The Great Depression was the result of an untimely collision of negative economic factors that began with the Wall Street Crash of October 1929 and rapidly spread worldwide. The market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation, plunging farm incomes, and lost opportunities for economic growth and personal advancement. The Depression showed how intricately interconnected the national economy was and marked a low point for America in almost every way, with widespread suffering by citizens throughout the land and at most levels of society.
Origins
Although its exact causes are still debated, there were several events that inevitably caused the Great Depression. One of the most significant was the overall decline in consumer demand. Around 1928, demand for new housing had faltered, subsequently leading to declining sales of building materials and unemployment among construction workers. The automobile industry and other manufacturers had to reduce production rates, while the prices of agricultural goods also dropped.
A speculative boom had taken hold in the late 1920s, which led hundreds of thousands of Americans to invest heavily in the stock market. Many investors bought shares "on margin," meaning to purchase them on credit while at the same time taking out loans to pay for those shares. Investors hoped that when the shares sold, they would make enough money to pay back the loans and interest, while also leaving some profit for themselves. By August 1929, brokers were routinely lending small investors more than two-thirds of the face value of the stocks they were buying. The loans exceeded $8.5 billion, more than the entire amount of currency circulating in the U.S. at the time.
Stock Market Crash
The rising share prices encouraged more people to invest, hoping the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. Because of margin buying, investors stood to lose large sums of money if the market turned down, or failed to advance quickly enough. With the Dow Jones Industrial Average, a major U.S. stock market index, just past its September 3 peak of 381.17, the market finally turned down and panic selling started at the New York Stock Exchange, the primary center of American financial activity located on Wall Street in New York City. On October 24, 1929, also known as Black Thursday, the value of common stock and shares in the U.S. market dropped by 40% and a massive, debilitating economic downward spiral was set in motion.
Stock market crash, 1929
A crowd gathers on Wall Street following the stock market crash on October 29, 1929.
Depression
The Wall Street Crash had a major impact on the U.S. and world economy and the psychological effects reverberated across the nation as business became aware of the difficulties in securing capital markets investments for new projects and expansions. The decline in stock prices caused bankruptcies and severe macroeconomic difficulties, including contraction of credit, business closures, firing of workers, bank failures, decline of the money supply, and other economic depressing events.
The failure set off a worldwide run on U.S. gold deposits and forced the Federal Reserve to raise interest rates. American banks began to fail in October 1930, one year after the crash, when farmers defaulted on loans. There was no federal deposit insurance during that time and bank failures were common. Depositors, worried they might lose all their savings, withdrew their deposited amounts – the accounts through which money flows back and forth among financial institutions – and changed them into hard currency – the paper and coins we hold. As withdrawals increased, the money multiplier decreased, meaning that money circulation throughout the economy slowed. This led to a decrease in the money supply, an increase in interest rates, and a significant decrease in aggregate investment. Some 4,000 banks and other lenders ultimately failed.
By 1932, unemployment had surged to 24 percent, while stock prices plummeted by more than 80 percent. More than 85,000 businesses declared bankruptcy. Industries that suffered the most included agriculture, construction, shipping, mining, and logging, as well as durable goods like automobiles and appliances, whose purchase could be postponed.
The economy reached bottom in the winter of 1932–33. In 1933, unemployment rose to 25 percent, with more than 11 million people seeking work. As the Depression deepened, vast numbers of families were unable to pay rent and were evicted from their homes to stay in “Hoovervilles,” the slang term for shantytowns that were contemptuously named after President Herbert Hoover , whose policies were considered to blame for the Depression.
Hooverville
A Depression-era shantytown, commonly called a Hooverville, near Portland, Oregon.
The agricultural losses were especially acute in the Great Depression. Between 1930 and 1936, severe drought conditions existed in America’s Great Plains regions, with soil turning to dust and then blowing across dry, unused fields in what became known as “Dust Bowls.” The high-speed wind storms that helped destroy the farmlands reportedly reached up to 60 miles per hour on April 14, 1935, also known as Black Sunday.
A great migration occurred in which approximately 200,000 farmers traveled west, hoping to find better land and opportunities in California. A large number of these workers did not have money for train or bus tickets and took to illegally hopping onto freight trains and earning them the slang name, “Hobos.” The migration also included many families, often more than one generation, who traveled together in search of work, food and a place to live.
Broke, baby sick, and car trouble!
Dorothea Lange's 1937 photo of a Dust Bowl family from Missouri stuck on the side of the road near Tracy, California.
Additional Economic Factors
Some believe a change in government policy, specifically a change in interest rates by the federal government, could have slowed the downward steps into the Great Depression. Yet international influences also contributed to the Great Depression. After World War I nations adopted the practice known as Protectionism, under which foreign goods were subject to tariffs, or import duties, so that foreign products would cost more and local products would cost less. The United States enacted extremely high tariffs, causing other nations to retaliate by establishing their own tariffs against American goods. Thus, American businesses lost several foreign markets in which they normally sold their goods.
International credit structure was another cause of the Depression. At the end of the First World War, European nations owed enormous sums of money to American banks, but these debts were rarely repaid and large banks suffered due to these debts. On a less widespread but still significant front, small American banks were crippled because U.S. farmers could not pay their debts as the overall economy worsened.
Economists still dispute how much weight to give the stock market crash of October 1929 as a cause of the Great Depression. It clearly changed sentiment about and expectations of the future, shifting the outlook from very positive to negative. Many academics see the Wall Street Crash of 1929 as part of a historical process called boom and bust. According to economists such as Joseph Schumpeter and Nikolai Kondratieff, the crash was merely a historical event in the continuing process of economic cycles. The impact of the crash was merely to increase the speed at which the cycle proceeded to its next level. Milton Friedman's book, A Monetary History of the United States, co-written with Anna Schwartz, makes the argument that what made the "great contraction" so severe was not the downturn in the business cycle, trade protectionism, or the 1929 stock market crash, but the collapse of the banking system during three waves of panic over the 1930-33 period.
Results
In 1932, the Pecora Commission was established by the U.S. Senate to study the causes of the Wall Street Crash. The following year, the U.S. Congress passed the Glass–Steagall Act, officially named the Banking Act of 1933, mandating a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds and other securities.
President Hoover had lost the presidential election of 1932 to Democrat Franklin Delano Roosevelt in a landslide and Roosevelt's economic recovery plan, called the New Deal, instituted unprecedented programs for relief and reform. In 1933, Roosevelt created the Federal Deposit Insurance Corporation (FDIC), which provided a legal protection against bank losses.
Stock markets around the world instituted measures to suspend trading in the event of rapid declines, claiming that the measures would prevent such panic sales. The Uptick Rule, which "allowed short selling only when the last tick in a stock's price was positive," was implemented after the crash to prevent short sellers from driving the price of a stock down in a bear run, a period of economic pessimism that fuels stock sales. Yet the one-day crash of October 19, 1987, known as Black Monday, when the Dow Jones Industrial Average fell 22.6%, was worse in percentage terms than any single day of the 1929 crash.
The net effect of the 1929 stock market crash was a sudden and general loss of confidence in the country's economic future. The explanations included high consumer debt, ill-regulated markets that permitted over-optimistic loans by banks and investors, and the lack of high-growth new industries, all interacting to create a downward economic spiral of reduced spending, falling confidence, and lowered production. The result was a Great Depression that showed the vast impact a nation’s economic health has on its overall wellbeing and the immense human toll such an event can cause.