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Explain the Causes and Effects of the Great Depression

The Great Depression was one of the most significant periods in American history. It came as a blow to the American people who were used to living in the “American Dream” (Paul. A., 1996, p.1), or the “Roaring Twenties”. The Depression was described as “The Rise and Fall of a Nation” (Tower Records, 1998). Lasting for about a decade, it is still considered to be “The worst economic slump ever in US history” (Paul. A., p.1, 1996). This essay will examine the causes of the Great Depression and its effects on the USA. Perhaps the events that most clearly associated with the Great Depression were the Wall Street crashes on October 24th and 29th, 1929. Although not acting as direct causes of the Depression, they worsened it to a horrible extent.

The Crashes were inevitable. Premature market Speculation was common throughout the 1920s, and it artificially increased shares’ value, allowing many Americans to become rich. It was only a matter of time until investors realized they were investing in what Aaron Gibes (cyberessays.com, 2002), an economist during the Depression, called “markets that were only prosperous “share-wise” “. Along with market speculation, the “Credit System” also made the crash inevitable. Stock Brokers prior to the Depression were so confident in the market that they began loaning people money to invest in shares. In return, they asked for a percentage of the profit their clients would make. This system, also known as investing in the “Margin”, put more money in the stock market than people actually had. It worked well as long as the rising trend continued.

Once shares’ value fell, however, brokers quickly demanded their money back from ordinary investors. These, in turn, reacted by selling their shares. This sequence of events resulted in a steeper fall in stock value, leading to a faster downfall of the market. (Brooman, p.26, 1997) Finally, by October 29th, “Bankers and the government were absolutely powerless to halt the crash, and… many of the fortunes so rapidly accumulated had been completely lost” (Smith, 1997, p.27). The rapid collapse of the American markets worsened poverty and unemployment throughout the USA, symbolizing the “Downfall of the prestigious American economy” (Ernie Pyle, 1936). Another cause of the Great Depression was the uneven wealth distribution throughout the USA. Despite the general rise in incomes and purchasing power throughout the 1920s, most Americans did not get a share of the era’s prosperity.

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Throughout the 1920s about 60% of the American population earned less than $2000 annually, which was considered to be the ‘poverty minimum’ (Sandiego.edu). The situation was so bad that during the same period, 5% of the population earned 33% of their incomes (socialstudieshelp.com, 2002). As time passed, the gap only grew. Working-class Spending was falling whilst production was increasing, thus resulting in the overproduction of consumer goods. Once every able American owned all possible consumer goods, industries had to drastically cut production. As a result, an increasing amount of workers were fired, and unemployment rose (Brooman, 1997, p.26). An additional cause of the Great Depression (and closely related to that above) was the disproportional increase in incomes. Between 1923 and 1929 “average worker output increased 32% in manufacturing.

During that same period of time, average wages for manufacturing jobs increased only 8%” (Paul A. p.1, 1996). This meant that purchasing power was decreasing in relation to productivity. As a result, the market became oversupplied with goods that couldn’t be sold. To solve the problem, businesses began selling their products through installment credit. The concept of ‘paying later’ appealed to many Americans who couldn’t afford to buy consumer goods otherwise. Between 1925 and 1929 total amount of outstanding installment credit more than doubled, and “By the end of the 1920s, 60% of cars, and 80% of radios were bought on installment credit” (Paul. A., 1996. p.2). By creating a false demand for products, businesses seemed to have found a temporary solution to their difficulties. What they actually did, however, was to “put off the day of reckoning” (Paul. A. p.2, 1996).

Inevitably, after few years, most Americans stopped buying consumer goods as past purchases put them in great debts. As a result, many businesses were forced to close down suddenly. Consequently, shares’ value dropped, and many people were left without jobs or money. The appealing solution to income problems, it seemed, “made the downfall worse when it came” (Paul A. p., 1996). Agricultural overproduction also proved to be a major cause of the Great Depression. Farming was in decline since WWI (socialstudieshelp.com, 2002). The government continuously encouraged farmers to use modern equipment in order to produce a larger turnover of agricultural goods. This led to an overproduction of food, leaving many farmers with huge surpluses (Brooman. p.26, 1997). As a result, food prices dropped, and farmers began making financial losses. Their reaction was to borrow money from banks and use it to produce even more food.

