AMERICAN STUDIES: HISTORY

Scarsdale High School

EDITED BY TOM MAGUIRE

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Chapter 1

What caused the Great Depression? To most people, this

question has an easy answer: the 1929 stock market

crash. But given the increasing complexity of the

American economy and the unprecedented scale of the

collapse, is the explanation really this simple? In this

reading from American History: A Survey (10th ed.),

Columbia University Professor Alan Brinkley identifies a

number of factors that, in the opinion of many historians

and economists, may have been responsible for the

greatest economic calamity in US history.

THE COMING OF THE GREAT DEPRESSION

Image: fineartamerica.com

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The sudden economic decline that began in 1929 came as an espe-cially severe shock because it followed so closely a period in which the New Era1 seemed to be performing another series of economic miracles.

The Great CrashIn February 1928, stock prices began a steady rise that continued, with only a few temporary lapses, for a year and a half. Between May 1928 and September 1929, the average price of stocks in-creased over 40 percent. The stocks of the major industrials—the stocks that are used to determine the Dow Jones Industrial Aver-age2—doubled in value in that same period. Trading mush-roomed form 2 or 3 million shares a day to over 5 million, and at times to as many as 10 or 12 million. There was, in short, a wide-spread speculative fever that grew steadily more intense, particu-

QUESTIONS

❖ Professor Brinkley identifies a number of factors that may have contributed to the onset of the Great Depression. You should be able to explain why each factor reflected problems in the US economy.

❖ What effects did the Depression have on American wealth?

❖ What were the effects of the Depression on American workers?

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SECTION 1

The Coming of the Great Depression

Image: newdeal.feri.org

Photo by John Allen for the Works Progress Administration

1 People at the time “liked to refer to the 1920s as the ‘New Era’—an age in which America was becoming a modern nation” (Brinkley 809).

2 This average is still the leading indicator of stock market performance. Listen to or watch almost any news broadcast and you will be told how “the Dow” did that day.

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larly once brokerage firms began encouraging the mania by recklessly offering easy credit to those buying stocks.3

In the autumn of 1929, the market began to fall apart. On October 21 and again on October 23, there were alarming

declines in stock prices, in both cases followed by temporary recoveries (the second of them engineered by J.P. Morgan and Company and other big bankers, who conspicuously bought up stocks to restore public confidence). But on Octo-ber 29, “Black Tuesday,” all efforts to save the market failed. Sixteen million shares of stock were traded; the industrial in-dex dropped 43 points; stocks in many companies became vir-tually worthless. In the months that followed, the market con-tinued to decline [see chart]. It remained deeply depressed for more than four years and did not fully recover for over a decade.

Many people believed that the stock market crash was the be-ginning, and even the cause, of the Great Depression. But although October 1929 might have been the first visible sign of the crisis, the Depression had earlier beginnings and more important causes.

Causes of the DepressionEconomists, historians, and others have argued for decades about the causes of the Great Depression. But most agree on several things. They agree, first, that what is remarkable about the crisis is not that it occurred; periodic recessions are a normal feature of capitalist economies. What is remark-able is that it was so severe and that it lasted so long. The im-portant question, therefore, is not so much why there was a depression, but why it was such a bad one. Most observers agree, too, that a number of different factors account for the severity of the crisis, even if there is considerable disagree-ment about which was the most important.

This clip, from Gold Diggers of 1933, features legendary per-former Ginger Rogers. What does this excerpt tell us about popu-lar entertainment—and popular attitudes—during the Depression? And don’t be alarmed if one of the verses is hard to understand: it’s in pig Latin (www.youtube.com/watch?v=UJOjTNuuEVw).

Movie 1.1 Irony Alert!

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3 There are a lot of parallels here to the housing market bubble and crash that damaged our own economy in 2007-8, digging a hole out of which we are still—at least as of this writing (January 2012)—climbing. I hope we will have time to explore some of these connections at the end of the year.

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One of these factors was a lack of diversification in the American economy in the 1920s. Prosperity had depended excessively on a few basic industries, notably construction and automobiles. In the late 1920s, those industries began to decline. Expenditures on construction fell from $11 billion to under $9 billion between 1926 and 1929. Automobile sales fell by more than a third in the first nine months of 1929. Newer industries were emerging to take up the slack—among them petroleum, chemicals, plastics, and others oriented to-ward the expanding market for consumer goods—but had

not yet developed enough strength to compen-sate for the decline in other sectors.

A second important factor was the maldistribu-tion of purchasing power and, as a result, a weakness in consumer demand. As industrial and agricultural production increased, the pro-portion of the profits going to farmers, work-ers, and other potential consumers was too small to create an adequate market for the goods the economy was producing. Demand was not keeping up with supply. Even in 1929, after nearly a decade of economic growth, more than half the families in America lived on the edge of or below the minimum subsis-tence level4—too poor to buy the goods the in-dustrial economy was producing.

