The Great Depression that started in 1929 and lasted through the late 1930’s has greater impact than other economic downturns in the United States because it was longer and has affected other countries worldwide. As such, it is considered as the worst economic crisis in the history of the United States.
Causes of the Depression
Stock Market Crash
The Great Depression is oftentimes linked to the Stock Market Crash of October 1929 because the Great Crash marked the start of the economic crisis.
The two events may have been closely related but this is because both are the effects of deep economic and social problems during the 1920’s. However, the Stock Market Crash reflected an economic weakness that proved to be fatal: over confidence in the stock market.
Americans found the stock market an avenue for productive investment because of the rapid growth in the stock market. In the belief that the value of stocks will continue to rise, and they can earn a profit from it, even the less affluent gambled on the stock market. Investors paid only a small part of the price and borrowed the rest, gambling that they could sell the stock at a high enough price to repay the loan and make a profit (“Great Depression in the United States”).
Overproduction, Overspending and Debt
The 1920’s was considered a period of prosperity. By 1929, the real GNP ((value of all goods and services, adjusted for price changes) is up 38 percent over 1922; unemployment rate
is 3.2 percent of work force, an all-time low; common stock values have tripled since 1922 (Himmelberg xvii). Americans have focused on “getting rich” and enjoying this prosperity. This has seemed to benefit the economy because industries produced vast quantities of goods to meet the growing demand for consumerism. However, the industry boom will continue as long as people can consume all the goods that these industries have produced and as such advertising enticed people to buy. Despite the prosperity of the 1920’s however, income is not distributed evenly and as such, a large majority of people cannot afford to buy the goods promoted by advertisements. Credit was therefore introduced to allow people to purchase the goods they wanted. The time came however when people have accumulated enough debt that they can no longer afford to buy newer products. People have to curtail spending because much of their income goes to paying for the old products they have purchased using credit. Hence, the supplies and goods of industries can no longer be sold and started to pile up which resulted to a collapse in the industries.
The American Smoot-Hawley Tariff Act of 1930 which adopted a protectionist trade policy exacerbated the situation. It was seen as a purely domestic measure to prevent the further fall of prices, but it provoked immediate retaliation by other governments and contributed to the contraction of international trade (Rothermund 55). Thus, the protectionist trade policy of the United States paved way for other countries to adopt the same policy making it difficult to trade and causing American exports to decline sharply.
The United States became the leading creditor of European countries struggling to pay debts and reparations incurred during the war. American bankers lent heavily to borrowers from Europe who had difficulty paying because of economic downturns and out of difficulty marketing their goods in the foreign market. This situation has affected the international banking
structure. Many banks also made loans to people and businesses within the country that cannot afford to pay back. In addition to this, some banks also gambled in the stock market and as such, when depositors tried to withdraw their savings, the banks no longer have the money to give causing depositors to panic and demand for their cash. This caused the collapse of many banks and consequently the loss of savings of millions of people.
The Great Depression resulted to several political effects in the United States and abroad, especially in Europe. In Germany, the economic disaster and resulting social dislocation contributed to the rise of Adolf Hitler (“Great Depression”). The Depression also introduced important changes in the government’s economic and social policies especially under the Roosevelt administration. Franklin Roosevelt himself was elected primarily because of his plans to address the economic crisis.
Jobs and Employment
The loss of confidence in businesses and the relative industrial bankruptcies during the economic crisis resulted to unemployment which peaked in 1933 at 12.8 million or 25% of the total workforce (Mcgovern 4). There are those who were employed but they are forced to work with reduced income as part-time workers, and since part-time
workers were considered “employed,” the actual loss in income by workers
was far more devastating than data on unemployment suggest (Mcgovern 4).
Physical and Social Impacts
The Great Depression brought about physical and psychological impacts on people as they suffer from lack of food, shelter and clothing. Some people died of starvation and malnutrition was rampant. Some people searched garbage dumps for food or ate weeds (“Great Depression in the United States”).Unemployment also caused psychological trauma especially
among men who were expected to provide for their family. The percentage of working women increased because of the need to replace the husband’s lost income. Many children also started to work at an earlier age to “provide” for parents who cannot find jobs. Because people lost their jobs, mortgages on homes and farms were foreclosed ultimately resulting to homelessness. Farmers also suffered a great deal because they cannot sell their products for profits.
President Hoover believed that the basic need as to boost the economy once again was to restore confidence on businesses. However, it was difficult to increase production among businesses in the face of clogged and unsold goods. President Hoover also cut government spending and raised the taxes. However, when these responses failed, the Hoover administration finally provided emergency loans to banks and industry, expanded public works, and helped states offer relief (“Great Depression in the United States”). The administration also embarked on a protectionist trade policy through the Smoot-Hawley Tariff Act of 1930 which only worsened the situation.
The New Deal
The most important and evident change introduced to mitigate the crisis was the New Deal, the program implemented during the Great Depression brought about through the leadership of the period’s key figure, Franklin Delano Roosevelt (FDR), the Democratic president first elected in 1932 in the depths of the depression (Himmelberg 3). The New Deal is a series of programs with three components: direct relief, economic recovery, and financial reform to address the situation during the Great Depression.
The Great Depression is considered the worst economic crisis in the history of United States, because of its length and global effects. Many theories attempted to identify its causes among which are the overconfidence in the stock market; overproduction, overspending, and debt; policies that affected situations in international trade; and banking systems. The Depression also resulted to unemployment, and several social, political and physical effects. Several responses were taken to address the situation, the most notable of which is the introduction of the New Deal.
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Himmelberg, Robert F. The Great Depression and the New Deal. Westport, CT: Greenwood Press, 2001. Questia. 24 Sept. 2006 <http://www.questia.com/PM.qst?a=o&d=101548728>.
Mcgovern, James R. And a Time for Hope: Americans in the Great Depression. Westport, CT: Praeger, 2000. Questia. 24 Sept. 2006 <http://www.questia.com/PM.qst?a=o&d=103644255>.
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