6.5: The Great Depression

In 1920, nearly 50% of Americans lived in places with populations below 2,500. About a third of Americans still relied on agriculture as their primary income. Since mechanized farming had made agriculture more efficient, crop prices plummeted, creating a crisis for farmers.

ECONOMIC PROBLEM: OVERPRODUCTION (of Agricultural Products)

• The 1920s were a great time for American business and manufacturing, but not the best time for labor and agriculture. President Coolidge vetoed the McNary–Haugen Farm Relief Bill, which would have provided relief for struggling farmers through the federal government purchasing surplus grain.
  • Coolidge saw this as an unnecessary (and potentially harmful) intervention in the market economy. Before the Depression, there was a tendency to believe -- especially among conservatives -- that it was not the federal government’s role to provide direct relief for people who were facing hard times.

The 1920s in Context

• The 1920s were a period of MASSIVE economic growth, but they ended with a crash.

causes of the stock market crash

1. The 1920s were a period of transition and the farm economy struggled. Economic upheavals can be a natural consequence of change. 

   1. The 1920 census was the first census that showed more Americans living in urban areas than in rural areas. By comparison, the 1790 census had 95 percent of Americans living in rural areas. Agriculture had become efficient to the point where there were more farmers than the market demanded (but real life had not caught up with these economic realities, as a farmer can’t exactly just go out and get another job).

2. Excessive Borrowing due to consumerism and cheap credit policies from the Federal Reserve (1922-1928)

   1. The Federal Reserve set interest rates around 4% through most of the 1920s. Low interest rates encourage borrowing and people took advantage of these interest rates in order to buy new household appliances, automobiles, and to wire their homes for electricity. When the Federal Reserve suddenly raised interest rates in 1928, it began to put a strain on American who were already heavily in debt.

3. Financial Collapse (Stock Market and Banks)

   1. With the stock market performing at record levels of growth during the 1920s, many Americans bought stocks to make short term gains. Because of low interest rates, some people bought stocks on the margin (with borrowed money). When the stock market crashed in 1929, investors who had bought stocks on the margin not only lost their own money, but also owed money to brokerage houses that had lent them the money. Then, the brokerage houses had toxic debt that they had no way to collect from ruined investors. \n In addition to the stock market collapse, banks failed across the nation, wiping out the life savings of many Americans who had funds deposited their money in the failed institutions. Bank runs became common, as crowds would rush to get their money out of a bank upon hearing even a rumor that it was failing. These bank runs only made the problem worse, causing the failure of banks that would have been able to remain solvent if depositors had not shown up en masse demanding all of their money, at once.

4. OVERPRODUCTION in the Late 1920s

   1. Because of rampant consumerism in the early 1920s, factories continued to produce new products at the rates they been producing. As consumerism slowed down in the late 1920s, a lot of goods were left on the shelves. That impacts profits, which in turn impacts stock prices. Overproduction in the agricultural sector resulted in a downward spiral of crop prices.

5. ECONOMIC FALLOUT FROM THE FIRST WORLD WAR

   1. The Treaty of Versailles was not exactly designed to get the global economy going. John Maynard Keynes, a British economist and father of “Keynesian” economics, attacked the treaty in his book, The Economic Consequences of the Peace (1919), in which he predicted economic fallout because of the “Carthaginian peace” that was imposed upon Germany. The United States attempted to mitigate the economic crisis with the Dawes Plan and the Young Plan, but ultimately, to no avail.

6. Herbert Hoover’s Policies (Did they turn a panic into the Great Depression?)

   1. Hoover responded to the stock market crash with a number of flawed policies:

      1. Tax Increase - Believing that the federal budget should be balanced, Hoover signed a tax increase into law with the goal of collecting more federal revenue. This came with the consequence of slowing down an already faltering economy.

   2. Tariff Increase - The Hawley-Smoot Tariff - the second-highest tariff in the history of the United States -  intended to protect American jobs, but ended up having a devastating effect on global trade by slowing the global distribution of goods by nearly 70 percent.

   3. [Voluntary] Wage Freeze - Hoover got business leaders together to agree to freeze wages. This had the unintended consequence of increasing unemployment.

potentially preferable responses on Hoover’s behalf

1. Give the overall economy a chance to recover (economic).
2. Support legislation providing temporary economic relief for the unemployed (political).

While not as ambitious as FDR, Hoover did take measures to use the power of government to remedy the Depression.

1. Hoover signed the Farm Board into law, which attempted to stabilize crop prices by buying surplus crops from farmers.
2. The Reconstruction Finance Corporation was created in order to make loans to banks and heavy industry.

What did Hoover NOT do?

• Hoover drew the line at direct relief. He saw direct relief for people suffering during the Depression as outside of the scope of government. To this point, the federal government had never given direct relief to individuals who were suffering due to an economic downturn.
• TODAY, when there is an economic crisis, the vast majority of the American people take it as a given that the government should take some sort of direct action to help people who are most negatively impacted by a sudden economic downturn.

comparing Hoover and FDR’s responses

• Hoovervilles: Unemployed people constructed shanty towns they called “Hoovervilles,” blaming the president for their economic woes.
• The Bonus Army debacle was a nail in Hoover’s political coffin, popularizing the idea that Hoover lacked compassion for people who were suffering.