The Great Depression was the worst economic disaster to hit the United States in its history. It featured high unemployment (peaking at nearly 25%! 😳) and desperation as people looked for the means to support themselves and their families. You should know some of its causes and how it changed the US.
When we look at the causes of the Great Depression, you can remember those with this helpful acronym BOPS :
The Great Depression had many different causes, and each one contributed to it in its own way. The 1920s, sometimes called the Roaring 20s because of the economic boom that occurred for some Americans, contributed greatly.
First, unregulated credit led people to buy more than they could afford, propping the country’s economy up on borrowed money and loans. This got worse when people borrowed money to invest in the ever-growing stock market bubble, a process known as margin-buying.
The Dow Jones Industrial Average, 1920 to 1955. Note the sharp increase through the 20s and then the absolute CRASH in 1929.
Margin is when a company lends your money against the value of stocks in your portfolio. Investors now played the market on credit, buying stock listed at 100 a s h a r e o n 100 a share on 100 a s ha reo n 10 down and $90 on margin. This bubble burst on October 29, 1929 ( Black Tuesday ) and stocks continued to fail during the next few years.
By 1933, the number of unemployed reached 13 million people or 25%.
A run on the banks , also known as a bank run, is a financial crisis that occurs when a large number of customers of a bank or multiple banks simultaneously withdraw their deposits, either because they believe the bank is, or might become, insolvent, or because they believe they will be able to withdraw their money faster than the bank can pay it.
During the Great Depression, banks in the US were unstable due to a lack of regulation and risky loans made during the 1920s. When rumors circulated that a particular bank was in danger of failing, customers would rush to withdraw their savings, which confirmed the rumors and ultimately led to the bank's collapse. This process of customers withdrawing their deposits, known as a run on the bank, quickly spread to other banks, leading to a cascading effect that caused hundreds of banks to fail. By 1933, 28 states in the US did not have a single bank remaining.
You may wonder why the banks just didn't give their customers their money. This is because they didn't have it! Banks use some or all of their deposits to fund loans. Usually they keep some reserves, but in this case because of a lack of regulation, it was all loaned out. Thus, when people asked for their money, the bank at one point had to say "sorry, we don't have it. We've lost all your money"
Runs on the banks are harmful to the economy because they can lead to a widespread loss of confidence in the banking system, which can ultimately result in a financial crisis. When banks fail, people lose their savings, businesses may be unable to access the credit they need to operate, and the overall economy can suffer. The Great Depression was a prime example of the devastating effects that a run on the banks can have on an economy.
Other problems with the economy included overproduction: the Great Depression had begun in the 1920s for farmers who had to compete with a recovering Europe.
The Dust Bowl was another major contributor to the economic struggles of the Great Depression. The Dust Bowl was an environmental disaster that occurred in the American West, particularly in states like Kansas and Oklahoma. It was characterized by high winds, low rainfall, and poor soil management practices, which resulted in widespread crop failure and environmental degradation. Many farmers lost their mortgaged farms and were forced to leave the area, with many moving to California and becoming known as " Okies ." The Dust Bowl had a significant impact on the agricultural sector, which was already struggling due to overproduction and other economic challenges.
All these problems were initially made worse by poor governmental responses: the Federal Reserve , responsible for controlling the money supply and interest rates, tightened the money supply and raised interest rates, making it harder for businesses to produce goods/services and harder for consumers to spend money.
The US government also passed the Hawley-Smoot Tariff that raised the taxes on imported goods in an attempt to save US industries. Other nations responded with their own tariffs and world trade ground to a halt.
Republican President Herbert Hoover was blamed for not dealing with the crisis effectively, although some of this criticism is unfair. He went against the normal wisdom of the time—which was to do nothing and let the markets correct themselves—and tried a program of limited public works (giving people jobs to build needed infrastructure) and voluntary business deals like wage freezes.
Image Courtesy of Wikimedia
The homeless traveled in box cars and lived in shantytowns, named “ Hoovervilles ” in mock honor of their president. Men and women lived in lean-tos made of scrap wood and metal, and families went without meat and fresh vegetables for months.
