The Great Depression

World War I

  • After four years at war, the world's economy had been drained. Britain, whose economy had relied on trading, faced serious economic problems. 40% of its merchant fleets had been destroyed by German submarines in the war, making it difficult to export goods. Other countries forced high tariffs on imports to protect their own industries, but this hurt Britain's economy. Britain's old and outdated factories, machines, and mines also hurt its industries.
  • Germany was also hit hard by the aftermath of the war. In an attempt to find money to pay its $33 billion debt in reparations, Germany printed a huge amount of paper money. However, this led to severe inflation. In 1923, the value of German money dropped so significantly that one had to fill a wheelbarrow with cash simply to buy a loaf of bread.
  • In 1921, Warren Harding became the new president of the United States. Under his control, America's unemployment rate dropped from 11.7% to 2.1% between 1921 and 1923. Technology was booming: electrical appliances and packaged food maid daily life easier, while radios, movies, air travel, international airmail,and automobiles all became more common. American farmers, however, were not faring well because crops were being cheaply imported from Europe again. There was no longer a high demand for American crops as there had been during the war.
  • America's economy took a turn for the worse in October 1929 when the stock market crashed. This caused The Great Depression: a time of slow business, high unemployment, low prices, and low wages. As 85,000 businesses failed, the unemployment rate shot up from 3.2% in 1929 to 23.6% in 1932. Banks were forced to close as they had loaned money to European and American businesses and didn't have enough money to honor the deposits.

German War Reparations

  • International debt accounts were deteriorating. Nations and families couldn’t pay their bills. In the early 1930s, European nations owed the U.S. $11.5 billion in World War I debt for food and war materiel.
  • And Germany, penalized under the Treaty of Versailles for war aggression, originally owed $64 billion in gold as reparations, which later reduced to $27 billion. Germany's payments to France or Britain could have been shipped to the U.S., reducing war-loan balances, but German payments were slow and small, and the arrangement fell apart after the stock-market crash of 1929.
  • By mid-1931, fear spread that Germany’s economy and government would collapse and defaults could spiral across Europe.
  • President Herbert Hoover gave a one year postponement on all debts.
  • In France, politicians objected, and the Senate disapproved the scheme. Because of their depressed economies, France and Britain needed German gold marks to fund payments to the U.S. If Germany was going to cut or postpone reparations to the European victors, the victors’ obligations to the U.S. would need to be rearranged or rescheduled.
  • Soon after, Berlin’s great Danat Bank closed, signaling the German economy’s distress, and markets began deteriorating once again. Too many cracks had appeared in the global economic structure for one gesture to reverse contraction, deflation and disarray. By fall, international commercial payments began freezing up, as governments and central banks reduced foreign-exchange transactions, declining to convert local currencies into dollars or pounds to pay overseas bills.

Inflation and Unemployment

  • Farmers who had lost their land and homes to foreclosure as a result of the Dust Bowl made up a large part of the idle workforce. “Hoovervilles” and shantytowns sprung up all across America, areas in which people gathered and constructed makeshift homes out of boxes, packing crates, abandoned cars, and scraps of wood.
  • To solve the problem of unemployment during the Great Depression, Franklin D. Roosevelt created a number of job-related programs as part of his New Deal, most notably:
  • Civilian Conservation Corps (CCC)
  • Tennessee Valley Authority (TVA)
  • Federal Emergency Relief Administration (FERA)
  • Work Projects Administration, Works Progress Administration (WPA)
  • The stock market crash caused a panic and thus a liquidity crisis as banks and other lenders became risk adverse and refused to loan money. The stock market actually began rebounding in early 1930, and returned to early 1929 levels by April. But because of the parabolic rise in stock prices in 1929, this was still almost 30% below the peak of September 1929.
  • Many economists believe that government tight money policies made the Depression worse and that the Federal Reserve did exactly the wrong things. According to the Keynesians, although President Roosevelt tried public works, farm subsidies, and other devices to restart the US economy, he never spent enough to bring the economy out of recession until the start of World War II.
  • Monetarists, including Milton Friedman, argue that the Great Depression was mainly caused by monetary contraction, they believe that the Federal Reserve allowed the money supply as measured by the M2 money supply to shrink by one-third from 1929–1933, thereby transforming a normal recession into the Great Depression.
  • The Austrian School of Economics also blames the FED but rather than not doing enough they believe that the key cause of the Depression was the FED’s expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. In February 1929 Austrian economist Friedrich Hayek published a paper predicting the Federal Reserve’s actions would lead to a crisis starting in the stock and credit markets. According to Murray Rothbard, who wrote America’s Great Depression, government intervention delayed the market’s adjustment and made the road to complete recovery more difficult.
  • Marxists blamed the rich, believing that recessions and depressions are the result of having no restrictions on the accumulation of capital and when too much capital is in too few hands recessions result. Hoover and Roosevelt attempted to remedy this problem with large government work projects. Sowing seeds of Socialism in the American economy in the New Deal and public works projects.

