The Causes of the Great Depression
One of the great mysteries of the twentieth century is how the U.S. economy could have gone from a state of unprecedented prosperity in the 1920s to one of unprecedented failure in the 1930s. In the 1920s, jobs were plentiful, the economy was growing and the standard of living was rising. Between 1920 and 1929, home ownership had doubled, and most home owning families enjoyed amenities, including electric lights and flush toilets, once regarded as luxuries. Sixty percent of all households had automobiles, up from 26 percent in 1920. More teenagers were attending high school, and fewer were working full time. Leading political and economic figures of the day said that the United States appeared to have reached “a permanent plateau of peace and prosperity”.
But by 1933 at least one fourth of the U.S. labor force was unemployed, and about the same percentage was working shorter hours, which reduced their income. Families were losing their homes, and many were going hungry. Adolescents who should have been in high school were riding around the country in freight cars, looking for work. Although 1933 marked the low point of what came to be called the Great Depression, the unemployment rate never dropped below 14 percent until 1941. A decade of hope had been succeeded by a decade of hopelessness.
What happened? The United States possessed the same productive resources in the 1930s as it had in the 1920s. The great factories and productive machinery that had raised living standards in the 1920s was still present in the 1930s. Workers still had the same skills and were willing to work just as hard as before, and farmers were producing more food than ever. How could life have become so miserable over such a short period of time?
Historians and economists still disagree about the actual specific cause(s) of the Great Depression. In general, it is commonly agreed that an interrelated series of factors led to the greatest economic crisis in American history.
National Council on Economic Education in Focus: Understanding Economics in U.S. History (2006).
THESIS –
The Causes - Illustrated
Banks, Credit and the Federal Reserve
L Farmers were in debt throughout the 20s because of overproduction and low crop prices. Their land was mortgaged (owned by banks), and they couldn't pay back loans.
L Others used loans as well - families to buy consumer goods, investors borrowed to buy stocks.
L In the 20s, banks opened up at the rate of 4 to 5 a day, and later in the 20s, failed at a rate of 2 a day - the prosperity of the country covered up the flaws in the system.
L The Federal Reserve System only loosely regulated banks at that time – but the Fed’s role in the causes of the Depression are still debated today.
L Some larger banks had trouble because they had inadequate reserves against stock market investments, as well as unwise loans.
L The government did not adequately regulate the banks' use of depositors' savings accounts to speculate in the stock market.
L Investors started to withdraw their dollars from banks - this further restricted the availability of money for businesses, causing more bankruptcies.
L The Fed did notincrease the supply of moneyto combat deflation.
L As investors withdrew all their dollars frombanks, the banks failed, causing more panic. The Fed ignored the banks' plight, thus destroying any remaining consumers’ confidence in banks.
L Many people withdrew their cash and put it under the mattress, which further decreased themoney supply.
International Trade
L Although far less depended than it would become, American economy relied heavily on exports.
L But, beginning late in decade, European demand for American goods began to wane.
o European industry and agriculture becoming more productive
o Some European nations, especially Weimar Germany, were suffering financial problems reducing their purchasing power
o Foreign nations were also experiencing debt crises, couldn't pay back war loans from WWI (and Germany couldn't pay the reparations to the Allies)
L European nations had amassed debts from the war far too great for them to absorb, and the US government refused to forgive the debts.
L American banks began to make loans to the European countries to be used to pay these debts.
L Problems arose as American economy weakened.
L European nations found it much harder to take out further loans
L Meanwhile, protective tariffs in the US were making it difficult for them to sell their goods in US markets, causing scarcity of US currency
L With sources of foreign currency drying up, European nations found it more difficult to pay loans and thus began to default
L This international debt problem was one of reasons the crisis spread to Europe.
Uneven Distribution of Wealth
L The business boom didn't make everyone rich - unequal distribution of profits went to farmers, workers, and other consumers, so they could not create a big enough market.
L The result was lower consumer demand versus an ever-increasing supply.
L In 1929, over half of the families in the U.S. were too poor to buy basic necessities, houses, cars.
L The average worker's wages of $1,500 a year failed to keep pace with the spectacular gains in productivity achieved since 1920.
L Since demand went down, so did construction and auto industry, leading to fewer jobs, so less money going into the money cycle.
L In general - there was too little money in the hands of the consumers.
Overproduction and Saturation
L The economy depended on a few basic industries, like construction and automobiles.
L During the 20s, the economy become saturated with many products due to overproduction - by 1929 production was outstripping demand.
L These industries began to decline by the end of the 1920s - in 1929 -- construction expenditures fell from $11 billion to under $9 billion, and auto sales declined by more than a third in the first nine months of 1929.
L Newer industries were not strong enough yet (chemicals, petroleum, plastics).
L Outmoded equipment left many industries less competitive.
L
Economic Policies
L The federal government had a very laissez faire approach to the economy in the 1920s
L The Secretary of the Treasury, Andrew Mellon, believed that economic policies that benefited the wealthy and big business would eventually benefit all Americans, and that prosperity would “trickle down” from the upper class to the middle class
L The government provided significant tax cuts for big businesses and wealthy Americans. To make up for the loss, government spending was reduced
L However, big business reinvested their profits more than increasing the wages and employment of workers
Farming Problems
L Farmers faced an overproduction crisis, as soaring debt forced many farmers to plant an increasing amount of profitable cash crops such aswheat.
L Although wheat depleted the soil of nutrients and eventually made it unsuitable for planting, farmers were desperate for income and could not afford to plant less profitable crops.
L Unfortunately, the aggregate effect of all these farmers planting wheat was a surplusof wheat on the market, which drove prices down and, in a vicious cycle, forced farmers to plant even more wheat the next year.
L Farmers had to defaulted on loans for their mortgages, leading to the failure of small banks
L Things were so bad in some areas that farmers burned corn for fuel rather than sell it.
L Furthermore, the toll that the repeated wheat crops took on the soil contributed to the1930s environmental disaster of theDust Bowlin the West