The effects continued to worsen:
Hoover refused to give WWI veterans their bonus a few years early, as they had requested during their Bonus March on Washington in 1932. This ragged group of some 22,000 WWI vets had come to Washington to lobby Congress to pay immediately a bonus for military service that was due them in 1945.
After the Senate rejected the bill, some of the vets stayed in Washington, living in ramshackle huts along the Potomac. Mounted troops drove the bonus army out of the capital, blinding the vets with tear gas and burning their shacks.
Democrats nominated Franklin Delano Roosevelt (FDR) , a cousin of former president Teddy Roosevelt, for president. People were ready for a change and tired of Hoover’s inaction. Roosevelt was elected in a landslide. During his first inaugural address, he told the American people that “the only thing we have to fear, is fear itself”.
FDR began to address the Great Depression immediately by proposing numerous pieces of legislation during his First Hundred Days in office in 1933. The pieces of legislation FDR and the Congress would pass during the new few years would be called the New Deal .
🎥 Watch: AP US History - 1920s and 30s
Bank Failures : Bank failures occur when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities.
Black Tuesday : This refers to October 29, 1929, when panicked sellers traded nearly 16 million shares on the New York Stock Exchange (four times the normal amount), and the Dow Jones Industrial Average fell -12%. Black Tuesday is often cited as the beginning of the Great Depression.
Bonus March : The Bonus March was a protest movement in 1932 by World War I veterans who were seeking early payment of a bonus promised to them for their military service.
BOPS : BOPS stands for Balance Of Payments Surplus. It is an economic term referring to a situation where a country exports more goods or services than it imports over a certain period.
Dow Jones Industrial Average : The Dow Jones Industrial Average (DJIA) is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States.
Dust Bowl : The Dust Bowl was an environmental disaster that took place in the Midwest during the 1930s. Severe drought conditions coupled with poor farming practices led to soil erosion resulting in dust storms that stripped away topsoil.
Federal Reserve : The Federal Reserve is America's central banking system established in 1913 to provide the country with a safe, flexible, and stable monetary and financial system.
First Hundred Days : Refers to the first hundred days of FDR's presidency where he passed numerous pieces of legislation aiming to alleviate problems caused by the Great Depression.
Franklin Delano Roosevelt (FDR) : The 32nd president of the United States, serving from 1933 until his death in 1945. He is best known for implementing the New Deal to combat the Great Depression.
Great Depression : The Great Depression was a severe worldwide economic depression that took place during the 1930s. It began in the United States after a major fall in stock prices around September 29, 1929, and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday).
Hawley-Smoot Tariff : The Hawley-Smoot Tariff Act was passed in 1930 during President Herbert Hoover's administration. It raised U.S import duties significantly with hopes of protecting American farmers and manufacturers from foreign competition.
Herbert Hoover : Herbert Hoover was the 31st President of the United States, serving from 1929 to 1933. His term coincided with the start of the Great Depression.
Hoovervilles : Hoovervilles were shanty towns built by homeless people during the Great Depression. They were named after Herbert Hoover, who was President during the onset of the Depression and was widely blamed for it.
Milton Friedman : Milton Friedman was a renowned American economist and statistician who strongly advocated for free-market capitalism. He is known for his theories on consumption analysis, monetary history and theory, as well as his demonstration of the complexity of stabilization policy.
New Deal : The New Deal was a series of programs and projects instituted during the Great Depression by President Franklin D. Roosevelt that aimed to restore prosperity to Americans.
Okies : Okies is a term that was used to describe Dust Bowl refugees from Oklahoma who migrated to California during the Great Depression in search of jobs and better living conditions.
Overproduction : Overproduction refers to the condition where supply (how much of a product is produced) exceeds demand (how much of it is wanted by buyers).
Public Works : Public works refer to projects such as highways, parks, and libraries that are financed by public funds and carried out by the government for the benefit of the community.
Purchasing Reduction : Purchasing reduction refers to a decrease in buying activity, often as a result of decreased consumer confidence or economic downturns.
Run on the Banks : A run on the banks is a financial situation where a large number of customers withdraw their deposits from a bank simultaneously, due to fears that the institution might become insolvent.
Stock Market Crash : The Stock Market Crash refers to the drastic drop in stock prices on the New York Stock Exchange in October 1929. This event marked the beginning of the Great Depression.
