The Great Depression

Facts

• The Great Depression started in September 1929 and it lasted till the 1930s. It was also the worst economic decline of the 20th century.

• The effect of the wake of the 1929 economic decline resulted in the stock market crash.

• Different sectors of the economy suffered greatly sending a lot of US citizens into unemployment and poverty.

• By 1933, the US unemployment rate had increased to 25% with over 16 million unemployed people.

• The Great Depression began to diminish at the election of Franklin D. Roosevelt as president; succeeding Herbert Hoover.

The US experienced one of its worst economic downturns in all history during the 1930s—the Great Depression. It was a widespread economic situation that had a worldwide impact, originating from the United States. Maintaining world power for a very long time till the present day it is no surprise that any economic situation with the US economy is most likely going to affect other nations’ economies, at least nations that directly or indirectly connected to the US government and economy.

The starting time of the Great Depression varied amongst different nations. However, for many countries, it started in 1929 lasting till the late 1930s. Making it the longest and most widespread depression in the 20th century. The US economic decline was the major factor that caused other nations’ economies to decline. The success or failure of each nation’s economy depended greatly on their internal strengths and weaknesses.

The Great Depression had different levels of impact on different nations, and for nations like Germany, it gave room for extremist political movements, birthing the rise of Adolf Hitler.

In an attempt to salvage the US economy and other nations’ economies, the US developed protectionist policies such as the Smoot-Hawley Tariff Act of 1930 which only aggravated the global trade collapse even more. Some economies began to recover by the mid-1930s; however, a few economies still struggled until World War II, thereby, worsening the economic decline. Since then, the Great Depression stands as a yardstick to measure how severe the global economy can decline.

There’s no doubt that the Great Depression had massive devastating effects on all affected nations, both developed and developing nations. International trade dropped by 50% and the unemployment rate in the US increased by 25% and nearly 33% in some countries. Tax revenue, profits, prices, and personal income all dropped. The most affected countries were those that were dependent on heavy industry such as the construction industry. The Farming, mining, and logging sectors were not left out in this economic turmoil as crop prices fell about 59%. While mining and logging sectors suffered the most impact in primary sector industries.

Events That Led to The Great Depression

The Great Depression was a major economic decline that started in the United States in September 1929. As the economy continued to plunge, the stock market crashed on October 29, 1929 (Black Tuesday), hence, spreading the news global. As a result of the US economic decline and stock market crash, the global gross domestic product (GDP) fell by nearly 15% between 1929 and 1932. This is in comparison to the 2008 financial crisis where the global GDP fell by 1% between 2008 and 2009.

Many economists believed that the major cause of the Great Depression was the stock market crash, however, some others disputed that fact seeing the stock market crash as an effect rather than a cause. The other possible reasons that could have caused the Great Depression were a weak banking system, industrial overproduction, low farm prices, etc.—each contributing a measure to the economic downturn.

Whether or not the stock market crash was responsible for the Great Depression both the economy and the stock market were in panic with millions of investors losing their investments completely and millions of individuals losing their homes and/or jobs. As a result of this, over the next couple of years, investment and consumer spending levels dropped drastically.

A few years before the 1929 economic decline and stock market crash, the US economy experienced a rapid expansion from 1920 to mid-1929. This period was nicknamed the Roaring Twenties. During this time, Wall Street was flooded with investments of both the rich and poor. Stocks were presumed to hold a promising future, hence, many investors including cooks and janitors channeled their savings towards stocks. Thus, the stock market experienced rapid expansion and reached its peak in August 1929, until October 1929 when the stock market eventually crashed following the news of an economic decline in September 1929.

The start of the Great Depression and the stock market crash can be summarized as thus;

• a decline in production

• increased unemployment

• stock prices higher than their actual value

• proliferating consumer debt

• low wages

• struggling primary sector industries

• excess bank loans that could not be liquidated

The Wake of the Great Depression

Up until the October 29, 1929 stock market crash, equity prices hit all-time high multiples of over 30-times earnings. In only five years, the Dow Jones Industrial Average increased by 500%. By 0ctober 24, 1929 some investors went into panic and began selling overpriced shares in huge amounts at the fear of a stock market crash. It was recorded that 12.9 million shares were traded on that day alone. The day was nicknamed “Black Thursday.” The fears that drove the investors into panic selling actualized five days later when another 16 million shares were traded following the wave of panic that swept through the market.

As a result of the stock market ruckus and panic selling of stocks, millions of shares ended up worthless and the investors who had bought shares on margin—with borrowed money—were left in a dilemma.

At the inception of the stock market crash, consumer confidence began to diminish and spending decreasing. The Decline in investment and consumer spending had an effect on different sectors of the economy as some industries began to either shut down or lay-off the majority of their employees. The employees who were lucky enough to keep their jobs had their wages slashed and buying power decreased. Many Americans fell into debt as they had almost no choice but to live that way. Increased debt also had its effects on businesses.

The Great Depression Build Up

After the stock market had crashed and the economy was gradually building upon the Great Depression, some investors like John D. Rockefeller remained optimistic that the impact was only going to be for a short while. “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again,” as said by Rockefeller.

