The Great Depression left a great impression on those who lived through it. Many can recall parents or grandparents saving much food in their pantries worrying about the chance they would be hungry again like during the Great Depression. A common saying of those who lived through the Great Depression was “you have no idea what it was like to be hungry”. Thankfully, those with political and economic planning power fixed the problems that created the Great Depression. Although we have experienced stock market crashes since, we have not experienced anything like what those in the late twenties and thirties experienced.
It is interesting to note that the United States was not the only country to experience the effects of the Great Depression. Many other countries such as Germany, Canada, and Australia felt the effects of the Great Depression. Many today think of the United States when the Great Depression is discussed but the Great Depression was the worst economic downturn experienced in the industrialized world. Australia was affected by the lack of demand for the raw materials it produced.
The outline of this paper follows the timeline of the Great Depression. Using this outline the paper will examine the causes and effects of the Great Depression. In this case, learning from history can prevent a future that includes a great depression.
The Causes of The Great Depression
Massive Business Inventories
This period of time is marked by growing inventories and the loss of jobs. In 1929 business inventories tripled because buyers reduced spending. More than half of all Americans were living at or below the poverty level during this time frame. Manufacturing jobs fell contributing to the growing problem of unemployment. Sales of automobiles dropped markedly. Automobile manufacturers were major employers and the downward swing in sales resulted in the loss of manufacturing jobs. Annual income in the United States averaged $750 (Kangus, 1997).
Lack of Diversification
The majority of jobs preceding the depression were manufacturing and construction jobs. This led to prosperity during the early twenties but contributed to the depression because most of the jobs were located in to few sectors of the market. The drop in manufacturing jobs meant that many jobs in the United States were lost. The consumers no longer had buying power to purchase products from the manufacturing. Supply is governed by demand. Little or no demand for a product results in no need to replenish the supply. Thus, there was no need for the workers that would replenish the supply.
Poor Distribution of Purchasing Power Among Consumers
Farmers had it much worse than any other sector of the population. While most Americans income was about $750 annually farmers earned a mere $273 annually (Kangus, 1997). Farmers had minimal buying power. The farmer’s troubles led them to default on their bank loans. Farmers who did survive the Great Depression were hit hard by the Dust Bowl 1933-39 in the prairie lands of the United States and Canada. It was not a good time for farmers between 1929-39. Farm income during the years preceding the Great Depression declined 66%.
Factory workers were hard hit during the Great Depression. The loss of demand for manufactured products (such as automobiles) led to the loss of manufacturing jobs. Job loss resulted in lost buying power. Loss in buying power resulted in loss of demand for products that those in this market sector would buy. Those who lost their jobs in the manufacturing sector experienced some of the same problems that farmers experienced such as the inability to buy homes and automobiles required to sustain economic growth in the United States.
Disproportionate Disposable Income
As the result of job loss in the manufacturing sector, and farm loss because of foreclosures (inability to pay mortgage because of decline in demand for products produced) the majority of income (40%) in the United States went to 10% of the population. The rich held most of the disposable income while the rest of the population struggled or ended up in soup kitchens and bread lines.
Huge Credit Problems
The financial situation in the United States during the Great Depression was terrible. More lost money than those who gained. Farmers were hit the hardest followed by those in manufacturing jobs.
Banks started to have problems when farmers became less able to pay their mortgages and ended up in foreclosure. Banks make their money by charging interest on the principal borrowed. When a farm went into foreclosure the borrower could no longer pay toward the interest or principal. The bank no longer is paid for making the loan. This problem snowballed during the Great Depression when farmers could no longer pay and banks could not find new buyers for the properties in foreclosure. Many banks failed.
Banks also make money by investing their reserves in the stock market. The banks make money when stock prices rise and lose money when stock prices fall. The stock market crash of 1929 put many banks out of business when they lost their reserves to falling stock prices.
Low Margins in Speculative Investments
Speculative investments were spurred forward by low margins designed to capitalize on the stock market. Margins are collateral given to a broker when borrowing from a broker to purchase securities. When the stock market crashed securities dropped in price but those who bought on margin lost their collateral to the brokers.
