GREAT DEPRESSION :
The Great Depression lasted from October 24, 1929 until the economic recovery of the 1940s. On October 29, Black Thursday, the stock market crashed heavily, and continued to fall sharply throughout the coming weeks. As a result, the United States and the world were thrown into a decade of poverty and unemployment. The depression affected all sectors of the economy. Farm owners and agricultural workers suffered from falling crop prices. Businesses failed from a lack of investment support and a decline in the ability of the masses to afford their products. Banks closed their doors as the nation's citizens hoarded their money and defaulted on loan payments. Unemployment and abject poverty enveloped the nation.
Herbert Hoover was President of the United States at the onset of the depression. His message to the people was one of continued belief in recovery, even in the face of worsening conditions. Though he eventually sparked some government action in an effort to curb the effects of the depression, he believed in the power of the economy to right itself without government intervention. The situation did not improve, and dissent grew throughout the nation. Hoover lost the presidency to Franklin Roosevelt in the 1932 election.
FDR quickly shifted from a stance of non-intervention to a government policy of regulation and relief. During the first hundred days of his presidency, he and his highly trusted advisors, known as the Brain Trust, created the New Deal. Marshalling a previously unseen executive power, Roosevelt created a number of agencies to aid agriculture, business, and the unemployed. The nation mobilized, and it appeared the economy might improve. However, the economy remained troubled, and criticism of the New Deal rose up in the government and in some political circles. A number of Supreme Court Rulings effectively dismantled the primary mechanisms of FDR's plan.
Undaunted, and gaining a public mandate with the Democratic successes in the 1934 midterm election, FDR set forth the Second New Deal in 1935. This program reaffirmed the administration's commitment to public support of the nation's troubled people. Great steps were taken in attempts to solve the unemployment problem and stimulate economic recovery. The legislation passed during this period would be the framework of the New Deal throughout the remainder of the decade. The economy showed some signs of recovery but was set back by the 1937 recession. After that, FDR enacted few additional measures to cope with the depression. Finally, economic recovery took place under the war economy of the early 1940s, with levels of poverty and unemployment returned to pre-depression levels.
The Depression brought marked changes to the political and entertainment culture of the United States. A culture of dissent and disillusionment produced ample political outlets, such as Huey Long's Share Our Wealth program. Dissent and disillusionment sparked by the depression affected popular culture as well. The 1930s were the golden age of radio. Radio shows, most of them comedies and soap operas, took people's minds off their troubles and provided happiness in a time of great sadness. Hollywood also flourished, as people flocked to the theatres to escape their everyday world of poverty and despair. In contrast, intellectuals and authors delivered a sharp dose of realism. Many were directly critical of capitalism and supported political alternatives, such as socialism or communism.
The Great Depression was a time of sadness and poverty for many, and became an abiding historical watermark in American history and consciousness. It produced a distinct political response that defined the Democratic Party throughout the twentieth century; some New Deal policies, such as Social Security, are now considered bedrock rights of American citizens. Under FDR, a new conception of the federal government emerged, based on the belief in economic regulation and social welfare.
Top
Black Thursday –The crash
In the roaring 1920s, the United States bathed in previously unheard of prosperity. Industry and agriculture alike profited from the thriving economy. The Federal Reserve Board (known as "the Fed") practiced a policy of easy money, and consumer conf idence was high. Average income grew steadily throughout the decade and production soared. Levels of investment grew to new heights. At year's end in 1925, the market value of all stocks totaled $27 billion. By early October of 1929, that number had g rown to $87 billion. However, the economy began to slow down in 1928, and the trend continued in 1929. Agricultural prices slipped, a result of production surpluses and a downturn in business activity. In July of 1928, the Federal Reserve Board, took n otice and hiked interest rates in an attempt to slow investment to a pace more appropriate to the economic decline. Despite this and other warning signs, patterns of investment continued much as they had in the mid-20s, giving little recognition to the e conomic slowdown. The stage was set for a major market correction.
