The Causes of the Great Depression
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The Causes of the Great Depression
Since the beginning of the Industrial Revolution early in the nineteenth century the United States ad experienced recessions or panics at least every twenty years. But none was as severe or lasted as long as the Great Depression. Only as the economy shifted toward a war mobilization in the late 1930s did the grip of the depression finally ease.
Stock prices had been rising steadily since 1921, but in 1928 and 1929 they surged forward, with the average price of stocks rising over 40 percent. The stock market was totally unregulated. Margin buying in particular proceeded at a feverish pace as customers borrowed up to 75 percent of the purchase price of stocks. That easy credit lured more speculators and less creditworthy investors into the stock market. The Federal Reserve board warned member banks not to lend money for stock speculation because if prices dropped, many investors would not be able to pay back their debts. No one listened. The stock market began sliding in early September, but people ignored the warning. Then on "black Thursday" (October 24, 1929) and again on "black Tuesday" (October 29, 1929) the ball dropped. More than 28 million shares changed hands in frantic trading. Overextended investors, suddenly finding themselves in heavily in debt, began selling their stocks. Many found that no one would buy anything at any price. Overnight, stock values fell from a peak value of 87 billion dollars to 55 billion dollars.
The crash was felt far beyond the trading floors. Speculators who borrowed money from the banks to buy their stocks could not repay the loans because they could not sell stocks. This caused many banks to fail. Since bank deposits were uninsured before the 1930s depositors' their money, which in many cases was all that many people had. The stock market crash intensified the course of the Great Depression in many ways. Besides wiping out the savings of thousands, it hurt commercial banks that had invested heavily in corporate stocks. It also caused a loss of confidence in the market prolonging the depression.
The downturn began slowly and almost unnoticeably. After 1927, consumer spending declined and housing construction slowed. Inventories piled up, and in1928 and 1929 manufacturers began to cut back on production and lay off workers. Reduced income and buying power in turn reinforced the downturn. By the summer of 1929 the economy was clearly in a recession.
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Great Depression Commercial Banks Black Tuesday Black Thursday Stock Market Stock Market Crash Stocks Investors Federal Reserve
Although the stock market crash and its immediate consequences contributed to the Great Depression, longstanding weakness in the American economy accounted for its length and severity. Agriculture, in particular, had never recovered from the recession of 1920-1921. Farmers faced high fixed costs for equipment and mortgages incurred during the high inflationary war years. At the same time prices fell because of overproduction, forcing farmers to default on mortgage payments and risk foreclosure. Because farmers accounted for about one-forth of the nations gainfully employed workers in 1929, their difficulties weakened the general economic structure. Other industries also had experienced economic setbacks during the prosperous 1920s. The older industries such as textiles, mining, lumbering, and shipping faltered, newer and more successful consumer- based industries, such as chemicals, appliances, and food processing, proved not yet strong enough to lead the way to recovery.
The nations unequal distribution of wealth also contributed to the severity of the depression. During the 1920s the share of the national income going to families in the upper and middle-income brackets increased. Tax policies contributed to this concentration of wealth by lowering personal income tax rates, eliminating the wartime excess-profits tax, and increasing deductions that favored affluent individuals and corporations. In 1929, the poorest 40 percent of the population received only 12.5 percent of aggregate family income, whereas the wealthiest 5 percent received 30 percent. Many people would spend their entire yearly paychecks on consumer goods. When this stopped the economy was hurt. Once the depression began this unequal distribution of wealth prevented people from spending the amounts of money needed to revive the economy.
President Herbert Hoover blamed the severity of the depression on the international economic situation. The war battered international economy functioned only as long as American banks exported enough capital to allow European countries to repay their debts and to continue to buy American goods. As U.S. companies began to cut back production, they also cut back their purchases of raw materials and supplies from abroad and as a result many European economies collapsed. American financiers sharply reduced foreign investment and consumers bought less foreign goods, debt repayment became even more difficult. As European conditions worsened, demand for American exports fell drastically. Finally, when the Hawley-Smoot Tariff of 1930 raised rates to an all time high, foreign governments retaliated by imposing their own trade restrictions, further limiting the market for American goods especially agriculture products.
The United States was hit the hardest during this worldwide depression. From the height of the prosperity before the stock market crash in 1929 to the depths of the depression in 1932-1933, the U.S. gross national product was cut almost in half, declining from 103.1 billion dollars to 58 billion in 1932. Consumption expenditures dropped by 18 percent, construction fell by 78 percent, private investment plummeted by 88 percent, and farm income, already low, was more than cut in half. During this period 9,000 banks went bankrupt or failed. The consumer price index declined by 25 percent and corporate profits fell from 10 billion to 1 billion dollars. Most shocking was that unemployment rose from 3.2 percent to 24.9 percent from 1929 to 1933.