Decline in Demand
After World War I European countries rebuilt. As they rebuilt they required less and less from the American markets. These countries recovered their ability to farm for food. These countries also regained manufacturing abilities. These two factors resulted in the decline in demand for American manufactured goods and food.
Financial Crises in Overseas Countries
Many countries found themselves in debt to American banks. These countries borrowed more money from American banks to aid their recovery from World War I. Many countries experienced high inflation rates that made American manufactured products to expensive for them to buy.
High American Tariffs that Discouraged Trade
These foreign countries were affected by American tariffs that made their products too expensive for American buyers. The tariffs were designed to spur the American economy buy making American products less expensive than foreign products.
Stock Market Crash
In 1929 the stock market crashed. In September of that year stock prices began to fall. By October the stock market was in real trouble. Stocks began to tumble on October 24 and by Tuesday, October 29th the stock market crashed as a result of panicked sellers (Feldmeth, 1998). That day is referred to as ‘Black Tuesday’. “By December $40 billion in stock value had been lost” (Feldmeth, 1998).
During, and leading up to, the stock market crash margin buying was out of control. $8.5 million in loans had been given to those wanting to purchase stocks on margin. The crash of the stock market meant that stock prices fell and borrowers could not cover their loans.
Stock Prices Fall
Stock prices fell and panic ensued. Those who had confidence in the market, and invested, lost great amounts of money as the value of their stocks dropped. There was no confidence in the market. The condition of the stock market by December of 1929 was deplorable. More than “$40 billion is stock value had been lost” (Feldmeth, 1998).
Hoover’s attempted calm
No one knows for sure what President Hoover was thinking but he did attempt to calm the American public by saying that he believed that the American economy was sound and that the state of the stock market was temporary.
Business failures were at an all time high between 1929 and 1933. Along with these business failures corporate profits fell as well. Corporate profits went from $10 billion to $1 billion. Banks in the United States lost the confidence of their patrons. Many banks failed and many people lost their savings to the failure. Unemployment within the United States was estimated at 25% of the population. Many of those who were employed were underemployed. That is, many highly educated individuals held jobs that required no education.
Malnutrition, Tuberculosis, Typhoid, Dysentery
One of the most disturbing parts of the Great Depression was the increase in communicable diseases. Many suffered from malnutrition because of the lack of funds to buy food. This made them more susceptible to other communicable diseases. Tuberculosis, typhoid, and dysentery were major problems for people during the Great Depression. Transients were most susceptible to diseases. Transients followed, and worked, the harvests working hard in the fields to earn enough to eat. Most transients were teenage boys who traveled in groups of up to ten to twelve boys. These transients rode the rails (hobos) from one area to another to get harvesting jobs.
“Hospitals treated transients only if they were seriously ill. They suffered diseases due to exposure, lack of cleanliness, vermin, contagion or infection. Ill-clad and undernourished, sometimes days would go by without food. “I was hungry all the time. Dreadfully hungry,” remembered John Fawcett. “I’d never been hungry before. I went two or three days without anything to eat. In a short time on the road, I lost 15 to 20 pounds. Your hunger hurts physically.” (Routledge, 2003).
Soup Kitchens and Breadlines
Many Americans were so hungry that they swallowed their pride and stood in long lines at soup kitchens and breadlines to get a bit to eat. Soup kitchens and breadlines offered a meal for as little as 5 cents or for free.
Large numbers of homeless roam the south for food and employment
In addition to the teenagers who rode the rails following the harvest large numbers of Americans roamed the south looking for work. Many pushed African American workers out of their jobs. African American workers held jobs that most Americans were not willing to take. But, the Great Depression brought renewed interest in those jobs. Those who were pushed out of their jobs headed north to cities where they believed they would find work.