As long as corporations had continued to ex-pand their capital facilities (factories, ware-houses, heavy equipment, and other invest-ments), the economy had flourished. By 1929,

however, capital investment had created more plant space than could profitably be used, and factories were producing more goods than consumers could purchase. Industries that were experiencing declining demand (construction, autos, coal, and others) began laying off workers, depleting mass purchasing power further. Even expanding industries often reduced their work forces because of new, less labor-intensive technologies; and in the sluggish economic atmosphere of

Market Bottom

Market Peak

Interactive 1.1 The Stock Market Crash. Click on the bubbles for more information

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4 What we today might call the “poverty line.”

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1929 and beyond, such workers had difficulty finding employ-ment elsewhere.

A third major problem was the credit structure of the econ-omy. Farmers were deeply in debt—their land mortgaged, crop prices too low to allow them to pay off what they owed. Small banks, especially those tied to the agricultural econ-omy, were in constant trouble in the 1920s as their customers defaulted on loans; many of them failed. Large banks were in trouble, too. Although most American bankers were very conservative, some of the nation’s biggest banks were invest-ing recklessly in the stock market or making unwise loans. When the stock market crashed, many of these banks suf-fered losses greater than they could absorb.

A fourth factor contributing to the coming of the Depression was America’s position in international trade. Late in the 1920s, European demand for American goods began to de-cline. That was partly because European industry and agri-culture were becoming more productive, and partly because some European nations (most notably Germany, under the Weimar Republic) were having financial difficulties and could not afford to buy goods from overseas. But it was also be-cause the European economy was being destabilized by the international debt structure that had emerged in the after-math of World War I.

The international debt structure, therefore, was a fifth factor contributing to the Depression. When the war came to an end in 1918, all the European nations that had been allied with the United States owed large sums of money to Ameri-can banks, sums much too large to be repaid out of their shat-

tered economies. That was one reason why the Allies had in-sisted (over Woodrow Wilson’s objections) on reparation pay-ments from Germany and Austria. Reparations, they be-lieved, would provide them with a way to pay off their own debts. But Germany and Austria were themselves in eco-nomic trouble after the war; they were no more able to pay the reparations than the Allies were able to pay their debts.

The American government refused to forgive or reduce the debts. Instead, American banks began making large loans to European governments, with which they paid off their earlier loans. Thus debts (and reparations) were being paid only by piling up new and greater debts. In the late 1920s, and par-ticularly after the American economy began to weaken in 1929, the European nations found it much more difficult to borrow money from the United States. At the same time, high American protective tariffs were making it difficult for them to sell their goods in American markets. Without any source of foreign exchange5 with which to repay their loans, they began to default. The collapse of the international credit structure was one of the reasons the Depression spread to Europe (and grew much worse in America) after 1931.

Progress of the DepressionThe stock market crash of 1929 did not so much cause the Depression, then, as help trigger a chain of events that ex-

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5 Foreign exchange: foreign currency coming into a country which that coun-try can then spend on goods made in other countries.

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posed longstanding weaknesses in the American economy.6 During the next three years, the crisis steadily worsened.

A collapse of much of the banking system followed the stock market crash. Over 9,000 American banks either went bank-rupt or closed their doors to avoid bankruptcy between 1930 and 1933. [See chart at right.] Depositors lost over $2.5 bil-lion in deposits. Partly as a result of these banking closures, the nation’s money supply greatly decreased. The total money supply, according to some measurements, fell by more than a third between 1930 and 1933. The declining money supply meant a decline in purchasing power, and thus defla-tion. Manufacturers and merchants began reducing prices, cutting back on production, and laying off workers. Some economists argue that a severe depression could have been avoided if the Federal Reserve system had acted more respon-sibly. But the members of the Federal Reserve Board, con-cerned about protecting its own solvency in a dangerous eco-nomic environment, raised interest rates in 1931, which con-tracted the money supply even further.

The collapse was so rapid and so devastating that at the time it created only bewilderment among many of those who at-tempted to explain it. The American gross national product7 plummeted from over $104 billion in 1929 to $76.4 billion in 1932—a 25 percent decline in three years. In 1929, Ameri-cans had spent $16.2 billion in capital investment; in 1933,

they invested only a third of a billion. The consumer price in-dex8 declined 25 percent between 1929 and 1933, the whole-sale price index 32 percent. Gross farm income dropped

Bank Failures 1921-1967Image: calculatedriskblog.com

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6 This is a crucial point.

7 Known as GNP. Today we use a slightly different measure, gross domestic product (GDP). Both are measures of the total value of the goods and serv-ices a nation produces.

8 Known as CPI, this is still the most widely used measure of the nation’s infla-tion rate.

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from $12 billion to $5 billion in four years. By 1932, accord-ing to the relatively crude estimates of the time, 25 percent of the American work force was unemployed (some believe the figure was even higher); another third of the work force experienced cuts in wages or hours or both. For the rest of the decade, unemployment averaged nearly 20 percent, never dropping below 15 percent.

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Protest march in St. Paul, Minnesota in 1937(Image: Minnesota Historical Society).

Gallery 1.1 Images of the Great Depression

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