Here it is: 2012’s research paper. I chose this particular topic because of both interest and lack of interest. The interest I had was in the Great Depression and its time and culture. I also wondered how the Great Depression, that monster whose cry drowned out the Roaring 20’s, started. The lack of interest was due to my being uncreative and lazy. However, I thoroughly enjoyed researching and writing about the causes of the Great Depression.
Whether it’s jobless men selling apples on the street, children skipping school to earn some money shoe shining, or city-sized Hoovervilles occupied by hundreds of homeless, bad times are associated with the Great Depression, 1929-1939. But how did it all get started? What really caused that decade of misery? The International Chamber of Commerce held the following accountable for the tragic event: 1) overproduction; 2) decline in commodity prices; 3) world agricultural crisis; 4) industrial unemployment; 5) political unrest; 6) partial closing of several world markets, mainly China and India; 7) varied bases for monetary circulation; 8 ) disequilibrium between short- and long-term credits; 9) fall in silver prices; 10) dumping of goods by Soviet Russia; 11) unprecedented taxation to meet international indebtedness; and 12) excessive state participation in private enterprises. Needless to say, there are many interconnected causes for the Great Depression. However, the five main causes are the beginning of big business and with it, overproduction, the stock market crash, bank failure, farm failure, and the incapable government response..
The first major cause is the result of the beginning of big businesses. Businesses started to grow due to an increase in manufacturing that was possible with the use of newly found oil, electricity and electric machines. By 1929, 70% of all factories were run by electricity, and machinery was taking away jobs faster than it created them. Not only did technology create big businesses, but well-thought work plans, such as the assembly line, also contributed to businesses’ success. In the 1920s manufacturing increased by 64%. Seven million radio sets and three million homes and apartments were designed and manufactured in the 1920s. Along with the three million homes, six million telephones were installed. Automobile output from 1915 to 1925 tripled (Washburne 438-439). With this success, larger companies started appearing because of business consolidation. Little businesses merged together and before long six thousand manufacturing and mining companies, four thousand public utilities, and eighteen thousand banks all disappeared (Washburne 442). Chains, like Ford, GM, and U.S. Steel, replaced them (Ross 28).
America’s industrial development was also encouraged by the need for products in Europe because Europe was preoccupied with World War I in 1914, and the regular bombings destroyed its factories. The growing American businesses leaped further ahead to meet the demands of their new overseas buyer. World trade for the first time became beneficial. The newly formed American chains started working together for mutual benefit and profit. Following World War I, America spent money overseas for the first time. American banks loaned five billion dollars to countries overseas from 1925 to 1929, and U.S. companies invested eleven billion dollars overseas (Washburne 443-444).
But this business success wasn’t all good. In fact, it had two major consequences. First, after World War I ended, Europe was again able to produce all the goods it needed, so American factories and companies had fewer buyers for their products. Trading the unwanted goods to countries outside of Europe was impossible because the American prices were too high for Asia and Africa. Even if Europe needed America’s goods, it wouldn’t have been able to purchase them: the purchasing power of Europe significantly diminished after WWI. Because pre-war empires in Europe were now broken up, that complicated production of materials. Suppliers and factories that had once been in the same country found themselves on opposite sides of the new borders, making manufacturing difficult or impossible. In addition, inflation in Europe started and got worse. One American dollar was worth over four trillion German marks. For these reasons, merchandise prices in America and Europe began to fall (Ross17-20).
America’s new chains, businesses, and factories found themselves overproducing hundreds of goods. No buyers came forward. Desperate to stop the overproduction issue, America decided to place tariffs (a tax on imported goods) on overseas products. That would raise the prices of foreign goods in the U.S., and hopefully then the American people would buy more American goods. The U.S. government thought that this and the little overseas trade left would solve the overproduction problem. So in 1922 the Fordney-McCumber Tariff was established. But the tariff did more harm than good. Overseas businesses, relying on American buyers to sell their products, couldn’t afford the high tariff. Countries were left with no choice but to place tariffs on their imported goods. The small amount of world trade left was blocked by giant walls of tariffs (Ross 20-22). World trade decreased by 50%.