On October 24, 1929, dubbed Black Thursday, the stock market crashed. Prices began to decline early in the day, triggering a selling panic in the New York Stock Exchange (NYSE). When trading closed the Dow Jones Industrial Average had fallen 9 percent and 12,894,650 shares of stock had changed hands, smashing the previous record of 8,246,742. Despite the crash, reports remained optimistic. Major New York banks united to buy up $30 million worth of stock in efforts to stabilize the market, and president Herbert Hoover announced that recovery was expected. Hoover's claims had little merit; the situation became bleaker during the next week. October 29 broke the now four-day old NYSE record for number of transactions: 16,410,035 shares changed hands in total. The market dropped 17.3 percent, confirming, and cementing, the permanency of the crash. The coming months saw no recovery.
The crash in the market spelled disaster for the national economy. Corporations with heavy investments faced a sudden and almost insurmountable shock to their assets. Investing froze. As a result, the national economy fell into an unprecedented period of depression. Import spending dropped from $4.399 billion in 1929 to only $1.323 billion by 1932. The same period saw a sharp drop in exports as well. National income slipped lower each year from 1929 to 1932, and did not return to pre-depression levels until World War II. Production reached its low point in 1932, contributing a slide in Gross National Product from $104 billion in 1929 to $59 billion in 1932. This drop in output caused unemployment to balloon over the same period, from 1.6 million unemployed in 1932 to 13 million in 1933; unemployment became arguably the foremost problem of the depression. Agricultural prices were cut almost in half, and many farms foreclosed upon.
Explaining the crash
The common explanation for event of the stock market crash in 1929 has remained constant from the time of crash until the present. Economists and historians generally agree that wild speculation had inflated stock prices far beyond their appropriate levels, and that at the first sign of a correction, traders panicked and began selling their stock, fueling the crash even further. Speculation on the future value of stocks presented a particularly significant problem in the 1920s because quite often investors bought stock with loaned money. Banks, confident in a rising market, were willing to loan speculators up to three quarters of the price of stock purchases. When the crash hit, it had a double effect; borrowing investors were unable to repay their debts, and banks could not collect their loans.
There is evidence to support the theory proposing rampant speculation as a cause of the crash, such as the increase in total market value from $27 billion in 1925 to $87 billion in 1929. During the period from 1922 to 1928, the Dow grew by 218.7 percent, followed by a drop of 73 percent between 1929 and 1932. Economist Harold Bierman uses the specific example of utility stocks, calculating that they were, on average, selling for three times their inherent value based on accounting numbers. Utilities stocks represented 18 percent of all shares on the New York Stock Exchange, meaning that small corrections in utility stock prices would have large effects on the market at large. These arguments suggest that the crash represented a market correction made necessary by inflation of stock prices due to speculation. However, many economists and historians cite a more varied and complex group of causes as contributing to the crash as well.
One theory of contributing causes cites the liquidation of British investments in the US market as an important factor in the crash. This liquidation resulted from market anxiety and tighter market controls in English markets after the revelation of the Clarence Haftry scandal. Hatry, a businessman in England, was found guilty of a plot in which he created and issued false securities to finance the operation of companies he owned. When caught, he owed English banks more than $65 million. He was unable to pay, and the banks bore the brunt of the disaster. These events led the British government to consider and implement a number of regulations on investment, and may have played into the decision of the Central Bank of England to hike interest rates. The increase in regulation, interest rates, and market anxiety that resulted from the Hatry scandal caused British investors to reduce foreign holdings, most of which were in the US market. While this argument might seem compelling, there is little evidence to suggest that this withdrawal was significant enough to play a part in triggering the selling panic of late October 1929.
Another, more compelling theory is that the stringent attempts of the US government and the Federal Reserve Board to stop speculation caused an overreaction in the market, leading to the selling panic. During 1928 and 1929, Hoover headed a crusade to curb speculation, which he feared would lead to a fierce correction in the market. He encouraged the media to warn about the perils of speculation and newspapers and radio news programs responded with frequent predictions of doom should the wild speculation continue. Hoover also encouraged the Fed to take measures to slow the economy. The Fed responded by increasing the discount rate from 5 to 6 percent, effectively increasing all interest rates. However, the warnings of the news media fell on seemingly deaf ears, as the market continued to provide lucrative profits for speculators, and the increased interest rates on loans did little to deter speculators who expected much higher returns on investment. Considering the lack of immediate effects, it is difficult to see how the crusade against speculation could have directly triggered the crash, but it no doubt helped to set the stage for the reversal of fortunes in late 1929.
