Module: ASCC
Level: L3
Groups: 1-2-3-4-5-6
Academic year: 2023-2024
America and the Great Depression
Introduction:
The Great Depression was an immense economic world-wide tragedy that caused millions of
people around the world to lose their livelihoods. It was also the beginning of US government
involvement in the economy and in society as a whole. The Great Depression began in 1929
and lasted until the early 1940’s. There is still considerable debate today about the causes of
the Great Depression, but one fact is sure, the depression came to an end with the
commencement of World War II.
Causes of the great depression:
Surprisingly, economists are still debating today about what caused the Great Depression.
Below are some theories by leading economists:
● The Stock Market Crash
After nearly a decade of optimism and prosperity, the United States was thrown into despair
on Black Tuesday, October 29, 1929, the day the stock market crashed and the official
beginning of the Great Depression. As stock prices plummeted with no hope of recovery,
panic struck. Masses and masses of people tried to sell their stock, but no one was buying.
The stock market, which had appeared to be the surest way to become rich, quickly became
the path to bankruptcy.
And yet, the Stock Market Crash was just the beginning. Since many banks had also invested
large portions of their clients' savings in the stock market, these banks were forced to close
when the stock market crashed. Seeing a few banks close caused another panic across the
country. Afraid they would lose their own savings, people rushed to banks that were still open
to withdraw their money. This massive withdrawal of cash caused additional banks to close.
Since there was no way for a bank's clients to recover any of their savings once the bank had
closed, those who didn't reach the bank in time also became bankrupt. Businesses and
industry were also affected. Having lost much of their own capital in either the Stock Market
Crash or the bank closures, many businesses started cutting back their workers' hours or
wages. In turn, consumers began to curb their spending, refraining from purchasing such
things as luxury goods. This lack of consumer spending caused additional businesses to cut
back wages or, more drastically, to lay off some of their workers. Some businesses couldn't
stay open even with these cuts and soon closed their doors, leaving all their workers
unemployed.
● Failure of the Federal Reserve
In 1963, University of Chicago economist Milton Friedman and economic researcher Anna
Schwartz found that the money supply in circulation between 1929 and 1933 fell by a third.
This was due mainly to hoarding of cash by frightened households and businesses.
Friedman and Schwartz blamed the Federal Reserve for failing to increase the money supply
to the banks, causing banks to fail and freezing credit for consumers. The two economists
argued this was the chief cause of the drop in consumer demand that crippled the economy.
Friedman and Schwartz said the Federal Reserve made a bad recession into a depression
when its leaders called for more money in the economy only when business was good, even
when the banks were desperate for more cash. When panicked depositors withdrew their
money, the banks failed, lending stopped, and the economy fell into a depression.
● The Gold Standard
For two decades, most economists accepted the Friedman and Schwartz theory that the
Federal Reserve's monetary policy caused the Great Depression. But, in 1983, Stanford
economist Ben Bernanke proposed that several other causes, especially the gold standard,
played a part, too.
Bernanke accepted the analysis of Friedman and Schwartz about the inadequate money
supply but blamed the gold standard as the major cause. He noted that countries that
abandoned it early, like Britain in 1931, had more freedom to get money circulating in the
economy. Those countries that stayed on the gold standard longer, as the U. S. did until 1933,
sank deeper into depression.
Bernanke explained that because of the restrictions the gold standard put on the money
supply, the Federal Reserve did not act, and banks failed. The resulting interruption of
lending depressed demand, which sent into motion the chain of events that led to mass
unemployment.
● Household Debt
Low interest borrowing rates and instalment credit in the 1920s led to higher household debt.
The prosperity of this time was largely built upon household debt as spending rose faster than
income.
When the recession worsened, many Americans found themselves in a financial trap caused
by "debt deflation." This means that the more wages fall, the fewer dollars the person has to
make debt payments that always remain constant.
Economist Irving Fisher explained in 1933 that to keep up with their house, auto, and other
debt payments, people cut back on their spending. This, he said, was the major reason
consumer demand dropped, which caused more price and wage deflation, less investment,
falling output by companies, and layoffs. Many eventually stopped making payments on their
loans, which helped to cause the banks to fail. Thus, household debt and debt deflation,
according to Fisher, pushed a recession into a depression.
Recovery: Roosevelt and the New Deal:
The U.S. economy broke down and entered the Great Depression during the presidency of
Herbert Hoover. Although President Hoover repeatedly spoke of optimism, the people
blamed him for the Great Depression. Just as the shantytowns were named Hoovervilles after
him, newspapers became known as "Hoover blankets," pockets of pants turned inside out (to
show they were empty) were called "Hoover flags," and broken-down cars pulled by horses
were known as "Hoover wagons."
During the 1932 presidential election, Hoover did not stand a chance at reelection and
Franklin D. Roosevelt won in a landslide. People of the United States had high hopes that
President Roosevelt would be able to solve all their woes. As soon as Roosevelt took office,
he closed all the banks and only let them reopen once they were stabilised. Next, Roosevelt
began to establish programs that became known as the New Deal.
These New Deal programs were most commonly known by their initials, which reminded
some people of alphabet soup. Some of these programs were aimed at helping farmers, like
the AAA (Agricultural Adjustment Administration). Other programs, such as the CCC
(Civilian Conservation Corps) and the WPA (Works Progress Administration), attempted to
help curb unemployment by hiring people for various projects.
The End of the Great Depression
To many at the time, President Roosevelt was a hero. They believed that he cared deeply for
the common man and that he was doing his best to end the Great Depression. Looking back,
however, it is uncertain as to how much Roosevelt's New Deal programs helped to end the
Great Depression. By all accounts, the New Deal programs eased the hardships of the Great
Depression; however, the U.S. economy was still extremely bad by the end of the 1930s.
The major turn-around for the U.S. economy occurred after the bombing of Pearl Harbor and
the entrance of the United States into World War II. Once the U.S. was involved in the war,
both people and industry became essential to the war effort. Weapons, artillery, ships, and
aeroplanes were needed quickly. Men were trained to become soldiers and the women were
kept on the home front to keep the factories going and to help in the production of food
products.
It was ultimately the entrance of the U.S. into World War II that ended the Great Depression
in the United States.