The second consequence of successful big businesses was none other than the stock market, and the individuals, banks and corporations purchasing ever larger numbers of stocks. Businesses continued to consolidate; they merged together so much so that by 1930 the two hundred biggest companies held one half of all American assets. For the first time, Americans bought stocks in these new companies. As the companies grew, so did the stock market and the demand for shares (Washbrune 442-443). Stock purchasing led to the second main cause of the Great Depression: stock speculation.
This new stock fever was so hot that stock prices rose by 38% in 1928. People all over the U.S. rushed to get stocks and the easy money it produced. But soon people weren’t buying stocks for their dividends (the percent an investor gets of a company’s profit), but for their resale price. People would buy stocks, the price would rise, and they would sell them again. Over nine million people and many banks invested in the “easy money” market. Americans spent all their life’s savings on stocks hoping to double or even triple that amount. As soon as the profits would roll in, they, too, would be invested back into the stock market. Soon Americans had spent so much money on stock that they had little left to buy goods (which added to the overproduction problem). If anything, this lack of money encouraged people to invest even more money into the stock market. Having all their savings already in the market, Americans bought stocks on margin (credit). Banks loaned Americans money that went right into the stock market (Ross 38-40). Amazingly, the stock market continued to rise from 1922 to 1928. In 1929 the Federal Reserve Board warned banks to stop lending money for stock purchasing, but their warning was moments too late (Ross 6-7).
Starting in October 1929, the stock market stopped rising. In mid-October the market was flat. On October 20th the stock prices fell for the first time in a decade. Investors became uneasy as stock prices continued to fall over October 21st through the 23 (Ross 7-8). On October 24th, Black Thursday, rumors of brokers committing suicide because of complete market failure spread. Confidence in the stock market shattered. Investors began pulling money out of the market, and frantically tried to sell their shares (Nardo 33). About sixteen and a half million transactions to sell happened on Black Thursday (Washburne 450-451). The market lost 11% of its value in that one day (Wikipedia: Stock Market Crash) . On October 29th, the day that officially marks the stock market crash, almost thirteen million shares were sold compared to a daily average of one to two million (Ross 7). So many stocks were for sale with no buyers that prices fell dramatically. GE went from $396.25 a share to $201 in a week. AT&T shares went from $304 to $222. A U.S. Steel share went from $261 in 1929 to $27 in 1933 (Washburne 451). Over twenty billion dollars was lost in two days (Wikipedia: Stock Market Crash).
Americans’ money was gone. Americans’ savings were gone. And people were in debt from all the stocks they had bought on margin. There was no point in trying to borrow more money from the banks; the banks were broke too (Ross 33).
Bank failure is the third main cause of the Great Depression. Banks first started to fail because of a new American habit: buying on credit. Stocks weren’t the only thing Americans had bought on credit. Houses, cars, new appliances, and every day necessities had been bought on credit. Buying on credit became a type of fade. “Buy now; pay later” ads were everywhere. By 1929 ten million Americans were paying off their debt with monthly installment payments (Nardo 30). When the stock market crashed, Americans had no way of paying back their debts; they had lost everything in the crash. Banks had also lost tons of money in the stock market crash, and so they demanded that people pay back their loans immediately. Of course, people had no money to do so. Banks took action. Businesses, farms, and houses were taken by the bank, but banks couldn’t sell thousands of buildings. From 1930 to 1933 nine thousand banks went bankrupt. The economy shrank by 50% from 1929 to 1933 (Ross 34).
Banks also failed because of farm failure, which is the fourth cause of the Great Depression. Just like the manufacturing industry, farming boomed along with World War I. Due to this success, American farmers began buying the latest equipment. Many farmers spent all their savings on the new machinery, or they bought it on credit ( Washburne 468).