President Herbert Hoover and other leaders also assured the nation that the crisis would only be for a short while as the stock market and the economy were expected to be back on track soon. Contrary to that the economic decline only grew worse. By 1930, at least 4 million Americans were unwillingly unemployed and couldn’t find a job. A year later the number of unemployed-job seeking Americans increased to 6 million. By 1933, at least 13 million Americans were unemployed and couldn’t find any work increasing the unemployment rate to 25%

Within that period, the US industrial production had decreased by half. In addition to that, the number of homeless people in America greatly increased; so did breadlines and soup kitchens. It was indeed a very devastating time for the whole of America and some parts of the world. Many Americans survived from hand to mouth by selling apples on street corners or doing other menial jobs while many others simply lived off free bread and soup, and free coffee and doughnut. As regarding this situation, a Chicago social worker had this to say, “We saw Want and Despair walking the streets, and our friends, sensible, thrifty families, reduced to poverty.”

The farmlands were also in great turmoil as a lot of farmers couldn’t afford to harvest their crops for commercial purposes, therefore, a lot of crops were left to rot on the farms while others in other parts were left to starve.

The hit on farms grew intense following the severe droughts hit the southern plains, bringing high winds and dust from Texas to Nebraska, still in 1930. This was known as the “Dust Bowl” and it led to a mass migration of people living in rural areas especially the farmland to cities in search of work.

By 1933, many American banks had failed as a result of the many customers retrieving all their monies thus, causing banks to liquidate their loans in duress to cover their cash reserves at hand. As banks failed a lot of citizens lost their life savings. All of these amounted to the increased unemployment status and poverty rate in the US.

As a result of this, there was an increase in bank runs spanning through the fall of 1931 to the fall of 1932, and by 1933 thousands of banks were no longer operational. The government sought to provide some banks and institutions with government loans, which would enable the banks to also loan out to businesses and more employees would maintain their jobs. Contrary to this, President Hoover did not believe that it was the government’s responsibility to stabilize the economy and provide economic assistance to its citizens.

Hoover VS Roosevelt

In Hoover’s defense of his government-economic philosophy, a government providing its citizens with economic relief may result in citizens’ dependency on the government for economic and financial resources, thereby, weakening individual character and work ethic. However, by 1932, Hoover revisited his school of thought and embraced government interference in the economy. The result of this was the creation of the 1932 Reconstruction Finance Corporation (RFC), through this, Hoover authorized $2 billion to banks and other major institutions including the railway. To this, Hoover also increased federal spending by 42% by creating public works programs.

Though some people thought that Hoover’s decision was “a little too late,” and by November 1932, power changed hands from Hoover to Franklin D. Roosevelt. Getting elected in the peak of the depression, Roosevelt remained positive and optimistic in the economic situation, saying that “the only thing we have to fear is fear itself.”

The Roosevelt administration soon tackled the depression head-on by first declaring a four-day “bank holiday” which would give the Congress ample time to pass reform legislation before reopening the banks. To reform the financial system, the Roosevelt administration created the Federal Deposit Insurance Corporation (FDIC) as protection for deposit accounts, and the Securities and Exchange Commission (SEC) as a regulator for the stock market to avoid similar occurrences that led to the stock market crash of 1929.   

The Recovery

As a means to further tackle the depression, Roosevelt initiated The New Deal, a series of domestic programs targeted at boosting business in America, reducing the unemployment rate, and protecting the public. It partly sprung from Keynesian economics which encouraged government stimulation of the economy. Set goals like healthy wages, full employment, and national infrastructure maintenance, were put in place to actualize The New Deal.

Through the New Deal, the Roosevelt administration was able to reform and stabilize the financial system.

In addition to the New Deal, there was also the Tennessee Valley Authority (TVA) which took up the responsibility of constructing dams, roads, bridges, and tunnels; through these construction projects, thousands of US citizens were got employed by the federal government. The TVA also took up hydroelectric projects as a means of controlling floods and providing electricity to the Tennessee Valley region.

The Works Progress Administration (WPA) was also set up as a jobs program targeted at the full employment of the unemployed. It was a strategy to get people off the streets and back to the workplaces, between 1935 and 1943 over 8.5 million people were employed. To fully deal with employment issues, the US government introduced some form of unemployment insurance or social security. Hence, the Social Security Act was introduced in 1935 which covered Americans that were either unemployed, disabled, or above working age by providing them with a little percentage of financial assistance. The economy gradually began to improve, recording an average of 9% increase in GDP annually.

What seemed to be an economic improvement soon came crumbling down once again after a sharp recession hit the economy in 1937. The recession was partly attributed to the Federal Reserve’s decision to increase its requirements for money in reserve. By 1938, the sharp recession was already diminishing and the economy improving, once again.

The Nazi regime in Germany, under the leadership of Adolf Hitler, caused a war break out in Europe in 1939—the result of this was the world war II. Though America supported Britain and France against Germany, it officially got involved in the war after the Japanese attack on Pearl Harbor in December 1941. The US gradually moved from the Great Depression into World War II.

America’s participation in the war opened up employment channels as defense manufacturing was in great need. By 1942, the Great Depression had greatly diminished and the nation had a new focus—world war II.