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Causes of the Great
Depression
During the 1920s the US
economy grew a great deal. However, not all was well and by 1929 the
economy was crumbling apart. One problem was that it was too
concentrated in the auto and construction industries. Both of these had
a wide-ranging impact on other industries. For example: the
process of building a created a demand for glass, metal, rubber, cloth, oil,
etc. As long as the auto industry was doing well, these secondary
industries benefited as well. Automobiles also stimulated the
development of gas stations and demand for roads. If the auto industry
slowed down, all of these sectors would feel a pinch as well.
Another problem with the
US economy that contributed to the Depression was an uneven distribution of
wealth. Over half of the US population lived under subsistence
level...they were barely scraping by. Meanwhile, a very small minority
had amassed great wealth. Here is the problem this creates: the
majority of the population has very limited purchasing power while that small
minority has extensive purchasing power. Eventually, the rich minority
stops purchasing things because they have everything they need. The
majority would like to purchase items but can't afford it. This slowdown
in purchasing led manufacturers to cut production, hours, and wages.
That move further limited the ability of the majority to buy things, which in
turn lowered demand even more and thus a viscous downward spiral begins.
Decreased demand for
manufactured goods was not just the fault of the industrial world.
Farmers contributed as well. Following WWI, there was a great demand for
American agricultural goods in Europe as that continent struggled to recover
from the destruction of the war. As Europe recovered, the demand for
American goods declined but the production did not. High supply + low
demand = declining prices and income. As their incomes dwindled, farmers
bought less and many found themselves forced into the sharecropping system
which cut their earnings even more.
Yet another contributing
factor to the Depression was the banking and investment sectors of the
economy. The 1920s was a time of wild stock speculation. Countless
investors bought on margin, meaning they borrowed money from investment firms
or banks to buy stocks, the stocks would then be held as collateral until they
loan was paid off. This was a great deal when you bought a stock that
increased in price because you could sell it, repay the loan and keep the
difference....you just made a profit without risking your own money. The
other side was that if the stock declined in value you had to pay. The
major part of a stock's price (or value) is based on confidence and
optimism. If an investor is confident that a company will make a good
profit in the future they will buy the stock which will increase demand for
that stock which will then increase its value (price). The market of the
1920s was overrun with optimism and there seemed to be no limit to its
growth. More and more people got into the market and more and more
bought shares on margin. As more people got into the market, the higher
prices went which enticed even more people to get in. Finally the bubble
burst. When people began to decide their stocks had risen to an
acceptable point and it was time to cash out (sell their shares) and preserve
the profit, the confidence took a pounding. As more and more people
began selling their shares, prices began to plummet. The crash of the
stock market created other problems in the US economy. Several banks
were heavily involved in the market. This involvement had several
repercussions. First: some banks went belly up, losing everything
in the collapse on Wall Street. Many more faced "runs" by
depositors who wanted to get their money out before it was lost. (There
was a great scene depicting a run on a bank in the movie "Its a Wonderful
Life.") If these banks did not have the resources to return the
deposits they too often closed their doors. The closing of banks and
loss of deposits contributed even more to the declining demand for
goods. More importantly however, was the contraction of credit that
followed.
When the economy was
chugging along all nice and healthy, corporations could get financing to
expand either through the stock market or through banks. When the market
collapsed, neither was available. New corporations in new industries
that could have lessened the Depression or averted it could not get the funds
to expand. No one in their right mind would put money into the stock
market and banks stopped giving loans in an attempt to solidify their own
financial stability.
Yet another contributing
factor associated with the banking industry was the situation in Europe.
After World War I, Germany was faced with tremendous reparations payments to
England and France. England and France owed a large amount of money to
the US from wartime loans. Because the US was dependent on European
markets, we stepped in with a program to bring some stability to them.
US banks and corporations made loans to England, France, and Germany.
Germany then used those loans to meet the reparations payments to France and
England. France and England then turned around and used the payments
Germany had made and their own loans from the US to repay the original wartime
loans. This method worked for a while but eventually it fell
apart. It was the same thing as using one credit card to pay off
another.