There were many causes of the stock market crash October 24, 1929. Of these various factors, the market speculation of the 1920s is the most important. However, one must consider external forces such as foreign investment, and look into the psychology of the market players in order to get a complete picture of the causes of the crash.
Top
Onset of the great depression
Following the stock market crash of 1929, the Great Depression took hold of America. Poverty and unemployment were rampant. No economic sector escaped the ravages of the depression. The decline of purchasing power in the market commodities staggered agriculture, which already had been suffering the effects of production surpluses. The prices of agricultural products fell off rapidly, and farmers responded by upping production. National wheat production, for example, was 35 million bushels higher in 1930 than it was in 1929, while prices fell from $1.09 to $0.71 per bushel. The results were disastrous.
In 1930, average farm income slid to the lowest it had been since 1921. Many farmers could not afford to pay their mortgages and lost their land. In 1933, 5 percent of the nation's farms underwent mortgage foreclosures. Nowhere was the situation worse than in the area known as the Dust Bowl, an area of about 150,000 square miles in the Midwest. As a result of excessive farming during the 1920s and before, this region suffered from massive soil erosion and dust storms which made it impossible to continue farming there in the 1930s. Millions of farmers migrated west to find new land or, in most cases, become temporary workers or sharecroppers. This helped the farm economy in some ways by cutting down production, but it brought misery to the people of the formerly fertile Dust Bowl.
The sluggish economy drastically reduced the quantity of goods and services bought and sold. The industrial and financial urban centers suffered from vast numbers of business failures, which came to a head in 1932 with over 30,000 failures nationwide. Banks closed their doors because of a lack of liquid assets. Almost 2500 banks suspended operation in 1931. Production fell off in the industrial sector as a result of falling investment and an inability to pay workers.
The massive numbers of closures and shut downs led to similarly huge unemployment. Unemployment reached an unheard of high of 25 percent in 1933, and hovered between 15 and 20 percent for the majority of the 1930s. Small towns and villages were hit the hardest, as were unskilled workers and minorities. Employment in the fields of construction and the manufacture of durable goods was especially hard hit, with 10 percent of engineers simultaneously unemployed in 1932. Abject poverty resulted. Children received inadequate nutrition and healthcare, and starvation became an everyday occurrence. The unemployed were evicted from their homes and left to wander the nation in search of jobs and charity. Ashamed of their degraded status, many committed suicide; the suicide rate in the US rose 30 percent between 1928 and 1932. Some of these wandering unemployed took action, most notably in organizing the demonstration known as the Shame of Anacostia Flats. At the beginning of the summer of 1932 more than 15,000 people, destitute and unemployed, converged on Washington D.C., to the Anacostia Flats area. Most of them were veterans of World War I who were demanding face value payment of their adjusted service certificates, bonds which were set to mature in 1945. On Hoover's orders, the army drove the demonstrators away.
Impact
The onset of the depression in both rural and urban areas demonstrated the inability of the US economy to cope with the impact of the stock market crash. To the citizen living in America in the 1930s, it seemed that everything that could go wrong did for business and agriculture alike. Economists differ in their explanations of the conditions that kept the economy from quickly recovering, as many at the time expected it would. There are three main strains of argument which seek to explain the causes of the prolonged tailspin of the economy during the Great Depression:
1. Inequality of income and wealth led to instability in the prosperity of the 1920s and set the stage for the heavy impact of the depression on those at the bottom of the economic heap. 2. The industrial or agricultural sectors had not yet correctly adapted to recent technological changes at the time of the crash, exacerbating the difficulties faced by each. 3. Because of Fed policy and other mitigating factors, the money supply was overly contracted, leaving the economy short of the assets required for recovery.
