The Great Depression

Justin Alan Griffith

United States History

November 22, 1999

 Named by Herbert Hoover, The Great Depression started in 1929. The Depression started in New York and spread throughout the United States in a matter of days. Although The Great Depression was mainly in the U.S., it affected the whole world. For the most part Americans were affected greatly, unemployment soared too unheard of levels, wages dropped dramatically, and the economy fell apart. Many blame the crash of the stock market, yet this was not the only cause; for example, The Dust Bowl that swept through Texas, Oklahoma and other Midwest states also contributed to the cause. The Gold Standard is thought to be one of the causes of Money Hoarding, but both the Gold Standard and Money Hoarding are causes of the depression. The mal distribution of money in the 1920's caused an unstable economy.

Franklin Delano Roosevelt came into office four years after the depression started, he was determined to turn the country around. FDR created The New Deal. The New Deal reshaped the economy, the stock market, and the political spectrum. FDR's positive attitude inspired the American people to never give up hope and to have faith in their country.

The Stock Market Crash of 1929, also called the great crash, American economic disaster that precipitated The Great Depression, an approximately 10-year economic slump affecting all the Western industrialized countries. During the mid-to-late 1920's, the stock market in the United States underwent rapid expansion, reaching a peak at the end of August 1929. Prices began to decline in September and early October, but speculation continued. On October 18 the stock market began to fall precipitately. The first day of real panic, October 24, is known as "Black Thursday," on that day a record 12,894,650 shares were traded. Though a number of major banks and investment companies bought up great blocks of stocks in a successful effort to stem the panic that day, their attempts soon proved to be vain. The panic began again on "Black Monday"; on "Black Tuesday" (October 29) 16,000,000 shares were traded, and the Stock Market Collapsed completely ( Encyclopedia).

This speculation and the resulting stock market crash acted as a trigger to the already unstable U.S. economy. Due to the mal distribution of wealth, the economy of the 1920's was one very much dependent upon confidence. The market crashes undermined this confidence. The rich stopped spending on luxury items and slowed investments. The middle-class and poor stopped buying things with installment credit for fear of losing their jobs, and not being able to pay off the interest. As a result industrial production fell by more than 9% between the market crashes in October and December 1929. As a result jobs were lost, and soon people starting defaulting on their interest payment. Radios and cars bought with installment credit had to be returned. All of the sudden warehouses were piling up with inventory. The thriving industries that had been connected with the automobile and radio industries started falling apart. Without a car people did not need fuel or tires; without a radio people had less need for electricity. On the international scene, the rich had practically stopped lending money to foreign countries. With such tremendous profits to be made in the stock market nobody wanted to make low interest loans. To protect the nation's businesses, the U.S. imposed higher trade barriers (Hawley-Smoot Tariff of 1930). Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 1932. The country spiraled quickly into a catastrophe. The Great Depression had begun (Gusmorino,1996).

In the Midwest, drought and winds caused once-fertile farmlands to go dry and turn to dust. Many farmers in what was known as the Dust Bowl - Oklahoma, Texas, and other Midwestern states - lost their farms and took to the roads with their families looking for work (Knowledge, 1999).

The Smoot-Hawley Tariff Act was passed in June of 1930. Since this occurred after the onset of the Depression, it's hard to see how it could have caused it. However, since the real effect of the increased tariffs was to increase prices and increase price rigidity, it is easy to see how the Act could have exacerbated the Depression. Enacting the tariff was exactly the wrong thing to do and about 1,000 economists signed a petition begging Congress not to pass it (Nordeen [1999]).

At the time of the Great Depression, America had a 100% gold standard for its money. This meant that all cash was backed by a government promise to redeem it in a specific amount of gold. Because the amount of money circulating in the economy is wholly dependent on the amount of gold available, the money supply is very rigid. If people start to hoard money the money supply can drop drastically. This is not a problem as long as prices and wages drop instantly to reflect the lower amount of money circulating.

People hoard money because they have a liquidity preference. i.e., people want to have their assets in a readily convertible form, such as money. There are several misconceptions about hoarding money. First, hoarding is not the same thing as saving. If you put your money into a savings account, that money is lent out to someone else who then spends it. Second, hoarding, by itself, cannot cause a recession or depression. As long as prices and wages drop instantly to reflect the lower amount of money in the economy, then hoarding causes no problems. Indeed, hoarding can even be seen as beneficial to those who don't hoard, since their money will be able to buy more goods as a result of the lower prices Nordeen [1999]).

The New Deal programs established new policies in the area of banking and finance. The Securities and Exchange Commission (SEC), created in 1934, continues to monitor the stock market and enforce laws regarding the sale of stocks and bonds. The Federal Deposit Insurance Corporation (FDIC), created by the Glass-Steagall banking act of 1933, has shored up the banking system of reassuring individual depositors that their savings are protected against loss in the event of bank failure.

New Deal economics and financial reforms, including creation of the FDIC, the SEC, and Social Security, have helped to stabilize the nation's finances and economy. Although the nation still experiences economic downturns, known as recessions, people's savings are insured and they can receive unemployment compensation if they lose their jobs (Littell, 1999).

The New Deal legacy has many dimensions. It has brought hope and gratitude for some people for the benefits they receive. It has also brought anger and criticism from those who believe that it has taken more of their money in taxes and curtailed their freedom through increased government regulations. The deficit spending necessary to fund New Deal programs grew immensely as the nation entered World War II (Littell, 1999).

The Chart on the first page depicts the unemployment rate for the American people during the years of the depression. With little consumer demand for products, hundreds of factories and mills closed, and the output of American manufacturing plants was cut almost in half from 1929 to 1932. Unemployment in those three years soared from 3.2 percent to 24.9 percent, leaving more than 15 million Americans out of work. Some remained unemployed for years; those who had jobs faced major wage cuts, and many people could find only part-time work. Jobless men sold apples and shined shoes to earn a little money (Encarta, 1998).

The return of prosperity during and after World War II revived some of the forces that divided society and promoted self-interest in the 1920s. But the experience of the Great Depression left a lasting mark on the United States in the forms of a much greater role for the federal government, a new political alignment in which Democrats would retain the support of a majority for most of the next half century, and a general feeling that the free market must be regulated in order to avoid another such economic catastrophe (Encarta, 1998).

Bibliography

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