Many were not pleased with Herbert Hoover’s response to the Great Depression. Hoover rejected giving money out on the ‘dole’. He felt that giving out direct assistance would undermine the determination of Americans to recover on their own. Hoover directed those who needed help to get help from local resources such as the Salvation Army, Red Cross, churches, and community resources. These resources were quickly exhausted leaving many Americans still hungry with no place to go. Eventually Hoover’s administration bows down and starts to use federal resources to help with the desperate situation many families found themselves in. During this time many men wandered the streets of cities looking for work. It was not uncommon to find long lines where jobs were advertised. As many as a thousand men would show up to interview for one job. (Weigand, 2001)
When Hoover’s administration finally responded to the situation many people were angry and blamed Hoover for their troubles. To prevent strikes and layoffs Hoover met with those in business and labor leaders. Several Federal work projects were funded to employee men. Women during this time frame were encouraged to stay home and care for the family while the men were encouraged to work via federal work projects. These projects included building the Boulder Dam, Hoover Dam, and Grand Coulee Dam.
Hoover used the Hawley-Smoot Tariff to raise the price of foreign products so that American products would be purchased. This gave a slight boost to the economy but worsened the situation overseas. It was no longer cost effective for foreign goods to be shipped and sold on American markets.
Reconstruction Finance Corporation
Hoover’s administration set up the Reconstruction Finance Corporation (RFC). This corporation gave loans to stimulate the economy. Roosevelt continued the RFC as part of the New Deal plan. Following the first World War the United States set up the War Finance Corporation to aid in economic recovery. The RFC was modeled after this program.
Election of 1932
By the time of the election of 1932 Americans were more than ready for a change in the oval office. Hoover faced off against Franklin Delano Roosevelt. On the campaign trail Hoover was booed and charged with being responsible for the Great Depression and the slow response of the Federal Government to the crises.
Hoover Goofs Again!
Hoover’s biggest mistake was not accepting responsibility for the Great Depression. He was quoted as saying that “No president must ever admit he has been wrong” (Feldmeth, 1998). This was the kiss of death for Hoover. No one can say that Hoover’s policies created the Great Depression but Hoover’s response to the Great Depression was slow and left many on the breadlines and in the soup kitchens longer than they needed to be.
Franklin Roosevelt’s New Brand of Government
Hoover’s opponent for president was Franklin Delano Roosevelt. His campaign promised a “New Deal” for the “Forgotten Man” (Feldmeth, 1998). His ideas for economic reform gave the American public a sense of optimism. Roosevelt offered the American public what they wanted to hear. He was for ending prohibition and increasing federal relief. Democrats won an overwhelming victory with Roosevelt taking office, and control of the House and the Senate going to the Democratic Party.
Americans needed only survive the lame-duck period of Hoover’s administration to move on to Roosevelt’s administration filled with optimism. Roosevelt’s slogan was “Happy Days Are Here Again” (Feldmeth, 1998). Roosevelt won the presidency with an overwhelming 57% of the popular vote. Roosevelt’s administration was charged with providing the American public with relief, recovery, and reform.
The Great Depression was a disaster for the American public. It followed a period coined the “roaring twenties”. The depression was the result of several things that went wrong such as businesses building up high inventories; drop in consumer demand, lack of diversification, and poor distribution of purchasing power among consumers.
Farmers had the hardest time during the Great Depression. Many lost their farms and any savings that they had in the bank. The 1930’s brought a drought to the prairie lands of Canada and the United States. This forced many farmers into foreclosure.
Drop in demand for manufactured goods resulted in layoffs. Manufacturing workers found themselves in much the same position as farmers. Both groups could no longer afford new homes and automobiles that were required to sustain economic growth.
As the situation got worse President Hoover’s administration was slow to respond. He told the American public that they should turn to existing resources for assistance. His response to the worsening crises with federal aid was a little too late.
The election of 1932 brought relief for the American public. The Newly elected President Roosevelt needed only wait out Hoover’s lame-duck period before he could begin the reforms needed to bring back the American people’s confidence in the Federal Government.
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Butkiewicz, James. (2002)”Reconstruction Finance Corporation”. EH.Net Encyclopedia, edited by Robert Whaples, 2002.
Feldmeth, Greg D. (1998) “U.S. History Resources”
Kangas, Steve. (1997) The Great Depression: Its Causes and Cure, Liberalism Resurgent (1997). Web.
Routledge. (2003). Riding the Rails-Teenagers on the Move During The Great Depression. New York.
Wiegand, Steve. (2001). U.S. History for Dummies. Analyzing the Cause and Consequences of the Great Depression.