While the collapse of the stock market in 1929 may have triggered economic turmoil, it alone was not responsible for the Great Depression. The depression throughout the nation and the world was a result of a combination of factors that matured during the 1920s
1. Background of the Great Depression
2. Economic Impact of the Great Depression
i. Failure of the stock market
ii. “Small scale farmers disadvantaged”
iii. Business and industry failure
vi. Human suffering
vii. Increase of government’s economy regulation
viii. Growth of macroeconomic strategies
ix. Homelessness, discrimination and racism
xi. Creation of dust bowls
xii. Illness and starvation
3. Overview of Stock Market Crash
4. How people bought products on margin
5. How trouble came up
6. Causes of the Great Depression
i. World-wide and domestic factors
6. Summary of the effects of Great Depression
8. Works Cited
The Great Depression
The great depression is an immense tragedy that took millions of people in the United States from work. It marked the beginning of involvement from the government to the country’s economy and also the society as a whole. After almost a decade of prosperity and optimism, the US was now exposed to a period of despair. The day when this happened is referred to as Black Tuesday, and it is the day when the stock market crashed. That was the official date when the Great Depression started. The stock market prices crashed to an extent that there was no hope for them to rise again. A long period of panic struck, and there was darkness in terms of stock market prices. Many people tried as they could to sell their stock, but, unfortunately, no one was ready to buy. The stock market that had for long been viewed as a path to wealth and richness was now a sure path to bankruptcy (Martin 106).
Economic Impact of the Great Depression
Failure of the stock market. The stock market was not the only one that was affected; actually, that was just but the beginning of the Great Depression. In effect, it was unfavorable for the clients whose money was already in the markets for investment: many banks had done that and that meant a huge loss to the clients. It was also a double loss in that though the clients lost their money, the banks were forced to close down. This is because they directly depended on the stock market. When this happened, it caused much panic even to other people, and this is what made them go to the other banks that were open to withdraw their money. This kind of massive withdrawal had a major effect in that it caused the banks to close too. What is more, it was a disadvantage to those who did not withdraw their money because of not reaching the bank on time. After the banks closed, people went bankrupt and could not claim anything whosoever.
Business and industry failure. Industries and businesses were highly affected too. This is because they were also working hand in hand with the stock market. Since the stock market had closed down, this meant that their savings and capital were lost. This affected the labor in the businesses since they had to cut on the number of workers who worked in the corresponding companies. Employees’ wages were also affected because any business could not pay them again as required. The stock market issue also affected the customers in that they stopped buying and spending on luxurious goods. This influenced greatly the companies that produced these commodities in terms of sales and also getting profit. The companies too had to close down (Martin 98).
Farmers. The Great Depression affected the farmers in a very adverse way. Though they always survived other depressions that they encountered, this one was a big challenge to them. Most of the farmers were situated at the Great Plains before the Great Depression took place. The territory was affected so badly by drought and dust storms which were horrendous in nature. They created a situation that was referred to as the Dust Bowl. The farmers were used to overgrazing, and now this had to combine with the effects of drought leading to a blow to the farmers. The latter were even left without food and crops for their animals. This is because the grass that the animals could feed on had already dried up and disappeared in the long run. The loose dirt was picked by the whirled wind, and topsoil got exposed. The farmers were left without crops as the wind picked up everything on its way (Martin 200).
Small scale farmers disadvantaged. Small scale farmers were more disadvantaged than the large scale farmers. They turned out to have a small piece of land on which they had to get their daily bread. Some of these farmers asked for tractors from their respective governments, and thus, they were made to pay some amount to cater for those. The hit that the farmers went through could not enable them to pay their debts. They could also not make it to feed their families, not mentioning themselves. Some of the farmers had also capitalized on the stock market and bank. Since the stock market was affected, and as a result, the banks too, the farmers suffered as well. Losing their investments and crops influenced greatly the way they related with each other and had an impact on their contribution to the economy of the land. The country lost a lot of laborers and this led to the deterioration of the country’s economy.