The solution only worsened the situation as food prices dropped even further. As a result, many farmers began defaulting on their loans (socialstudieshelp.com, 2002) and were thrown off their land (Brooman. p.26, 1997). This, in turn, led to the collapse of many businesses serving farms, including banks. Another cause of the Great Depression was the trade problems between the USA and the rest of the world. In 1923, the government imposed tariffs on foreign imports (Brooman. p.26, 1997). Its intention was to protect home industries from foreign alternatives. The governments in other countries reacted by equally imposing tariffs on American goods. The results of the trade “standstill” were not desirable. When American markets failed in 1929, most businesses were unable to sell their surplus goods abroad. With barely any customers left inside the USA, many businesses were forced to close down.

The situation became even worse when the USA increased tariffs even further. Consequently, Europe was no longer able to buy American goods. “When that happened in 1929, US exports fell 30% immediately” (Paul A. p.5). This led to a loss of approximately “$1.5 Billion in foreign sales between 1929 and 1933” which “was fully one-eighth of all lost American sales in the early years of the Depression” (Paul A. p.5). Finally, what perhaps made the Depression inevitable were the American government’s “Laissez Faire” policies. The Republican party in government prior to the Depression believed the economy would perform best if left untouched. As a result, there were no welfare systems for the poor and unemployed. Nevertheless, the Republican policies of ‘Rugged Individualism’ were widely popular among the flourishing businesses of the 1920s.

When the Depression hit the USA in 1929, the government was unable to deal with the sudden amount of hungry, poor, and unemployed. Instead, it assured people “the ship would right itself” (socialstudieshelp.com, 2002) and that “prosperity was just around the corner” (Edgar Hoover to a group of businessmen in 1932). These, in turn, were forced to rely on charity to survive. “By the time Hoover [Republican President] recognized he had to do something, it was too little or too late” (socialstudieshelp.com, 2002). Perhaps more significant than the causes of the Great Depression are its effects. These, like the causes, were quite numerous. The most obvious effects of the Depression were widespread poverty and unemployment. By 1933, 25% of the American workforce was unemployed (Brooman. p.30, 1997). Since no welfare systems existed in the USA, many Americans who lost their jobs and money were forced to set up in shantytowns called “Hoovervilles” (see illustration #1 on the right). These were named after President Hoover, the Depression’s scapegoat.

Direct consequences of the sudden increase in poverty and unemployment were the rise in hunger and suicide victims. Most of the poor and unemployed during the Depression couldn’t afford to buy food. Consequently, charities and municipalities set up ‘breadlines’ where they distributed free food to the needy. Nevertheless, there still remained many who couldn’t access these services and were forced into starvation. These were mainly farmers who lived outside the city. To cope with the sudden famine, they fed on wild berries and roots (Brooman. p.31, 1997). In some cases, they actually died of starvation. Alongside hunger, Suicides also became an epidemic during the Depression. In 1932, 23,000 Americans committed suicide (Brooman. p.30, 1997). This was the highest yearly figure in American history. In fact, between 1926 and 1933, suicide rates increased from 12.6 per 100,000 people to 15.9 (Smith. p.29, 1997).

“Many saw it [suicides] as the most convenient escape path from their newly aroused life burdens” (Paul A. p.7, 1996). Those who didn’t follow this path had to rely on the increasing number of charities created during the Depression. Another inevitable effect of the Great Depression was the closure of thousands of banks and businesses. With decreased consumption and the collapse of the stock market, many businesses found themselves with piled inventories, no customers, and no money to stay afloat. As a result, production dropped, and many businesses closed down. “Between the two market crashes in October 24th and 29th, production fell 9%” (Paul A. p.6, 1996) while in 1932, 20,000 companies went bankrupt (Brooman. p.30, 1997).

Consequently, many Americans lost their jobs. This meant that an increasing amount of people began defaulting on their various bank loans. Since many banks already made huge losses on the stock market, customers’ inability to repay loans left them no choice but to close down. As a result, many people panicked and tried to withdraw their money from their banks. This further worsened the situation, and even more, banks closed down, thus leading to a nationwide deflation. “By the end of 1932, 20% of the banks that had been operating in 1929 had closed down” (Smith. p.30, 1997). The sudden loss of Millions of Dollars belonging to naive depositors increased poverty and made the public lose confidence in the entire financial system (Smith. p. 30, 1997).

