history notes

UNDER-CONSUMPTION

A central feature of the Depression was that Americans reduced their spending on consumer goods. There was a limited market for items such as new cars, radios, and houses because those who could afford these goods had already purchased them. However, most people could not afford to buy these items due to the significant income gap between the rich and poor, as well as between various demographics, including farmers and workers in new industries and among black and white populations. Consequently, 71 percent of Americans lived on low incomes below $2,500 a year, lacking the purchasing power necessary for luxury consumer goods and new houses. Once the market was saturated, well-paid workers in these goods-producing industries began to lose their jobs, further eroding their purchasing power.

OVER-PRODUCTION IN INDUSTRY

The challenges faced by older industries, such as coal, textiles, and railroads, have been previously discussed. Additionally, by the late 1920s, the car and construction industries entered a period of decline. For instance, car sales plummeted by a third in 1929, and construction spending dropped by $2 billion since 1926. Although these industries continued to produce goods, the decreasing demand led to a scenario where fewer consumers were buying, resulting in overproduction.

FALLING INCOME OF FARMERS

The 1920s were particularly hard for the one-third of the population engaged in agriculture. Overproduction coupled with falling demand created significant trials for farmers. Many indicators of the Great Depression, such as falling prices, declining incomes, and rising unemployment, were already present for farmers throughout the 1920s. Therefore, the onset of the Great Depression did not drastically alter their situation as they were already enduring hardships. However, conditions for farmers worsened in the early 1930s, leading to even lower economic activity. Severe droughts struck the Great Plains between 1930 and 1931, exacerbated by soil erosion from intensive farming and subsequent dust storms that began in 1932. This resulted in vast areas of agricultural land becoming unusable, increasing unemployment, and further decreasing incomes. While these circumstances did not cause the Great Depression, they severely exacerbated its impact.

FAILING BANKS

A robust economy requires banks to safeguard people's savings, facilitate purchases of goods and property, and provide loans for business growth. However, in the USA, banks faced major vulnerabilities: many possessed limited reserves of money and lacked support systems to help them during downturns; only one-third of banks were associated with the Federal Reserve System, leading to challenges in uniform regulation and assistance during crises. Prior to 1929, around 20 percent of all banks, equating to 5,172, failed during the 1920s. After the 1929 crash, customers became anxious about bank stability and rushed to withdraw their savings, triggering the feared 'run' on banks. This sentiment deteriorated further when, in December 1930, the New York City Bank's failure left 400,000 people without their savings, resulting in a loss of $286 million without any federal rescue, leading to a collapse of faith in the banking system and further bank failures that also impacted supporting businesses.

PROBLEMS IN EUROPE

The factors contributing to the Great Depression were not exclusively American; significant issues also stemmed from Europe, notably due to the First World War. During the war, the USA lent vast sums to Allied nations, which needed repayment in the 1920s. Many European countries struggled to repay these loans, prompting them to take out new loans from the USA to settle their debts. This created a reliant cycle on continued American loans, which became unsustainable once the Great Depression commenced in the USA. The subsequent reduction in money supply hindered the capacity of European nations to purchase American goods, damaging American exports and company profits. To compound the situation, major European countries began to isolate themselves from American trade in the early 1930s: high tariffs were imposed on American products, Germany attempted to achieve self-sufficiency, and Britain established trade agreements within its empire. These protective measures significantly limited the market for American goods, hurting international trade flow. This adversity was further aggravated by a critical crisis in 1931 involving the failure of several major European banks, prompting massive cash withdrawals; during a six-week period, approximately $1.105 billion was withdrawn across Europe. This situation led to numerous bank failures, which further weakened international trade, plummeting from $36 billion in 1929 to about $12 billion three years later.

• Under-Consumption

  • Central feature of the Depression: Americans reduced spending on consumer goods.

  • Limited market for items (cars, radios, houses) as affluent consumers had already purchased them.

  • Majority could not afford these goods due to significant income disparity (rich vs. poor, farmers vs. industrial workers, demographic differences).

  • 71% of Americans lived on low incomes below $2,500 a year, lacking purchasing power for luxury goods.

  • Job losses in goods-producing industries further eroded purchasing power.

• Over-Production in Industry

  • Older industries (coal, textiles, railroads) faced challenges leading up to the Depression.

  • Decline in car and construction industries by late 1920s:

    • Car sales dropped by one-third in 1929.

    • Construction spending decreased by $2 billion since 1926.

  • Persisting production in these industries led to overproduction due to falling consumer demand.

• Falling Income of Farmers

  • One-third of the population involved in agriculture faced severe challenges in the 1920s.

  • Issues included overproduction, falling prices, declining incomes, and rising unemployment.

  • Onset of the Great Depression did not drastically change farmer hardships, which were already present.

  • Conditions worsened in the 1930s:

    • Severe droughts and dust storms significantly reduced agricultural land usability.

    • Resulted in increased unemployment and further income loss.

    • These conditions worsened the impact of the Great Depression but did not cause it.

• Failing Banks

  • Banks play a crucial role in an economy by safeguarding savings and facilitating business loans.

  • Major vulnerabilities in U.S. banks:

    • Limited money reserves and lack of support during downturns.

    • Only one-third associated with the Federal Reserve System, complicating regulation and crisis assistance.

    • Approximately 20% of banks failed in the 1920s (5,172 total).

  • Post-1929 crash:

    • Public anxiety led to bank runs, depleting savings.

    • New York City Bank's failure in December 1930 caused 400,000 people to lose savings (loss of $286 million).

    • Erosion of trust in the banking system triggered further failures impacting related businesses.

• Problems in Europe

  • Contributing factors to the Great Depression were not only American; significant issues arose in Europe post-World War I.

  • The U.S. lent large sums to Allied nations, needing repayment in the 1920s:

    • Many European countries struggled to repay, leading to new loans from the U.S. to cover debts.

    • This cycle of reliance on American loans became unsustainable with the onset of the Depression.

    • Reduction in money supply limited European nations' ability to purchase American goods, harming exports and profits.

  • European countries turned inward in the early 1930s:

    • Imposed high tariffs on American products and pursued self-sufficiency (Germany).

    • Britain created trade agreements within its empire, constraining U.S. goods' market.

  • Critical crisis in 1931:

    • Major European banks failed, leading to massive withdrawals (approx. $1.105 billion in six weeks).

    • Resulted in further bank failures and a decline in international trade (fell from $36 billion in 1929 to about $12 billion by 1932).