Many economists claim that the structural inequalities of the 1920s were cause for weakness in the economy. During the 1920s, corporate profits rose greatly, but wages at the lowest level did not much change. As a result, the percentage of total income in the United States controlled by the top 5 percent of earners rose from 22 to 26 percent, while the bottom 40 percent of earners controlled only 12 percent at the time of the crash. This inequality had multiple effects. First, it meant that the market for luxury goods boomed in the 1920s. Once tighter financial times set in, however, the luxury market became more or less defunct, causing the collapse of a significant number of businesses and the unemployment of the workers within that industry. Second, and more importantly, the inequality in wealth meant that the middle and lower classes would be more deeply affected by the depression than they would have had there been greater equality. First, the poor had no nest egg on which to rely during times of hardship. Second, the rich were so much richer than the poor that they had no concept of a common fate. Any measures taken to ensure the stability of the rich, then, were not likely to aid the poor in their quest for employment, shelter, and sustenance. This left the poorer classes on their own to fight the depression, without the benefit of personal wealth to engender stability.
Other economists cite the application of technology as a major factor leading to the great impact of the market crash. In the agricultural sector, technology steadily advanced during the early twentieth century. As technology made farms more efficient, commodity prices dropped. However, because the commercial market grew markedly during and following World War I through the inclusion of foreign purchasers-- mostly Europeans whose farmlands had been ravaged by the war--demand kept up with supply. However, once the depression set in and the United States' markets became increasingly isolated, it became clear that the technological advances in farming benefited consumers more than producers. Effectively, then, technology increased production to excessive levels and thereby created the drop in prices that cut farm income drastically. The industrial sector, it is argued, suffered from a different problem. The claim made by some economists is that many areas of industry lagged in the application of technology in the late 1920s and throughout the 1930s. As a result, these industries failed to attract the investment needed to keep up production and employ sufficient numbers of workers.
The third economic approach that tries to explain the extent to which the depression entombed the US is the 'monetarist' school, advanced by Milton Friedman and others. The monetarists blame the short money supply for the descent into depression. They claim that a greater money supply, which could have existed had the Fed made different decisions regarding monetary policy, would have jump-started the economy through heightened consumer spending and investment. During the early depression, the Fed kept a tight monetary policy, attempting to stave off inflation. The monetarists believe that some inflation is a necessary side effect of an easy money policy that would have increased economic activity and led to quicker recovery.
All economists who theorize about the causes of the onset of depression recognize that the United States was not the only nation in economic turmoil. It is important to think about the depression as a global phenomenon, and to realize that the United States has strong economic ties to many foreign nations. Developments abroad had effects on the domestic economy throughout the 1930s, and vice versa.
Top
The global scale of the great depression
The Great Depression extended beyond the borders of the United States. The crisis occurred within the context of a global economic slowdown, which as a whole both contributed to and was influenced by the American depression. Many nations, especially in Europe, experienced economic trouble leading up to the period of the depression. The American stock market crash was certainly the largest event leading up to the global depression, but it was not the first sign of the weakening of the global economy, and it was not the last. Many economies experienced a time lag before the effects of the American crash set in and economic conditions took a distinct turn for the worse. By the early 1930s, nearly every nation of the world had sunk into depression. The political responses of nations struck by economic hardship differed by region.
The most relevant political response in Europe was the rise of fascism. Fascism emerged, most notably in Italy and Germany, under the leadership of Benito Mussolini and Adolf Hitler, respectively. The trend of rising fascism may be seen throughout the years following the ravages of World War I, but was especially prominent as a response to the Great Depression. European fascism stressed national solidarity and protectionism. These values could be seen in economic programs of neo-mercantilism, which insulated fascist nations from world trade as they attempted to recover from the depression.
Fascism in Europe was most remarkable and had the greatest global consequences in the special case of Germany. No country in the world was as hard hit as Germany by the depression. As the loser of World War One, Germany was bound by the Treaty of Versailles to pay extensive reparations to France and Great Britain. These reparations proved a constant economic problem for Germany throughout the 1920s, leading to high inflation as the government printed money at a rapid rate in order to pay reparations and attempt to stimulate the economy simultaneously. As a result, Germany experienced poverty and unemployment, even before the Great Depression arose. The depression enhanced the preexisting economic difficulties, and unemployment peaked at over 30 percent in 1932. The German government struggled to develop a coherent recovery strategy until Hitler and the Nazi Party came to power on January 30, 1933. Hitler mobilized the industrial economy in preparation for war, and instituted protectionist trade reforms. The economy began to slowly recover. More importantly, however, Hitler used his leadership position to advance his ideology of Aryan racial superiority and his desire for European and global hegemony. This ideology set the stage for the Second World War.