Farms also started to consolidate, similar to businesses. That consolidation combined with the new machinery caused over five thousand workers to be laid off during the 1930s. After World War I, farmers grew poor with all the debt from the equipment they had bought on credit ( Washburne 469). When farmers began defaulting on their bank loans, banks took over the farms and tried to sell them. Given the economic situation in the country, banks couldn’t find buyers. As a result, banks couldn’t recover their money and this contributed to bank failure.
Those who hadn’t overextended themselves with too much credit weren’t in any better of a situation. Farmers’ luck continued to decrease with falling crop and livestock prices. After the stock market crash in 1929, Americans could no long afford the pay the prices for food. Farmers had to lower the prices of their goods if they wanted to sell them. From 1929 to 1933 agricultural prices fell 64%. In addition, transportation prices rose. Most farmers couldn’t pay the extra money to transport their goods. Soon it took more money to transport goods than the price farmers could get for the goods. One pound of cotton in 1929 was sixteen cents; in 1933 one pound was six cents. Since it was too expensive to harvest or ship their produce, farmers left their crops in the fields to rot. The South became a slaughter zone as farmers killed their animals rather than pay the extortionate prices to ship them to buyers. In Oregon, sheep ranchers killed thousands of their ewes ( Washburne 468 & 470).
The weather was no comfort to the farmers. During the 1930s droughts and dust storms swept the Great Plains. From Canada to Texas, Colorado to the Alleghenies, the Dust Bowl, as it is named, blew away crops and even some barns and homes leaving rock-hard dry ground. The Dust Bowl wasn’t over quickly, nor did it weaken. In fact, between 1933 and 1934 the dust and wind blew even harder taking most of what was left of the crops and killing some people. The Dust Bowl wasn’t the only natural disaster destroying crops. In 1937 the Ohio River flooded – killing over two hundred people – and ruining countless farms ( Washburne 468-469).
As the country’s economic crisis continued to grow, the American government didn’t respond much. Government role in the 1930s was lacking, and it is the final main cause of the Great Depression. Herbert Hoover (1929-1933) became president of the United States at the very beginning of the Great Depression, but he believed too much government interference would further ruin the economy and political system (Ross 31). He also thought welfare was harmful because it ruined self-esteem. For these reasons, Hoover only minimally involved the government in the economy. He asked businesses to keep production levels up, which added to the overproduction problem, and he increased spending on government roads and bridges. He thought doing so would keep some people in work and others optimistic. However, the country’s optimism didn’t rebound. He also signed another tariff act: the Hawley-Smoot Act of 1930. That tariff was the highest tariff ever – even higher than the Fordney-McCumber Tariff – and was designed to keep all foreign products out of the country for good (Washburne 554-556). Unfortunately, as stated before, tariffs increased the economic problems. Hoover, although he tried, didn’t succeed in mending the economy. Some people blamed Hoover solely for the Great Depression, and even though that isn’t true, he was never able to improve the economy.
To conclude, the Great Depression had five main causes: the beginning of big business and with it, overproduction, the stock market crash, bank failure, farm failure, and the incapable government response. All those things helped to feed the economic disaster into the biggest depression in our nation’s history. Many of these same issues were the cause of a more recent recession in 2008, but I hope the American people will examine their own past and not let history repeat itself.
References
Elgin, K.(2011). The Great Depression. Chicago, IL: World Book
Landau, E. (2007). The Great Depression. New York City, NY: Children’s Press, Cornerstones of Freedom.
Nardo, D., ed. (2000). The Great Depression. San Diego, CA: Greenhaven Press, Inc.
Ross, S. (1998). Causes and Consequences of the Great Depression. Austin, TX: Raintree Skeck-Vaughn Publishers.
Washburne, K. C. (2003). America in the 20th Century. New York City, NY: Marshall Cavendish.