When all of these
factors combined, the decreased demand due to falling incomes on farms and
limited incomes in industrial families, the crash of the stock market and
failure of the banks that were too deep in it, the reliance on the auto and
construction industries, and the unstable European financial situation, not
only did the US but the entire world fell into a Great Depression the likes
that had never been seen before or since.
Depression Life
For some families, the
Depression had no impact. In Kentucky, most people had grown up in a low
standard of living and had little connection with the stock market or
industrial world. The vast majority of Kentuckians were farmers who were
capable of supporting their families off the land. A common statement
among Kentuckians who lived during the Depression is "We didn't know
there was a depression, we didn't know we were poor, we thought everybody
lived like that." For others it was harsh time of unemployment and
adjustments.
Many families found the
emotional damage as hard to handle as the financial damage. Most
Americans in the era subscribed to the belief that a man made his own
way. Any success or failures a person had was the result of their own
efforts. So, many families blamed themselves for their
unemployment. While many were coping with this problem and trying to
make ends meet, others made great efforts to project an image of not being
effected. Some families continued to heat and light every room in their
homes, they would paint their home's exterior or put up new curtains. By
doing this they preserved a notion in their community that they were so well
off, the Depression did not effect them.
Thousands of men became
hoboes. They boarded freight trains and rode across the country looking
for jobs or handouts. As the Depression deepened, African Americans were
increasingly forced from jobs that had typically been reserved for them.
White Americans felt these positions, such as porters and bellhops, were below
them and refused to take them. When the Depression came their outlook
changed and any employment was good employment. To supplement any meager
incomes a family had, they often coped with the Depression in other
ways. Families began making their own clothes and quilts. Gardens
were planted to provide food and people bartered (using forms of exchange
other than money. For example: a person might have offered a slab
of bacon in exchange for dental work) for services.
Not everything was
gloomy during the 1930s. Radio and movies provided some release from
daily troubles. Listening to the radio was a social event as friends and
family were invited over to listen to comedies, music, and soap operas.
During the 1930s movie attendance increased. Popular films included the
debuts of Gone With the Wind, Wizard of Oz, and Mickey Mouse.
Depression Politics
Herbert Hoover was in
office for a very short period of time before the Depression set in.
This was doubly disastrous for a president whose campaign speech had included
the phrase "A chicken in every pot and a car in every garage."
Hoover's approach to combating the Depression was the same as had been used in
previous depressions...let it work itself out. Hoover's philosophy was
that if confidence could be restored then the economy would pick up.
While this is a sound philosophy, it failed in Hoover's hands. He made
repeated statements about the Depression being over. This made it seem
that he was out of touch with the population because they were still in the
midst of a Depression. Hoover's refusal to establish major federal
programs to fight the Depression was also a mistake. He believed that
local and state relief agencies could deal with the demand for relief until
the Depression was over. Those agencies quickly fell apart as demand far
surpassed their resources.
As the years went by,
the US population was growing more weary of Hoover's leadership and the
Depression. In 1932 a large group of WWI veterans marched to Washington
to petition Congress for early payment of their war pensions. When the
government failed to respond, they set up camps and prepared to stay in
Washington until they were heard. This would not be though. The
army was brought out and forcefully removed the veterans, another debacle for
Hoover.
By this point Hoover was
a regular target of derogatory terms. An empty pocket pulled inside out
was called a "Hoover Flag." The shantytowns built from
cardboard boxes and any other materials in cities across the nation were
referred to as "Hoovervilles," while rabbits and squirrel were
called "Hoover chickens."
The Election of 1932
When Hoover came up for
reelection in 1932 it was pretty much a forgone conclusion that the only
person he could beat would be a dead communist. Unfortunately for him,
he was faced by Franklin D. Roosevelt. FDR had many things to offer the
American electorate. He was a cousin of Teddy and had the magical
Roosevelt name. As Governor of New York he had led a more activist
program to provide relief to citizens there. He was the first politician
to use his personal magnetism and his trademark smile. Roosevelt exuded
confidence and optimism while Hoover's administration had been a shambles.
When the votes were
counted Franklin had a mandate. He had defeated Hoover by a count of 472
electoral votes to 59 for Hoover. Roosevelt would use that mandate to
establish a series of programs aimed at bringing the US out of the Depression,
helping the people while doing this, and taking measures to prevent another
Depression.
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