Causes and Effects of the Great Depression
- Laissez Faire policies that left the economy
- Over speculation on the stock market
- Decline in foreign trade
While we have spoken about the 20’s as a time of great prosperity,
it was a tad deceptive. Problems lie under the surface that would not
be dealt with by the conservative administrations of Harding,
Coolidge and Hoover.
The Great Depression did not begin in
1929 with the fall of the over inflated stock market. In fact the
Depression began ten years earlier in Europe. As the depression raged
on in Europe American’s believed they would be immune to its effects.
Isolationist sentiments and conservative doctrine held that the less
we had to do with Europe the better. As a result American polices
never addressed the possibility of the United States entering a
depression as well. Actually American policies actually contributed
to our entry into the depression.
The early warning signs first came in
the agricultural sector. Farmers continued to produce more and more
food due to technological advances like the tractor. As production
grew farm prices dropped. It was simply a matter of supply and
demand. Framers reacted in the traditional manner and boosted
production even further. Prices plummeted. Farmers began to default
on their loans and the banks foreclosed. To make matters worse the
central part of the nation was hit with a terrible drought. Farmers
were devastated. The drought turned that portion of America into what
was called “The
In the 1920’s American economic
policy was laissez faire. Businesses were left alone and for sometime
things appeared to fine. American businesses reported record profits,
production was at an all time high. The problem was that while
earnings rose and the rich got richer, the working class received a
disproportionally lower percentage of the wealth.
This uneven distribution
of wealth got so bad
that 5% of America earned 33% of the income. What this meant was that
there was less and less real spending. Despite the fact that the
working class had less money to spend businesses continued to
increase production levels.
Purchasing dropped internationally as
well. Since Europe was in a depression people there weren’t buying as
much as businesses had estimated. Then the Fordney McCumber Tariff
and the Hawley Smoot Tariff raised tariff levels to as much as 40%.
Europe which was already angered at US foreign actions responded with
high tariffs of their own. International trade was at a standstill.
At this point you should be asking
the question “If no one buying and companies were increasing
production levels, wasn’t there going to be a problem?” BINGO!!! The
problem is known as overproduction. American businesses were producing far more
than could be consumed. The result was lost profits and eventually
debts. After a while many companies went out of business. Why would
these companies continue to overproduce? There are several reasons.
Some were managed poorly. Others were part of holding companies that
placed layers and layers of companies, each relying on the others
production levels like a pyramid. If one company in the pyramid
reported lower production levels the others fell off and it looked
bad. In many cases however crooked company owners reported earnings
that were higher than they were actually were in order to drive up
the stock price.
As a result of World War I America
had emerged as the worlds leading creditor nation. Foreign powers
owed the United States and its companies about a billion dollars
annually. With declining trade in America, a demand for reparation
from the United States and the continuing European depression this
Throughout this period of time
Americans (and it seems this included Harding, Coolidge and Hoover.)
Truly felt they would be prosperous forever. They didn’t see or were
unwilling to see the warning signs. With this confidence Americans
began to increasingly invest in the stock market. The market began an
unprecedented rise in 1928. By September 3rd
1929 the market reached a record high of 381. Then the decline began.
Many didn’t think it would last but on October 24th
panic selling began as 12.8 million shares changed hands. Then came
29th 1929. The market plummeted. By July the Dow
reached a low of 41.22. Millions upon millions of dollars had been
lost. Many who had bought on margin (credit) had to pay back debts
with money they didn’t have. Some opened up the windows and jumped to
their deaths. The depression had arrived.
Banks that had invested heavily in
the stock market and real estate lost their depositors money. A panic
ensued as people lined up at the banks to get their money.
unfortunately for many the money just wasn’t there. As the amount of
money in circulation dropped deflation hit. Money was worth more but there was
little money to be had. The fed which had the power to put more money
into circulation did nothing (laissez faire). Workers were fired as
thousands of businesses closed down. Unemployment rose to
25-35%. In Toledo Ohio
fully 80% of the workers were unemployed! Real estate investments
flopped because with deflation a building that was once worth ten
million was now worth five. The mortgage and debt stayed the same but
the income was gone. Banks foreclosed on loans and took possession of
worthless properties that nobody could afford to buy. Between 1930
and 1932 over 9000 banks failed.
With all of this there Hoover
announced to Americans that they should “stay the course” that the
ship would right itself. After all, Hoover was a self made man, a
rugged individualist. By the time Hoover recognized he had to do
something it was too little and much too late.