Overproduction and underconsumption

  • Farmers in the United States began producing more food during World War I to help supply allies in Europe with food. This overproduction continued through the 1920s. At this time, more and more farmers were trading their work animals for tractors and other machinery, which increased production even more. The overabundance of wheat, meat and other farm goods on the market drove the price down without increasing demand, which left farmers poor. Also during this time, more and more homes in urban and suburban areas had access to electricity and the demand for consumer goods rose. Manufacturers produced more goods to meet the demand. Advances in machinery and better processes increased production, but the workers' wages remained the same. Supply greatly surpassed demand, and workers were laid off in great numbers. Since many people were unemployed and barely had money for food and other necessities, the demand for consumer goods plummeted.
  • Overproduction uses up resources and floods the markets with cheap goods. It becomes a vicious cycle. As the resources get used up production cost increase. But prices keep falling because demand has been saturated. As a result production stops when prices get to low.
  • The cycle deepens at that point to what we call a depression. Workers are laid off and farmers loose their land. Debts go unpaid and banks have to close. People lose their savings and there is even less money to buy the surpluses stuffing the warehouses.
  • The only thing that can be done is increase employment and raise wage levels. Enough demand has to be created so that industry can retool and begin production in areas where there are new markets.
  • At first this was done with the "New Deal". Government spending into infrastructure created jobs and resources for new industrial growth. Programs like Social Security, banking regulations, and unemployment insurance helped stabilize incomes and protect savings. Legalization of unions greatly increased incomes.
  • Some say this wasn't enough and the depression wasn't going away. But, that's academic. Government spending did end the depression when WWII started. It was the perfect depression crusher. There was no danger of overproduction, most of the stuff was being destroyed as fast as it was being produces. Same for unemployment, men were being killed as fast as they could enlist or be drafted.
  • We haven't completely resolved things. The overproduction/recession cycle still goes on. Resources are being used up and the environment is being destroyed. Spending on infrastructure and war are still used to keep the recessions from becoming depressions. This spending produces enormous debts and no one really has an answer for what to do about that. The Socialist answer is to prevent overproduction but I'm not sure if that can be done peacefully.

Stock market crash

  • The stock market crash of 1929 resulted in a drastic economic downturn that led to the Great Depression. Businesses closed, banks declared bankruptcy, and millions of individuals lost jobs and savings. By 1932, 13 million of all Americans were out of work.
  • During the 1920s, the U.S. stock market underwent rapid expansion, reaching its peak in August 1929, after a period of wild speculation. By then, production had already declined and unemployment had risen, leaving stocks in great excess of their real value. Among the other causes of the eventual market collapse were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank loans that could not be liquidated
  • Stock prices began to decline in September and early October 1929, and on October 18 the fall began. Panic set in, and on October 24, Black Thursday, a record 12,894,650 shares were traded. Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday. On Monday, however, the storm broke anew, and the market went into free fall. Black Monday was followed by Black Tuesday (October 29), in which stock prices collapsed completely and 16,410,030 shares were traded on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors, and stock tickers ran hours behind because the machinery could not handle the tremendous volume of trading.
  • After October 29, 1929, stock prices had nowhere to go but up, so there was considerable recovery during succeeding weeks. Overall, however, prices continued to drop as the United States slumped into the Great Depression, and by 1932 stocks were worth only about 20 percent of their value in the summer of 1929. The stock market crash of 1929 was not the sole cause of the Great Depression, but it did act to accelerate the global economic collapse of which it was also a symptom. By 1933, nearly half of America’s banks had failed, and unemployment was approaching 15 million people, or 30 percent of the workforce.

Banks Collapse

  • In the 1920s, Nebraska and the nation as a whole had a lot of banks. At the beginning of the 20s, Nebraska had 1.3 million people and there was one bank for every 1,000 people. Every small town had a bank or two struggling to take in deposits and loan out money to farmers and businesses.
  • As the economic depression deepened in the early 30s, and as farmers had less and less money to spend in town, banks began to fail at alarming rates. During the 20s, there was an average of 70 banks failing each year nationally. After the crash during the first 10 months of 1930, 744 banks failed – 10 times as many. In all, 9,000 banks failed during the decade of the 30s. It's estimated that 4,000 banks failed during the one year of 1933 alone. By 1933, depositors saw $140 billion disappear through bank failures.
  • Gresham, Nebraska, had two banks – one too many for that small town. The bank in danger of failure merged with the other. Gresham resident Walter Schmitt (right) remembers the deadly consequences for the owner of the failed bank.
  • When a new president, Franklin Delano Roosevelt was inaugurated in March 1933, banks in all 48 states had either closed or had placed restrictions on how much money depositors could withdraw. FDR's first act as President was to declare a national "bank holiday" – closing the banks for a three-day cooling off period. The most memorable line from the President's speech was directed to the bank crisis – "The only thing we have to fear is fear itself."
  • Some economists and historians have argued that the bank crisis caused the Great Depression. But others have looked at fundamental economic factors and regional histories and argued that banks failed as a result of the economic collapse
  • Whether the fear of bank failures caused the Depression or the Depression caused banks to fail, the result was the same for people who had their life savings in the banks – they lost their money. At the beginning of the 30s, there was no such thing as deposit insurance. If a bank failed, you lost the money you had in the bank. Carla Due's family experienced the fear that a bank failure would wipe out savings.

