Great Depression

The Great Depression in the United States lasted from 1929-1940. It was the worst and longest economic collapse in the history of the modern industrial world. This paper will address the main causes, Federal government response, policies enacted, and the impact the Great Depression had on American society.

A common misconception is that the stock market crash of October 1929 was the cause of the depression. In fact, it was a result of multiple issues in the economy.

The modernization of industry had created the capacity to produce vast quantities of goods, but the prosperity could only continue if demand grew as rapidly as supply did. People were persuaded to abandon values such as saving, postponing the purchase of goods until they could be afforded with cash, and buying only what was needed. This resulting mass consumption kept the economy going through most of the 1920’s.

There was a heavy concentration of wealth in the automobile and radio industry; however, these industries would not be able to expand indefinitely because the need for them was finite. The American economy wasn’t well diversified, so when these industries slowed down, the entire economy did as well.

Another underlying problem was the uneven distribution of wealth. As the decade progressed, the portion of income going to the wealthiest grew larger. This was largely due to two factors: While businesses showed remarkable gains in productivity in the 1920’s, workers received a relatively small share of this wealth. At the same time, with the passing of the Revenue Act of 1926, huge cuts were made in the top income-tax rates. Between 1923 and 1929, manufacturing output per person-hour increased by 32%, but workers wages grew by only 8%. Corporate profits increased by 65% in the same period, and the government let the wealthy keep more of the profits.

In 1929, the top 0.1% of American families had a total income equal to the bottom 42%. The people being encouraged to use a new novelty-“credit,” did not have enough money to do so. This just prolonged the day when consumers accumulated so much debt that they could no longer keep buying the products coming off the assembly lines.

During World War I the U.S. Government subsidized farms and paid inflated prices for wheat and grains. This policy worked well during the war, since European production had decreased. Farmers were also encouraged to buy more land and modernize in order to produce more food; however, when the war ended, the government ended its policy to help farmers. After the war farmers found themselves competing in an over-supplied international market. Prices fell, and farmers were often unable to sell their products for a profit.

After World War I the United States, for the first time in its history became a creditor nation and lent money to European nations. Germany, especially, would have difficulties in paying off the loans if there was an economic downturn. Many American bankers weren’t ready for this new role, and the huge debt level made the banking structure very unstable by the late 1920’s.

In addition, the U.S. maintained high tariffs on goods imported by other countries at the same time it was making foreign loans and trying to export products. This combination could not be sustained. If other nations could not sell their goods in the U.S., they could not make enough money to buy American products or repay American loans.

The 1920’s produced a widespread belief that anyone could get rich, and for a time, many did. Investors in the stock market bought millions of shares “on margin,” which was similar to buying products on credit. They paid only a small part of the price to a broker and borrowed the rest, gambling that they could sell the stock at a high enough price to repay the loan and make a profit. The Dow Jones average doubled in value in less than two years. As investors began selling stocks in late October 1929, the market plummeted. On October 29 stocks lost $10 billion to $15 billion in value. By mid-November almost all of the gains had been erased, with losses estimated at $30 billion. The stock market crash signaled the beginning of the Great Depression.

The initial government response to the Great Depression was ineffective. Hoover insisted that the economy was sound and that prosperity would soon return. He believed the basic need was to restore public confidence so businesses would begin to invest and expand production, providing jobs and income to restore the economy to health. Business owners, however, saw no reason to increase production while unsold goods were on the shelves. By 1932 investment had dropped to less than 5% of its 1929 level.

Hoover was convinced that a balanced budget was essential to restoring business confidence, and therefore he sought to cut government spending and raise taxes.