The Depression also had devastating effects on agriculture, namely farming. Decreased consumption due to Depression meant food prices dropped even further. This led to a 50% reduction in average farm wages between 1926 and 1933 (Smith. p.31, 1997). In fact, between the same period of time, farm income throughout the USA dropped from $13.3 billion to $7.1 billion (Smith. p.31, 1997). As a result, an even steeper collapse of businesses serving farms and farming communities took place. By 1932, one farmer in every twenty was thrown off his land due to failure in mortgage repayments (Brooman. p.30. 1997). The situation became even worse when a drought lasting throughout the 1930s hit farmland across the USA. These catastrophic events eventually encouraged desperate farmers to migrate to California in search of employment (Tower Records, 1998). The conditions there, however, were just as hopeless.

Political Upheaval was another effect of the Great Depression. Firstly, demonstrations occurred almost on a daily basis throughout the Depression. They were probably the most common form of protest. These were mainly used to criticize the government’s actions following the Depression (Tower Records, 1998). Some, however, took advantage of the Depression and its demonstrations to gather support for their ideals. These were mostly radicals who believed only a profound change in the regime would end the Depression. The biggest group of radicals were the Communists who actually had political representation. Alongside were other collections such as Anarchists and Fascists (Paul A. p.9, 1996).

Another form of protest was Labor Unions’ agitation. “Their [Labor Union] secret weapon was organized worker strikes” (Ernie Pyle, 1936). These were used to improve workers’ conditions in various factories and industries. At first, strikes were illegal and therefore uncommon. Employment was not abundant, and workers knew striking would put them at risk of losing their jobs, or worse, their freedom. But, once Roosevelt was elected, he signed an act allowing strikes. This gave a Greenlight to a wave of industrial strikes throughout the 1930s. The Great Depression also had an impact on the industrialized nations of Europe. The USA had been the world’s largest creditor. “Foreign powers owed the United States and its companies a billion dollars annually” (Socialstudieshelp.com, 2002). Their economic redevelopment following WWI depended on America’s financial stability.

When the Depression hit America, “…the industrial world was caught in a vicious spiral of increasing unemployment and economic decline” (Smith. p.29, 1997). Decreased exports and therefore worldwide industrial decline meant that unemployment increased in Europe, along with poverty and political upheaval. The chief European victim of the Depression was Germany, where unemployment reached nearly 40% of the workforce (Encarta.msn.com). The final effect of the Depression was the end of the thirteen-year-long Republican rule. Most Americans blamed the Depression on the government, and chiefly the president. Slogans such as “In Hoover we trusted, now we are busted” were circulated all throughout the country. Americas wanted a change, and in November 1932, they got it. Democrat candidate, Franklin D. Roosevelt (see illustration #2 on the right) was elected president, beating Hoover by a 20% margin.

Roosevelt was elected under his promise of “A new deal for the American people”. The ‘deal’ was a series of programs aimed at stimulating the economy in order to pull the USA out of the Depression (cyberessays.com). The Depression was a tragic episode in America’s history. Blinded by the excesses of the 1920s, Americans failed to perceive the early symptoms of the disaster. As a result, the Depression managed to inflict untold devastation on the American people. Unemployment, poverty, and homelessness were only some of the challenges the USA had to overcome during those horrible ten years. The lessons delivered by the Great Depression will remain engraved as scars in America’s history for many more years to come.

Bibliography

– Booklets:

  • Josh Brooman (1997), The Age of Excess, Longman Inc: New York, United States of America.

– Handouts:

  • Nigel Smith (1997), The USA, 1917 – 1980, Oxford University Press: Oxford, Great Britain.

– Websites: (all accessed 8. 2. 02)

  • Gusmorino, Paul A., III (May 13, 1996), Main Causes of the Great Depression. Gusmorino World. Online. Internet: http://www.escape.com/~paulg53/politics/great_depression.shtml
  • http://www.cyberessays.com/history/163.html
  • http://www.socialstudieshelp.com/USRA_Depression.html
  • http://encarta.msn.com/find/concise.asp?ti=761584403&sid=6#s6

– Videos:

  • History Channel, Great Depression Video, Tower Records, 1998.

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