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1920s Transition to Urban Industrial Economy
Most of the causes of the Great Depression resulted from the financial weaknesses of the 1920s’ economy. The 1920 census revealed that 1920 was the first year during which more than 50 percent of America’s population lived in cities. The urban economy grew phenomenally due to the application of mass production to the car industry and the production of other consumer goods. Advertising also created demand for products, and people used newly available forms of credit to purchase them, increasing the debt of the average American consumer.
Causes of the Great Depression
Officially, the causes of the Great Depression were overproduction, installment buying, uneven distribution of wealth, high tariffs, and stock market speculation. Let’s look at each of these a little more closely.
During World War I, while demand was high, American farmers took out loans for land and equipment so that they could plant more crops to take advantage of the high prices. After the war, farmers continued to grow the same amount of food so they could pay their loans, which led to overproduction (when demand is low and supply is high, it leads to a drop in prices). Farmers who had gone into debt had difficulty paying off loans, and many lost their farms when banks foreclosed on their loans. When too many farms were foreclosed upon, the banks themselves began to fail because banks could not find anyone to buy the foreclosed farms.
Installment buying allowed customers to pay for higher-priced goods—like cars, vacuum cleaners, and refrigerators—using monthly payment plans. As people began to lose their jobs after the stock market crash of 1929, they were unable to make their payments. In addition, when they couldn’t pay off their debts, consumers cut back on spending, creating a cycle of reduced demand for consumer goods that were already being overproduced, layoffs at factories making those goods, and consumer inability to pay.
In 1929, the richest 5 percent of the population controlled about 40 percent of America’s wealth. The other 95 percent of the population experienced a drop in income between 1920 and 1929. This is referred to as an uneven distribution of wealth. When the Depression hit, lower-income families often had no savings to fall back on.
The Hawley-Smoot Tariff of 1930 was an example of a high tariff—it increased tariffs by about 20 percent, hoping to protect American industry. Unfortunately, other countries simply raised their own tariff rates in retaliation. This led to a further reduction in international trade, worsening the global impact of the Depression.
Arguably the most immediate cause of the Great Depression—the stock market crash of October 1929—was brought about by stock market speculation. Speculation refers to the buying of stocks in hopes of being able to sell them quickly for a profit, but this process often ignores the risk that stock prices may fall instead of rise. In addition to speculation, some investors bought stocks on margin—meaning they would pay a small percentage of a stock’s price and borrow the rest, hoping to pay off the loan when they sold the stock for a profit. In September 1929, stock prices fell, causing investors to try to sell all their stocks. As the supply of stocks rose, the demand for stocks was low, which caused stock prices to drop, causing more people to panic about the falling prices and try to sell their stocks. Eventually, this all resulted in the stock market crash on October 29, 1929 (sometimes called “Black Tuesday”).
Immediate Effects of the Great Depression
The Great Depression affected Americans almost immediately as companies closed and people lost their jobs. Unable to bring in wages, they could no longer pay their mortgages and debts or even buy food for their families. Very soon people were lined up for food in bread lines, and the unhoused moved into shantytowns (encampments consisting of shacks). Malnourished children developed health problems; in many areas, schools were closed, child welfare programs were cut, and some families were forced to send their children to work in sweatshops. Fathers and older sons often left home, riding the rails across the country hoping to find work.
While not technically an effect of the Great Depression, the Dust Bowl occurred at a very inopportune time and made the lives of people who were already living in poverty even worse. In the Great Plains, the overfarming that had taken place during and after World War I left the soil exposed and depleted. A severe drought, combined with these environmental factors, led to frequent enormous dust storms. As a result, the Great Plains area became known as the Dust Bowl. Unable to grow crops or pay their farm bills, many families migrated to California in the hopes of finding work as migrant fruit pickers. (Sometimes these families were called “Okies” or “Arkies” due to the states from which they originated.)
Early Government Responses to the Great Depression
Republican Herbert Hoover was President at the beginning of the Great Depression. You may recall that Republicans had a long tradition of laissez-faire government, and Hoover shared this inclination. Many economists advised Americans to just wait it out, saying that eventually the economy would correct itself and everyone could move on.
Hoover’s main contribution to Depression relief was called the Reconstruction Finance Corporation. It authorized $2 billion for emergency financing for banks, life insurance companies, railroads, and other large businesses, but not to help individuals. Hoover believed that, by helping business owners, the money would “trickle down” to the average citizen through job growth (which never actually developed).
The American public was increasingly upset about the Great Depression. People protested in various ways: farmers upset by low food prices burned crops, blocked roads to prevent food from getting to market, and used force to prevent farm foreclosures. Others showed their disgust with President Hoover by naming the unpleasant effects of the Depression after him. For example, “Hoovervilles” were shantytowns for people without homes, and “Hoover blankets” were the newspapers in which they wrapped themselves.
