MONEY and BANKING PAPERS FULL GRAPHICS

 

 Causes of the Great Depression

by Sarah Carroll

 

Throughout the 1920’s, new industries and new methods of production led to prosperity in America. America was able to use its great supply of raw materials to produce steel, chemicals, glass, and machinery that became the foundation of an enormous boom in consumer goods (Samuelson, 2). Many US citizens invested on the stock market, speculating to make a quick profit. This great prosperity ended in October 1929. People began to fear that the boom was going to end, the stock market crashed, the economy collapsed and the United States entered a long depression.

The Great Depression of the thirties remains the most important economic event in American history. It caused enormous hardship for tens of millions of people and the failure of a large fraction of the nation’s banks, businesses, and farms. The stock market crash in October 1929 is believed to be the immediate cause of the Great Depression, but there were many other factors and long-term causes that developed in the years prior to the depression.

The 1920’s may have been prosperous for some Americans, but the growing prosperity was actually weakening the economy. Many US citizens were never participating in the boom from the start. There were some wealthy individuals, but 60% of people were living below the poverty line. The coal mining industry had expanded greatly, creating many jobs, but with the introduction of oil and gas, the production of coal was decreased along with the amount of jobs. The United Mine Workers Union’s membership fell from 500,000 in 1920 to 75,000 in 1928 (Temin, 33). The cotton industry experienced similar unemployment problems. In the agricultural industry, an increase in production was met with a decrease in demand, so farmers also became unemployed. The American farms and factories produced large amounts of goods and products during the prosperity before the Depression.

 

 On average, people’s wages stayed the same even as prices for these goods soared. The factories and farms still continued to produce at the same rate, but demand for their products was decreasing. As a result, more and more workers became unemployed, until 25% of the population was out of work. The American Federation of Labor fell from 5.1 million in 1920 to 3.4 million in 1929 (Temin, 68). All of these groups, being poorer than the rest of the country, could not afford to participate in the boom of the 1920’s. There was a major unequal distribution of income that led to the richest 1% of Americans owning approximately 40% of the country’s wealth (Matthews, 2). The country entered the 1920’s with Warren G. Harding as president. Harding was a Republican as well as a laissez-faire capitalist who advocated policies which reduced taxes and regulation, allowed monopolies to form, and allowed the inequality of wealth and income to reach record levels (Tanner, 3). Harding died in 1923 and Calvin Coolidge continued Harding’s policies of minimal government intervention in the economy and in business. Under Coolidge, the stock market began its “artificial” five year rise, the top tax rate was lowered to 25%, and the Supreme Court made an important ruling which further limited government control over monopolies (Tanner, 8).

  In the 1920’s more people invested in the stock market than ever before. Between May 1928 and September 1929, the average prices of stocks rose 40 percent. Stock prices rose so quickly that at the end of the decade, some people became rich overnight by buying and selling stocks (Matthews, 3). People could buy stocks for only a 10% down payment. Between 1920 and 1929 the number of shareowners rose from 4 million to 20 million (Temin, 45). With artificially low interest rates and a booming economy, people and companies invested in over-priced stocks. During 1928 and 1929, the prices of many stocks went up faster than the value of the companies the stocks represented. “It was like pouring gasoline onto a fire-the flames rose up, no lasting fuel was added, but the economy sure looked great” (Matthews, 3).

 

Buying on credit was huge problem in the 1920’s. Since the 20’s was a period of great economic boom, not many people took the future into consideration. Many people bought expensive luxury items using money they did not have. Installment buying allowed people to make a monthly, weekly, or yearly payment on an item that they wanted or needed. Buying on credit and installment buying left millions of people in debt. Installment buying allowed lenders to repossess an item if the borrower missed just one payment. People may have stopped making new purchases to reduce the risk of losing things they already had bought on credit. There was a big drop in consumer spending, which lowered prices, which meant that farmers, businesses, and nations could not repay their debts. 

Rising debt led to restrictions on new loans, which led to scarce credit, less borrowing, lower prices, more bankruptcies, and so on (Samuelson, 1). The spiral downward of trade, investment, people’s confidence, and the economy began. Many economists agree that the Great Depression began with the Stock Market Crash in October of 1929. Stock values plummeted, stockholders were wiped out, banks and factories shut down, and millions of Americans were left jobless and penniless. Although the Stock Market Crash in October of 1929 certainly began the Great Depression, there were many events that led to the gradual decline of the economy. During the prosperous 1920’s, bank failures, together with low incomes among farmers and factory workers, helped set the stage for the depression. Uneven distribution of income among workers also contributed to the slump.

 

The 1920’s were a prosperous period for business, but most farmers did not prosper. Prices of farm product fell about 40 % in 1920 and 1921, and they remained low through the 1920’s (Tanner, 3). Some farmers lost so much money they could not pay the mortgage on their farm and were forced to rent their land or move. Bank failures in the agricultural areas became more frequent. About 550 banks went out of business from July 1, 1928 to June 30, 1929, the period of greatest prosperity in the 1920’s (Temin, 58). Workers in the coal, railroad, and textile industry did not share in the prosperity either. Industrial production increased 50 %, but workers could not buy goods as fast as the industry produced them because their wages were low. Workers reduced their spending to hold down their debts, the amount of money in circulation decreased, and business became even worse. The Stock Market Crash was an immediate cause of the Great Depression, but there were many long-term causes that gradually weakened the economy.

Bibliography

Matthews, Layth. “What Caused the Great Depression of the 1930’s?” Internet. http://www.shambhala.org. 2002.

Samuelson, Robert. J. “Great Depression.” The Concise Encyclopedia of economics. Internet. http://www.econlib.org. 2002.

Tanner, Neal. “The Easy Life of the ‘20’s Contributed to Great Depression.” Overview: The Great Depression. Internet. http://www.marist.edu/summerscholars. 2002.

Temin, Peter. Lessons from the Great Depression. 1989.

 

 

 

 

 

 

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