named after Hoover. Towards the end of Hoover’s presidency, in 1932, when the Bonus Army veterans came to Washington D.C., they demanded of a pension (payment after one’s retirement). Hoover chose to ignore them and wanted them to go away. Some veterans, up to 10,000 of them, refused to leave, but many other veterans gave up and headed back home. That summer of 1932, Hoover lost during reelection and democrats nominated Franklin D. Roosevelt to be their president. In accepting the nomination, Roosevelt promised a “New Deal” to promote recovery. 1932 was one of the most desperate years in economic history, partly because of all the republican presidents, and the New Deal was a new ray of hope for the people, as it aimed to bring immediate relief from the Great Depression and replace a socialist system of government with an American capitalism system. During Roosevelt’s presidency, the economy got worse. Three months later, the Congress established the Glass-Steagall Act, in which commercial banking was separated from investment banking. It created an agency known as the FDIC (Federal Deposit Insurance Corporation) to guarantee bank deposits. In addition, Roosevelt created his “Brain Trust,” which guided his idea of the New Deal. During the first hundred days of Roosevelt’s presidency, Congress passed records of bills that provide “relief, recovery, and reform.” In contrast to Hoover, Roosevelt supported the idea of “direct federal relief.” In the first hundred days of Roosevelt’s presidency addressed so many concerns by creating a series of acts, laws, and agencies to help stabilize the economy. For example, Congress passed the Civilian Conservation Corps to allow unemployed men to work in rural camps dealing with farming and architecture. In April 1933, Roosevelt removed the country’s gold standard and replaced it with currency backed by government pay. In May, Congress passed the Federal Emergency Relief Act which provided money to people who do not have money. The Agricultural Adjustment Act funded farmers to restrict production and balance supply and demand for farms so that prices would stay constant and not increase nor decrease. (Wessels) This helped to boost farm prices. Before end of May, Congress established the TVA (Tennessee Valley Authority) to build dams and provide cheap electricity and help prevent natural disasters. In summary, Roosevelt created a very huge impact by gaining public confidence in depositing money to banks, created new jobs, raised farm prices, and many more. The New Deal policies impacted the government, reduced unemployment, helped African Americans survive. Although, some things were not achieved from the New Deal such as including the fact that policies did not directly focus on liberties of African Americans, did not necessarily treat everyone the same, and/or accommodate for military forces.

By the 1920s, there were so many American factories part of mass-production, where factories were able to make more goods in very less time compared to the past. Companies usually liked high production because it led to high income. Although, trouble started to arise because there were not enough people to buy all of the products being produced and led to a state of overproduction. By 1929, the buying spree was coming to an end. Many Americans were unwilling to borrow money to buy more consumer goods. The wealthy were also borrowing less money because they had everything they needed. Soon, it led to a state of underconsumption. It is the situation in which people buy fewer goods than what the economy is actually producing. The problem of underconsumption spread to the industry very quickly and many businesses stopped production of goods. This affected labor because workers lost jobs and it led to massive unemployment. Businesses were not able to pay money for the workers’ wages and people who lost jobs were no longer able to buy products that the industry was producing. The state of underconsumption hurt farmers the most and they faced many difficulties. Although they prospered during World War I by supplying food for soldiers, those markets started to disappear and caused for prices of farm products to decrease. Farmers were open to buying more goods created by the industry, such as cars and appliances for farming. Just like everyone else, they borrowed money but as agricultural prices decreased, farmers had difficulty paying off their loans. In fact, some farmers lost everything. Hoover, who was currently the president of the government’s food administration, encouraged the increase in agricultural production during World War I. According to The Gale Group, by the end of war, United States farmers nearly doubled the production of bushels per year. Hence, farmers started to produce more and more crops each year. Approximately, employment of farmers increased by 5% by the 1920s. The problem was that United States farmers relied on European countries for their agricultural production. However, countries in other parts of the world faced many hardships with paying off their debts to the United States. Producers had “competition” with other nations including South Africa, which made it more difficult to sell crops in the market. Because of the overproduction of farm products, prices fell quickly. Coolidge, a president of the United States, also took minimal steps to better the interminable crisis. Congress’s attempts failed and farmers’ situations worsened. As prices continued to fall, farmers kept going bankrupt and/or went into a state of debt.

Discrimination was highly present during the Great Depression, especially for African Americans. Competition was huge in the stock market, as the whole nation was suffering. Many African Americans were hired last and given the least amount of wages. During the New Deal, the National Recovery Act of 1933 was established by Congress, to help the country to recover. It promoted the idea of blacks and whites getting equal wages. However, this did not work according to plan and the New Deal helped blacks minimally to improving living conditions. African Americans could not sustain to helping their families, and many died because of famine and starvation. Furthermore, farmers were also highly discriminated. According to Teach TCI, the wealthiest 5% of American families received 33% of total money earned in the country. This was 60% more than what all other families earned and 40% of families were undergoing a state of poverty. Despite the prosperity during the 1920s, there was always income inequality by factory and business owners. Wealth was distributed unevenly and the gap between poor people and rich rose steadily. Workers’ wages did not go up for them to even buy what manufacturers were producing. For a certain period, people made up for unequal distribution by using credit to buy goods for the household. Buying spree was coming to an end and people were unwilling/unable to borrow money, including the wealthy.

As can be seen, the Great Depression negatively affected United States and other countries all over the world due to many causes including stock market crash, government actions, overproduction, unemployment, income inequality, and more. Roosevelt’s “New Deal” policies have helped Americans in need and attempted to end the era. The result of the Great Depression led United States to be more careful with the economy and protect the country to avoid problems that could arise in the near future. As a result, the Great Depression ended in 1939, but United States economy was still in a precarious situation and it was not till the end of WW2 that the Great Depression actually did end.

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