The Great Depression (1929 – 1941)

When you see or hear “The Great Depression,” you should immediately think of the following:

1. The 1930s (about 80 years ago)

2. Poor people and high unemployment

3. Franklin Roosevelt and growing government involvement in peoples’ lives.

A depression is an economic term used to describe a period in which the economy contracts over an extended period of time. The economy works in cycles, sometimes doing well, sometimes not. This is called a business cycle; it is a normal event. Declining business production and high unemployment is often called a recession. When the cycle remains low, it is a depression.

The U.S. has experienced several depressions, but the worst one started in 1929. October 29, 1929 is known as Black Tuesday because so many shares of stock were sold. This collapse of the stock market is known as the Great Crash.

Share (of stock) = a piece of a company that can be purchased. When you buy stock, you are giving money to a company. In return, they give you a piece of paper saying you own a small piece of the company. As an owner, you are entitled to receive part of the company’s profits. This is called a dividend. You may also sell your piece of the company. If you buy a piece of a company for $50, you hope the company does well and the value of your stock will go up. You might then sell your piece for $75. You just made $25 by buying and selling stock. However, if the value of your company declines to $30, you have lost $20. You may sell and live with your loss, or you may want to hold on to your share, hoping the value will go back up. But if the value drops to $25, you have lost even more money. It becomes a guessing game on when you should sell.

So why did the stock market crash?

This can partly be explained by over-speculation. You have previously learned that speculation is the hope of making huge profits by investing (spending) money. People, businesses, and banks all wanted to make huge amounts of money. As such, they invested their money into companies, expecting (and hoping) that the company would do well. The companies often misrepresented themselves to encourage people to give them money. But people also bought stocks on margin (like credit) without money. If and when the company started doing poorly, the lenders wanted their money back, but the stock-holders could not pay because the stock (company) was virtually worthless. So people who made the loans lost their money as well.

What made it worse than it had to be?

FEAR is the main answer. When people began to realize that their stocks were not worth as much as they thought, they decided to sell them. Selling, naturally, means that people did not want them which means there was less demand, and that drove the price down even farther. People could not sell fast enough, but all the values were based upon what people thought. This was the essence of BlackTuesday. The exact same phenomenon happened to individual banks. People were afraid of losing their money, so they went to withdraw it before the bank failed – but by withdrawing the money they, in fact, did make the bank fail, and some people did not have the chance to get their money. The FederalReserve also feared that people were speculating with too much borrowed money (and they were). But the Federal Reserve overreacted by removing money from circulation which meant that there was not enough money to compensate for the crisis. Hence, banks had no money to stay open or to loan to businesses and families. Likewise, the federal government tried to protect businesses by raising tariffs. But by raising tariffs, other countries retaliated by also raising tariffs and decreasing the market for American goods.

Like the economic depression of 1893, farmers continued to try to produce more and more to cover their debts and operating costs. It is a counterintuitive situation. By producing more, demand and value are decreased, so farmers made even less. From an individual standpoint, it does not make sense to produce LESS when you need to make MORE, but increased production actually lowered yields.

President Roosevelt recognized that the nation’s problems were real, but he also realized that much of the catastrophe was based on peoples’ fears. That is why he addressed the nation with his assurance that “the only thing we have to fear is fear itself.”