The experience of the depression produced different responses in other areas of the world. Latin America and South America saw the rise of Populism, a movement centered around the desire to reduce economic ties to the United Sates and Europe and focus on the development of domestic markets and domestic social programs. Populism constituted a rebellion against the ruling economic oligarchies, which favored free trade and high exports in Brazil, Argentina, Peru, and elsewhere.
Within the colonized states of Asia and Africa, the 1930s was a decade of rebellion against colonial powers and the advent of freedom movements. In India, there was a successful movement to enfranchise the peasant classes, which significantly diluted the power of both British and Indian elites. Colonized states throughout Asia and Africa responded similarly. Southeast Asian colonies had the most pronounced movements, as Burma and Vietnam both attempted to win Independence. Vietnam turned toward Communism, a shift that would have marked effects on the world stage throughout the coming decades.
Due to the linkage of the world's economies through networks of trade, the Great Depression was a common global experience. However responses differed by region based on distinct preconditions, and produced results that significantly shaped the future in each region.
In Europe, the experience of the 1920s and early 1930s was one of constant chaos and frustration. The 1920s were spent coping with the significant economic setbacks of World War One, followed by the onset of depression in the early 1930s. Between the two wars, European nations were continuously trying to find a system of organization and a balance of power that would function diplomatically and economically. The result was a feeling of general chaos among the people. Out of this chaos grew a desire for order. In some nations this desire was satisfied through a political shift toward socialism. In Italy and Germany, where chaos was especially prevalent, the desire for order was met by the rise of fascism. Fascism offered an aggressive stance toward economic recovery, which appealed to the helpless masses. Nationalism, another primary feature of fascism, was attractive in that it united the people to battle the scourge of the depression, and prioritized the urgent needs of the body of citizens. As for the ideology of global hegemony, it capitalized on feelings of frustration, helplessness, and victimization. The goal of global dominance was the extreme embodiment of the conviction that the depression was imposed by external forces which must be removed from power in the name of stability. The consequences of the rise of European fascism are well known. World War Two began as the result of the goal of global hegemony propagated by Hitler in Germany.
In Latin and South America, as well as Asia, the shock of the depression provoked a change in consciousness for the disadvantaged people who had traditionally been relegated to the periphery of the market. The unrest created by the depression marked a chance for the masses to change the power alignment. There was an outpouring of latent resentment of those who, in power, had kept the masses silent and voiceless. In Latin and South America, this resentment found an outlet in the Populist movement, which rebelled against the oligarchies that had, for years, kept the economic focus on international trade, at the expense of the domestic economy. In Asia and Africa, this resentment took the form of independence movements, rebelling against the distant colonial powers which had undermined the sovereignty of the local masses. Linking these responses to the rise of fascism in Europe was the advent of nationalism resulting from the hope that together, the masses could overcome the depression, and from the conviction that recovery was contingent upon self- reliance. This change of consciousness had long-reaching effects.
Populism in Latin and South America paved the way for the ascension of a number of nationalistic dictators who would significantly shape the evolution of the region during the coming decades. In Africa, anti-colonial movements were a feature of life until the colonial powers finally granted independence to many colonies during the 1950s and 60s. In Asia, anti-colonialism led to major conflicts between nationalistic independence movements and the colonial powers. The most notable case is that of Vietnam, where Communist nationals struggled for over twenty years to win independence in the face of opposition from France and later, the United States.
Top
Recovery and war economy
Beginning in 1933, when policies began to reflect a more socialist political approach in both the United States and Europe, the global economy entered a state of gradual recovery, or at least stability. Franklin Roosevelt was the architect of this recovery in the United States. 1933 was the economic low point of the Great Depression, with unemployment in the United States topping out at 25.2 percent. Under the liberal reforms of Franklin Roosevelt, the unemployment rate dropped steadily, to 20.3 percent in 1935, to 14.3 percent in 1937, and then up slightly to 17.2 percent in 1939 as a result of the 1937 recession.
