Great Depression
The Great Depression (1929-39) was the deepest and longest-lasting
economic downturn in the history of the Western industrialized world. In the
United States, the Great Depression began soon after the stock market
crash of October 1929, which sent Wall Street into a panic and wiped out
millions of investors. Over the next several years, consumer spending and
investment dropped, causing steep declines in industrial output and rising
levels of unemployment as failing companies laid off workers. By 1933,
when the Great Depression reached its nadir, some 13 to 15 million
Americans were unemployed and nearly half of the country’s banks had
failed. Though the relief and reform measures put into place by President
Franklin D. Roosevelt helped lessen the worst effects of the Great
Depression in the 1930s, the economy would not fully turn around until
after 1939, when World War II kicked American industry into high gear.
(1) THE STOCK MARKET CRASH OF 1929
The American economy entered an ordinary recession during the summer
of 1929, as consumer spending dropped and unsold goods began to pile
up, slowing production. At the same time, stock prices continued to rise,
and by the fall of that year had reached levels that could not be justified by
anticipated future earnings. On October 24, 1929, the stock market bubble
finally burst, as investors began dumping shares en masse. A record 12.9
million shares were traded that day, known as “Black Thursday.” Five days
later, on “Black Tuesday” some 16 million shares were traded after another
wave of panic swept Wall Street. Millions of shares ended up worthless,
and those investors who had bought stocks “on margin” (with borrowed
money) were wiped out completely.
(2) Bank Runs
Small banks overextended credit to the farmers, and big banks
lended to the European nations which eventually defaulted.
(3) The Dust Bowl
The Dust Bowl is an environmental disaster that hit the Midwest in the
1930s. A combination of a severe water shortage and harsh farming
techniques created it. Some scientists believe it was the worst drought in
North America in 300 years.
In 1930, weather patterns shifted over the Atlantic and Pacific
oceans. The Pacific grew cooler than normal and the Atlantic became
warmer. The combination weakened and changed the direction of the
jet stream. That air current usually carries moisture from the Gulf of
Mexico up toward the Great Plains. It then dumps rain when it
reaches the Rockies. When the jet stream moved south, rain never
reached the Great Plains.
Tall prairie grass once protected the topsoil of the Midwest. But once
farmers settled the prairies, they plowed over 5.2 million acres of the
deep-rooted grass. Years of over-cultivation meant the soil lost its
richness. When the drought killed off the crops, high winds blew the
remaining topsoil away. Parts of the Midwest still have not recovered.
Ironically, federal agricultural subsidies are partly responsible for
draining the Ogalla Aquifer. These subsidies began as part of the
New Deal. They helped small farm families stay on the land and hang
on through the Dust Bowl years. Now, the subsidies pay corporate
farms to grow all types of crops. Corn for cattle feed is the biggest
culprit, fattening 40 percent of the nation's grain-fed beef.
Cotton growers in Texas receive $3 billion a year in federal subsidies.
They drain water from the Ogallala Aquifer to grow fiber that is no
longer used in the United States. It's shipped to China, where it's
made into the cheap clothing sold in American stores.
Other subsidies encourage farmers to grow corn for ethanol bio-fuel.
The number of production facilities in the High Plains region is being
doubled. In response, farmers are increasing corn production,
draining an additional 120 billion gallons a year. (Hoover’s
Administration)
(4) Jazz Age
During the economic boom of the Roaring Twenties, the traditional
values of rural America were challenged by the Jazz Age, symbolized
by women smoking, drinking, and wearing short skirts. The average
American was busy buying automobiles and household appliances,
and speculating in the stock market, where big money could be
made. Those appliances were bought on credit, however. Although
businesses had made huge gains — 65 percent — from the
mechanization of manufacturing, the average worker’s wages had
only increased 8 percent.
The imbalance between the rich and the poor, with 0.1 percent of
society earning the same total income as 42 percent, combined with
production of more and more goods and rising personal debt, could
not be sustained. On Black Tuesday, October 29, 1929, the stock
market crashed, triggering the Great Depression, the worst economic
collapse in the history of the modern industrial world. It spread from
the United States to the rest of the world, lasting from the end of
1929 until the early 1940s. With banks failing and businesses closing,
more than 15 million Americans (one-quarter of the workforce)
became unemployed.
(5) Hoover’s Administration: Government Inaction
President Herbert Hoover, underestimating the seriousness of the
crisis, called it “a passing incident in our national lives,” and assured
Americans that it would be over in 60 days. A strong believer in
rugged individualism, Hoover did not think the federal government
should offer relief to the poverty-stricken population. Focusing on a
trickle-down economic program to help finance businesses and
banks, Hoover met with resistance from business executives who
preferred to lay off workers. Blamed by many for the Great
Depression, Hoover was widely ridiculed: an empty pocket turned
inside out was called a “Hoover flag;” the decrepit shantytowns
springing up around the country were called “Hoovervilles.”
One of Hoover's main concerns was that workers' wages would be
cut following the economic downturn. To ensure high paychecks in all
industries, he reasoned, prices needed to stay high. To keep prices
high, consumers would need to pay more. The public had been
burned badly in the crash, and most people did not have the
resources to spend lavishly on goods and services. Nor could
companies count on overseas trade: foreign nations were not willing
to buy over-priced American goods any more than Americans were.
This bleak reality forced Hoover to use legislation to prop up prices
(and hence wages) by choking out cheaper foreign competition.
Following the tradition of protectionists, and against the protests of
more than 1,000 of the nation's economists, Hoover signed into law
the Smoot-Hawley Tariff Act of 1930. The Act was initially a way to
protect agriculture but swelled into a multi-industry tariff imposing
huge duties on more than 880 foreign products. Nearly three-dozen
countries retaliated, and imports fell from $7 billion in 1929 to just
$2.5 billion in 1932. By 1934, international trade had declined by
66%. Not surprisingly, economic conditions worsened worldwide.
Hoover's desire to maintain jobs and individual and corporate income
levels was understandable. However, he encouraged businesses to
raise wages, avoid layoffs and keep prices high at a time when they
naturally should have fallen (with previous recession/depression
cycles, the U.S. suffered one to three years of low wages and
unemployment before the dropping of prices led to a recovery).
Unable to sustain these artificial levels, and with global trade
effectively cut off, the U.S. economy deteriorated from a recession to
a depression.
