7.9 - The Great Depression

Causes of the 1929 Crash

• Wall Street Crash: The business boom of the 1920s, marked by rising stock prices, collapsed dramatically in October 1929. The Dow Jones reached an all-time high in September 1929 but then plummeted, leading to massive financial losses for millions of investors.

• Black Thursday and Black Tuesday: The stock market panic began on Black Thursday, October 24, 1929, with a massive sell-off. Attempts by bankers to stabilize the market failed, and on Black Tuesday, October 29, stock prices collapsed completely, as sellers vastly outnumbered buyers.

Underlying Causes of the Great Depression

• Uneven Distribution of Income: Economic gains were not evenly shared during the 1920s. The wealthiest 5% of Americans earned over 33% of all income, leading to reduced consumer spending and contributing to economic decline as businesses started to cut jobs.

• Stock Market Speculation: Many people speculated on stock prices rising without investing in the actual value of businesses. The widespread practice of buying on margin meant that when stock prices fell, many faced financial ruin.

• Excessive Use of Credit: Low interest rates and optimistic beliefs about continual economic growth led to increased borrowing and spending. This over-reliance on credit eventually resulted in loan defaults and bank failures.

• Overproduction of Consumer Goods: Businesses produced goods at a rate that exceeded the purchasing power of consumers with stagnant wages, leading to a surplus of products and financial strain on companies.

• Weak Farm Economy: Farmers had not shared in the 1920s prosperity and faced ongoing issues such as overproduction, high debt, and low prices, exacerbated by severe weather and droughts during the 1930s.

• Government Policies: Lax government regulation in the 1920s and high tariffs hindered international trade and placed additional pressures on the economy. The Federal Reserve’s policies to maintain the gold standard rather than stabilizing the economy also contributed to the crisis.

• Global Economic Problems: The interconnected global economy was fragile, with Europe still reeling from World War I. The U.S. policies demanding repayment of war loans and maintaining high tariffs worsened the global economic situation.

Effects of the Great Depression

• Economic Impact: The U.S. gross national product halved from $104 billion to $56 billion between 1929 and 1932, reflecting a severe economic contraction. Over 50% of the nation's income was lost, and around 20% of all banks failed, erasing 10 million savings accounts.

• Social Impact: Unemployment soared to 25% by 1933, affecting 13 million workers, not counting farmers. The widespread poverty and unemployment led to increased homelessness, family stress, and urban migration in search of jobs. Shantytowns, known as “Hoovervilles,” became common as the homeless sought shelter.

President Hoover’s Policies

• Initial Response: Hoover initially advocated for voluntary action, urging businesses not to cut wages and unions not to strike, while relying on private charities to help the needy. He was reluctant to involve the federal government, fearing it would undermine individual self-reliance.

• Shift in Policy: As the Depression worsened, Hoover recognized the need for more direct government intervention but insisted that aid should come from state and local levels, not the federal government.

Hawley-Smoot Tariff (1930)

• Impact on Trade: This tariff, which was the highest in history, significantly raised duties on foreign imports to protect U.S. industries but led to retaliatory tariffs from European countries. This exacerbated the global economic downturn by sharply reducing international trade.

Domestic Programs

• Federal Farm Board: Originally established before the crash, it was intended to help farmers by storing surplus crops. However, the program was too modest to significantly impact the vast overproduction issues in agriculture.

• Reconstruction Finance Corporation (RFC): Founded in early 1932, the RFC aimed to stabilize critical sectors like banking and railroads through emergency loans. The hope was that stabilizing large businesses would indirectly support smaller ones, although critics argued it mainly benefited the wealthy. “Trickle down economics”, giving money to big business will eventually trickle down.