Under FDR, the Federal Reserve Board gained greater power and freedom to directly manage the economy. Monetary policy under FDR was generally expansionary, flooding money into the market, in efforts to stimulate recovery. The result of this easy money policy was a rise in prices, a rise in production, and a rise in investment, all factors that helped the desired goal of stimulating economic activity and helping to lessen unemployment. As a result, by 1935, real weekly earnings in the US had regained 1929 levels. By 1939, real earnings climbed another 18 percent.
However, through 1940 the depression still held the US fully in its grasp. Businesses had grown somewhat confident and willing to invest in development, but most were wary of tying up liquid assets in investment, concerned that there might be a relapse into depression at any moment. Individuals were more confident in the stability of the bank system due to the backing provided by the Federal Deposit Insurance Corporation (FDIC) created in June of 1933, but there was still an element of distrust in dealings with the banks, which had failed in early 1933. It was not until the United States became embroiled in World War II that the Great Depression ended for good.
The United States Senate issued a declaration of war on Japan on December 8, 1941, and Germany declared war on the US on December 11. Industrial factories were at first slow to convert to military output, but by 1942, 33 percent of the economy was devoted to the war effort. Between 1941 and 1945 the US spent approximately $250 million a day in efforts to defeat the enemies. Federal expenditures were more than $320 billion over that period. That was two times as much money as the federal government had spent in its entire history up to that point. This influx of money stimulated an industrial boom and vanquished unemployment. By the end of the war in 1945, farm income had more than doubled. Corporate profits rose by 70 percent over their 1940 level, and the real wages of industrial workers increased by 50 percent. Perhaps most notably, the earnings of the bottom fifth of workers climbed 68 percent. Gross Domestic Product (GDP) nearly doubled, from $832 billion in 1940 to $1559 billion, measured in constant 1987 dollars. Living standards improved significantly. The Great Depression ended, swept away by the war.
There is no doubt that it took the United States' involvement in war to stimulate the full recovery of the economy. However, historians differ on the question of the extent to which the New Deal began, and set the stage for, full recovery. Some historians and economists criticize FDR's programs, claiming that the economy would have rebounded naturally more quickly without government intervention. They criticize the deficit spending that Roosevelt maintained throughout his terms in office. Others claim that Roosevelt kept the economy afloat with his social programs and spending.
Those who laud Roosevelt's efforts at recovery often claim that the success of his varied programs stemmed from the unifying fact that most of the New Deal programs (and especially those of the Second New Deal) were socialist in spirit. The programs' socialist aspects include the regulation of the banking system and other financial institutions, involvement in wage determination through the National Recovery Administration and the Fair Labor Standards Act, policies of moderate redistribution of wealth, and the granting of social welfare programs to the disadvantaged. Liberal analysts claim it was socialism in America and abroad, notably in Germany, which carried nations through and out of depression.
If it is true that FDR's policy decisions were helpful to the economy, there must be an explanation of the prolonged effects of the depression under the New Deal. Historians explain the lag in recovery by examining the psychology of the businessmen and investors. The argument is that despite the effectiveness and soundness of the New Deal programs, the precarious economy of the early 1930s was ever-present in the minds of those with the ability to stimulate economic activity. Steady price and wage decreases at the onset of the depression created the expectation of further cuts. Thus businessmen cut production in anticipation of declining profits, and let workers go in accordance. Investors, seeing these trends, saw no opportunities for profitable investment. The economy was stagnant. Despite FDR's attempts to inspire confidence in the leaders of industry, and the slowly improving economy, both investors and businessmen were wary of overextending their funds. They feared investing in research and development that might not pay off.
Even shortly after the beginning of the war, leaders of industry felt reluctant to switch over to war production, fearing that the war would end too soon for investments in the conversion of production to pay off. As a result, the army suffered significant shortages during the early months of the war. After it became clear that the war was deepening and that the United States government was willing to spend a great deal of money on the war effort, expectations changed. Investment expansion and recovery ensued, bringing an end to the misery of the Great Depression.
