The Great Depression
Causes and Effects of the Great Depression
Causes Overview
The actual underlying causes of the Great Depression were weaknesses in the overall economy, overproduction and under-consumption, unequal distribution of wealth, over expansion of credit, fragile corporate structures, weak governmental policies, dependence on international trade, and a weak banking structure.
The Great Depression and Farmers
Weaknesses in the economy had existed before 1929 and were expanding. Farmers never recovered from the post-war recession as they faced a return of foreign competition and were often unable to repay their debts. During World War I, European farmers marched off to war. As such, they needed to import large amounts of food and the United States was eager to sell. During WWI, American farmers were encouraged to grow more and more food and even then, prices continued to climb. It was a boom period for farmers, who could easily sell all of their food for high prices. Farmers made lots of money, which they invested in buying more land, investing in more tools, and producing larger and larger amounts of food.
Once the war ended, all of that came to an end. As European farmers went back to their farms, Europe imported less food from America. American farmers, however, were now producing much more food in 1919 than they had been in 1914. Food prices collapsed completely, leading farmers to struggle.
Farmers responded to low food prices by growing more crops. They hoped that by selling more food, they would be able to make more money. However, more food on the market meant that food prices fell even more, causing farmers to grow even more food, which further contributed to declining prices. Farmers were trapped in a cycle of overproduction, meaning that they were making more goods than could possibly be consumed, which lowered prices. This meant that American farmers entered the Great Depression a full decade before the rest of the world.
Purchasing Power: Workers and Consumers
Purchasing power refers to the ability of a consumer to purchase goods, based on their wages.
There were unemployment problems in the railroad, coal, and textile industries well before 1929. Speculation in real estate and the boom that followed had declined. The sale of automobiles which expanded greatly during the twenties had also begun to slow. These things led to under-consumption and overproduction.
Consumer goods are goods that are made specifically for consumers to improve their lives, rather than for production. New consumer goods were created during the 1920s, including automobiles, washing machines, refrigerators, and a whole plethora of new goods. People bought large numbers of these goods, stimulating the economy, leading to an economic boom throughout the early and mid-1920s. The problem with this was that these goods were durable goods, or goods built to last. The quality of these goods was very high and so when something went wrong with a product, it was repaired rather than replaced. A washing machine produced in this time period could work for decades with regular maintenance, meaning that a consumer would not have to purchase a new one every few years.
As the sales of products began to decline, businesses struggled to find new ways to make a profit. Businesses cutting wages in order to keep their profits up. By cutting wages to increase profit, however, they reduced purchasing power and workers could not afford to purchase the goods that they were making in the factories. In short, they were paying workers less but it meant that consumers had less to spend. This meant that warehouses were often full of unsold goods, as few could afford them.
Contributing to under-consumption and the weakness of the economy was an unequal distribution of wealth. Forty percent of all families had an income of less than $1500 in the twenties, which was below the poverty line. One percent of the population owned 59% of the nation’s wealth, 87% of the population only owned 10% of the wealth. Therefore, the economy was dependent on the spending of a very small portion of the population. Workers could not afford the products they produced, as a result, demand dropped. As the economy got worse this group that couldn’t afford products grew and eventually was unable to by the basic necessities of life.
Negligence, Corruption, and Organization
Stock market growth throughout this time was financed in no small part by “margin-buying” or taking out loans to buy stock in a company. The purchaser of the stock owned the stock, but also owed a debt to the bank that had to be paid back later.
Next in line were the significant deficiencies of the government’s policies. Actions by the federal government actually contributed to the Depression. Stock market speculation was unregulated, tax policies favored the wealthy and added to the unequal distribution of wealth, and antitrust laws were not enforced. Businesses were allowed to do whatever they liked.
Throughout this period of time businessmen, bankers, and other leaders truly felt they would be prosperous forever. They didn't see or were unwilling to see the warning signs. With this confidence Americans began to increasingly invest in the stock market. The market began an unprecedented rise in 1928. By September 3rd 1929 the market reached a record high of 381. Black Tuesday (October 29, 1929) was the day of the actual stock market crash. As businesses began to fail from overproduction and under -consumption, panicked investors began to sell off their stock at a frenzied rate, causing stock prices to collapse. By July, the stock market had reached a low of 41. Billions of dollars had been lost.
Those who had purchased stocks on margin (by using credit) were required to pay back their loans, which they could not. When the stock prices collapsed, that money vanished. The banks, who had loaned all of this money, found that their debts would not be paid back and soon the pressure was on. A panic ensued as people lined up at the banks to get their money. The banks, however, did not have the money, as it had been loaned out on bad debts.
Workers were fired as thousands of businesses closed down. Unemployment rose to 25-35% nationwide. In Toledo Ohio fully 80% of the workers were unemployed. Real estate investments flopped because so many people could not afford to buy real estate. Banks foreclosed on mortgages and took possession of worthless properties that nobody could afford to buy. Between 1930 and 1932 over 9000 banks failed.
The International Economy
The international economy was very much connected, even in the early 1900s. The final cause of the Depression was a weak international economy. Many European economies had not fully recovered after World War I and they relied heavily on the economy of the United States.
Many nations owed American banks money. Both to fight World War I and to pay for rebuilding efforts, Europeans had gone deep into debt with American banks. So long as the economy was growing, paying back these loans was not a problem. After Americans bought European goods, Europeans could make their debt payments to the American banks. For much of the 1920s, this worked pretty well.
When the U.S. economy slowed, fewer European goods were being bought by Americans. As a result, European businesses and governments found that they could not make their debt payments to American banks. Also, U. S. Businessmen were making fewer foreign investments in European companies and American bankers had less money to loan, in general. Soon Europeans were defaulting on their loans, unable to pay back their debts.
After it became clear that the Great Depression was in full swing, the American government went to work trying to protect the economy. The response to this was the Smoot-Hawley Tariff, which put high taxes on foreign goods. The tariff was supposed to protect American businesses, by preventing them from competing with European companies.
However, this caused European nations to implement their own tariffs against American businesses. Soon, American businesses could not sell their products to European consumers, causing further problems. Soon, the international marketplace ground to a halt, with few goods being sold over international borders. This denied people everywhere access to the foreign markets, which caused further economic troubles.
As Europe plunged into Depression, the huge debts that Britain, France, Germany, and others owed the United States could not be repaid, either. Banks that had loaned out large sums of money to finance the fighting found that these debts were unsustainable, meaning that they could not rely upon the income to help them against bad debts at home.