The Great Depression
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The Great Depression:
A Series of Downward Spirals
Class: Macroeconomics
Teacher:
On October 29, 1929, the New York Stock Exchange experienced a tragic fall. Fortunes were lost and lives were destroyed. The Crash of 1929 shook what was an already unstable economic foundation. America began fueling itself for an economic collapse long before the stock market crashed. The root causes of the crash are still under debate, but the effects of the crash are infamous. America was thrown into economic turmoil. Thousands and thousands of people lost their homes and were unemployed for years. This period of despondency lasted from 1929 until 1939 and was known as the Great Depression. While the stock market crash is the most immediate and well known cause of the Depression, it was by no means the only cause.
Modern economists have different theories explaining the sudden downfall in the economy. Some feel that abuse of credit was the cause, while others believe it was overproduction. The monetary policy of the 1920s was laissez faire, as well as Americas economic involvement with Europe at the time. American policy makers at the time felt that an isolationist approach would benefit the country. By isolating America, economists believed they would prevent Europes problems from spreading. While we created enough problems of our own, Europes woes began to affect America directly, especially after the tariffs America instituted. America created too many problems of its own in the 1920s, which led to numerous, inescapable downward spirals.
President Herbert Hoover felt that the best way to straighten the economy was to leave it alone. He strongly felt that America would correct itself. His first action was attempting to balance the budget by raising taxes and cutting government spending. His actions as President did very little to help the economy, yet he continued to do nothing, still claiming that America would correct itself. Hoovers nearsightedness and inaction characterized the ideology that led to the Great Depression.
The Beginning
The events leading up to the Great Depression began long before the stock market crash of 1929. Towards the end of World War I, farmers production reached an all time high. After the war, there was no need for such amounts, and demand plummeted. As a result, produce flooded the market, and prices dropped. In an effort to regain profits, farmers increased their production Now, there was even more produce on the market, but demand had not increased. Prices dropped further, and farmers further increased production, each time losing more money to production. They had trapped themselves in a downward spiral. They lost more and more money with each production increase and soon were out of money, entirely. The nation simply did not need that much food. To make matters worse, the Midwest soon experienced a drought that put many farmers out of business. While farmers in the Midwest lost their farms due to drought and lack of supply, farmers elsewhere lost their farms due supply that far exceeded demand. Either way, farms were lost.
The government did little to help the ailing farmers. The government during the 1920s felt that everything was fine, so they left businesses alone. Businesses, during the early to mid 1920s, were doing well, according to their accountants. Prices were up and cost of production was low. The 1920s, as a whole, were relatively prosperous. Culture boomed and industry reached a record production capacity. During the war, demand for industry was high. The nation prospered, and technological advances made it possible for factories to produce more and more consumer goods. Industrial moguls felt that they could sell more than ever if they made more than ever.
Again, demand exceeded supply. Companies produced more, but did not sell more, and they lost money. To cut the cost of production increases, companies began to lay off workers. Technology allowed them to maintain the level of production with fewer workers, so companies laid off workers. Because the companies were attempting to save money by releasing workers, they did not increase the remaining workers wages. The companies ostensibly discouraged workers to buy their products in an attempt to stimulate the market with an increased supply.
According to Wadill Catchings and William Foster, “wages increased at a rate lower than productivity increases.” The benefits seen from increasing productivity went into profits, which companies then invested in the stock market, instead of paying their remaining workers higher wages. In order to spread the purchasing power to the lower classes, President Calvin Coolidge, along with the businesses in America, pressured the Federal Reserve Board to keep the discount rates low. People invested in the companies and as long as the companies continued to expand, the economy would benefit. The prices of the companies, however, were inflated. The companies were not doing poorly, but their success was not adequately translated onto the stock market.
Advent of Credit; Banking Failures
At this point, the stock market was booming. With so many people gaining wealth in the stock market, more people invested, and prices soared. Soon enough, people were paying far more for shares than their actual worth. Some people did not know about the inflated prices, but the ones that did know did not care because they felt that the stock value would keep on increasing. Few even considered whether their stocks would falter.
People in the lower class wanted to take advantage of the stock market, but many of them were workers who had just been laid off. They could not afford to invest in the stock market unless they bought stock using credit. People paid a small part of the stock price but bought the rest on credit, hoping to sell the stock at a price high enough to make a profit. Many people actually made profits, but some lost everything, and still owed money. Consumers accumulated large debts by buying on the margin.
Investors at the time did not seem to understand the concept of credit. They ignored the fact that they still owed money and continued to spend on the margin. Those consumers that respected the concept of debt were at still high risk, even if they maintained a steady paycheck. Debt had grown so high that in the event of price deflation,