Unemployment. Many people lost their jobs during this time of the Great Depression. Having lost their jobs, it was very difficult for people to bring food on the table. Families were even forced to sell their houses and move to apartments. Others were made to move in together since the standard of living was going down day by day. Paying rent was now a very hard thing to achieve. It was even complicated for people to separate or divorce. This was the time when the rate of separation and divorce went down. This is because everyone needed the other to contribute, especially in paying the rent. Due to ego, men who had already lost their jobs felt ashamed even to walk in the cities, and, therefore, they were forced to stay in their homes. If at all the wives and the children were working, they felt that their status was challenged. Even in this situation, the two categories aforementioned were forced to go looking for jobs. This time, women were even accused of taking the man’s place after getting a job.
As a matter of fact, it was hard to get jobs locally because every part of the country had been affected. Many people were seen on the roads looking for jobs. Many people could not afford luxurious goods like cars, and thus, very few cars were seen on the roads. A lot of the cars were on sale since maintenance costs were unaffordable. The majority of teenagers were affected as they were the people who were seen on the roads walking up and down looking to get some job (Martin 187).
Older men, women, and families at large were on the rails too. They would be seen boarding trains just to cross and see whether they could get some occupation. Every time there was a job opening, many people applied for the position and chances for employment at such. Those who could not get the job would end up living in shanty towns which were outside the town. The houses in such places were made of affordable cheap materials like newspapers, wood, mud, cardboard, and iron sheets. Farmers who could no longer afford their previous lives would be found in western California. This is because of the agricultural opportunity rumors that came from that area. It is true that there were periods of agricultural opportunities. The farmers were nicknamed as Okies and Arkies.
The Great Depression took place during the reign of President Herbert Hoover. The citizens always blamed the governing President, though he always talked about optimism. Some of the shanty towns which were far from big cities were named after him – for instance, Hoovervilles. Interestingly, newspapers used to cover people sleeping in the streets were called Hoover Blankets. What is more, even bad looking broken cars were referred to as Hoover Wagons (Martin 134).
Human suffering. The Great Depression had a huge impact in that it caused human suffering. It took a very short time, and the levels of living went down drastically. People started borrowing from each other just to survive. Unemployment increased since industries could not take employees anymore. They could not afford to pay the people what they deserved. Research shows that at least a fourth of the labor force in all the industrialized countries could not work anymore (Martin 145). The industries could not satisfy them in terms of wages. This was noticed in 1930, and the total recovery was only realized by the end of that decade.
End of international gold standard. The Great Depression is seen as a cause of international gold standard. There was no money to invest anymore, and it was evident that the interest rates went down too. There was also the introduction of floating rates, and people stopped using the fixed exchange rates. On the other hand, there was an expansion of the welfare state and labor unions in 1930. Union membership went to an extent of doubling between that year and 1940. This was a result of extreme unemployment and the National Labor Relations Act which was passed in 1935. All this led to collective bargaining. The US took an extra mile of coming up with unemployment compensation. This also included the survivors’ and old age insurance. This was incorporated in the Social Security Act the same year. Its aim was to cater for the hardships that the citizens were going through in 1930.
Increase of government’s economy regulation. The rate at which the government regulated the economy increased substantially. The focus was mostly on the financial markets. Different bodies to carry out this function were established. These included the Securities and Exchange Commission which was established in 1934. The main role of these institutions was to control and regulate stock issues in the stock market, especially with regard to the new products. The Banking Act went ahead to come up with deposit insurance, whose role was to work with the banks by prohibiting them from underwriting. Deposit insurance was not so popular in the world up to the Second World War. This time it was able to work effectively, hence achieving its mission and objectives.
Growth of macroeconomic strategies. The aim of the latter was to fight the economic upturns and downturns. As a matter of fact, different strategies were established to fight the Great Depression. An increased focus on how the government spend, tax cuts, and expansion of the monetary fund were some of the ways to fight the the phenomenon under consideration. The government was also trying to work to its best so as to fight unemployment. The banks were also working against recessions.
Homelessness, discrimination and racism. Many people had lost their jobs and it became even hard to get rent for their houses. They had to move to shanty areas which also were not very affordable. Others could not afford anything to cover their heads. This led to building the Hoovervilles. Since so many people were unemployed, there was a huge competition in the job market. Very few could get jobs, and those who did were not paid according to what they delivered. Under the circumstances, discrimination grew and African Americans could rarely get a job. Racism was an issue at that time. Americans were more aggressive as they noticed that there were shrinking opportunities to get a position. The African Americans, Asian Americans, and Hispanics were the people who suffered the most. This is because of the discrimination and racism that were going on. Again, the whites were claiming the jobs which were paying poorly, hence occupying the opportunities that these minorities had before Hoovervilles.
It is evident that in any country there are different levels of people as far as their income is concerned. Where people live is different depending on what one eats. The lifestyle generally depends on what the person earns…
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