Effects in the US

  • After the stock market crash of 1929 and the collapse of more than 40% of American banks by 1933, strict trading and banking regulations were put in place, as well as financial protections, enforced by the newly formed Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC).
  • Franklin D. Roosevelt introduced programs between 1933 and 1938, designed to help America pull out of the Great Depression by addressing high rates of unemployment and poverty. An array of services, regulations, and subsidies were introduced by FDR and Congress, including widespread work creation programs. The cornerstones of the New Deal were the Public Works Administration and the National Recovery Administration.
  • FDR’s New Deal increased the role of government in people’s lives to unprecedented levels, levels that continued long after America had recovered from the Great Depression.
  • When the Dust Bowl conditions in the 1930s led to farmers abandoning their fields, mass migration patterns emerged during the Great Depression, with populations shifting from rural areas to urban centers.
  • Many people who survived the Great Depression would remain frugal throughout the rest of their lives, wary of banks, apt to hoard food, and suspicious of the stock market.

Effects in Germany

  • At the end of the First World War, Germany became a democratic republic known as the Weimar Republic. The government was unable to deal with the economic crisis left by the war.
  • In 1923, France occupied the Ruhr Valley, the heartland of German industry, because Germany was unable to pay war reparations demanded by the Treaty of Versailles. The new Weimar Chancellor (like president) or Prime Minister succeeded in getting France to withdraw, and America loaned Germany money to stabilize the German economy.
  • The economic situation in Germany briefly improved between 1924-1929. However, Germany in the 1920s remained politically and economically unstable. The Weimar democracy could not withstand the disastrous Great Depression of 1929.
  • The disaster began in the United States of America, the leading economy in the world. The American stock exchange is in the city of New York in a building on Wall Street. The Wall Street stock exchange collapsed in 1929 and the American economy collapsed with it. This event was known as the Wall Street Crash, and was the start of the Great Depression.
  • The Great Depression affected all capitalist economies in the world. American banks immediately withdrew the loans they had made to Germany. Businesses closed, unemployment rose and inflation was rampant. German money had so little value, that it might take a wheelbarrow full of notes to buy a few groceries!

Effects in one other European country - the UK

  • The 1930s economy was marked by the effects of the great depression. After experiencing a decade of economic stagnation in the 1920, the UK economy was further hit by the sharp global economic downturn in 1930-31. This lead to higher unemployment and widespread poverty. However, although the great depression caused significant levels of poverty and hardship (especially in industrial heartlands), the second half of the 1930s was a period of quiet economic recovery. In parts of the UK (especially London and the South East, there was a mini economic boom with rising living standards and prosperity.
  • Unemployment rates in the 1930s were barely higher than unemployment rates we’ve experienced in the 1980s and 2000s. However, there is a big difference. In the 1930s, unemployment benefit was minimal – to be unemployed left workers at the real risk of absolute poverty. In the current period, unemployment benefits are relatively meagre, but they enable absolute poverty to be avoided. In that sense the depression of the 1930s created more economic poverty than the current recession.
  • The stock market crash of 1929 precipitated a global recession. The US was particularly badly affected by the stock market crash because of the growth in credit in the years leading up to it. The UK was more insulated because it had experienced no real credit boom in the 1920s. In fact, the UK was already in a prolonged economic stagnation of low growth. Because the UK economy relied heavily on trade, the decline in global demand, hit the UK economy, and with lower exports, the UK economy went into recession. 1931 was particularly damaging, with real GDP falling 5%.
  • 1931 was a pivotal year for the UK economy. A European financial crisis (failure of German and Austrian banks) threatened to harm the UK’s financial system. More pressingly, the economy was stuck in a deep recession, with unemployment a real problem. The UK’s membership of the gold standard also looked under threat. Many felt the UK was overvalued and so Sterling was under pressure. To keep the value of the Sterling in the gold standard, there was pressure to reduce budget deficit through fiscal consolidation and increase bank rates to attract money into UK and keep the Pound at its target rate in the gold standard.
  • In 1931, the government was under great pressure. There was risk of a global financial crisis spilling over into London markets. The Pound was overvalued and there was a fear, the government would be unable to maintain the value of Sterling. The real economy was also in bad shape, with record levels of unemployment and growing social unrest at the extent of the recession. The Treasury put great pressure on the government to pursue fiscal austerity and reduce the budget deficit. (see: Treasury view) It was felt it was essential to balance the budget and restore confidence in the Pound.
  • In the 1931 budget, the chancellor Lord Snowden and Ramsay MacDonald accepted the necessity of implement budget cuts. Unemployment benefits were cut and public sector wages were also cut. This split the Labour party, and MacDonald formed a coalition of mostly Conservative MPs to pass the budget.

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