The Great Depression: America's Biggest Financial Collapse in Economic History

A Fall of the American Economy - The Mystery Behind the Great Depression

An economic recession is defined as a decrease in GDP in two consecutive quarters. A depression is defined as a severe and long recession. The Great Depression was an economic depression that was the longest and largest depression in American history. Not only did it affect the United States’ economy, but the world economy as well. The lessons learned from the Great Depression are lessons that economists used to learn from the mistakes people made and are used to help prevent another depression. There were a lot of causes of the Great Depression. Many people believe the only cause of the Great Depression was simply a stock market crash. However, that was only one of five major causes that lead to the Great Depression.

One of the three long term causes of the Great Depression was the overproduction of goods and services. During the 1920’s, the economy was doing well. Companies figured they could produce as many goods and services as they could, since people were able to afford them. They began to produce too much, which led to a larger supply and lower demand, forcing companies to start charging less for products. This is good for the consumer in the short term, but the producer is feeling effects because their profit margins are reduced and they have too many goods in their inventory. This can lead to companies forcing to close or lay off workers because they are making less money of the goods they sell.

The second long term cause is the excessive borrowing of money to buy stocks. People borrowed from banks to buy stocks, and banks would use the money people stored there to buy stocks. This is part of the building up of the collapse of the stock market. During the 1920’s, stock prices were constantly increasing. The stock market cannot increase forever, so the higher stocks got, the more intense a recession would follow. When the stock market crashed in October of 1929, people tried to get their money out of their savings accounts. However, many banks had also had their money in the stock markets, and people lost all their money because it was not federally insured at this time.

The third long term effect was low farm prices and low wages leading to uneven distribution of income. The low farm prices are part of what led to the overproduction of certain goods, particularly crops. Overproduction is never a good thing, because when a seller of something has too much inventory, they become less profitable. The low wages were another issue. Obviously, low wages are always something you don’t want. When people have low wages, they aren’t spending money to help stimulate the economy.

A short term effect was the stock market crash. This was not as big of an affect as some people think. Only 5% of people at the time had stocks, so only those people were effected immediately. After that, the banks started to fail because the banks had money invested in the stock market. When the banks failed, people couldn’t withdraw their money, which was one of the biggest issues during the Great Depression. Many people lost their life savings due to the banks closing.

Another short term effect was tariffs restricting trade between countries. Tariffs are essentially taxes on exported goods. Tariffs lead to less trade between nations, and/or more expensive goods and services. This leads to less competition and less options for the consumer. One tariff in particular is looked at as a cause for the Great Depression, the Hawley-Smoot Tariff Act of 1930. The act reduced American imports and exports by more than half. The act was passed in hope of protecting American jobs and farmers from foreign competition. What they didn’t realize is that competition is a good thing and it drives innovation from companies.

Black Tuesday is a day that forever lives in American infamy. It marks the day of stock market crash of 1929 on October 29th, 1929. Many historians and economists believe that this day led to a domino effect of events that eventually led up to the Great Depression. The crash was so bad that the stock market did not reach the levels of 1929 again until 1954, well after World War II. The stock market crash led to the closures of banks, which led to people losing their money, which led to people not being able to spend money to stimulate the economy.

Herbert Hoover was president during the beginning of the Great Depression. Many people believed he was part of the cause of the Great Depression, and he earned the nickname “Do Nothing President” because he believed it was not the government’s job to interfere with economic affairs. He had one of the lowest approval ratings for a president in American history. Despite his nickname, he did do a few things to try to alleviate the Great Depression. However, the success of these things were not very great. He passed the Reconstruction Financial Corporation Act. It published and allowed people to see which banks were closing. It was with good intention, but it made the issues worse. When people saw one bank close, everyone began to withdraw the money from their banks, leaving the banks with no money. Hoover’s financial advisor, Andrew Melon, kept assuring Hoover that nothing needed to be done and that the recession would eventually end. Another testament to Hoover’s disapproval was the nickname for cardboard houses people began to live in. They gained the nickname “Hoovervilles” because people had to move into boxes because they could no longer afford their houses. The impact of the Great Depression on everyday life was a very big one. The unemployment rate was near 25%, and those who did not lose their jobs most likely saw their wages cut. Millions of people lost their live savings, their homes, etc. due to the horrible state the economy was in. Parents had to send their kids to the homes of relatives in order to be able to afford necessities such as heating or electricity. Very few people were unaffected by the Great Depression, mostly people who were very rich and got out of the stock market right before the crash.

In 1932, there was an election to decide the new president of the United States. Four years into Herbert Hoover’s term, he was disliked by nearly everybody. Franklin D. Roosevelt won the 1932 election, gaining 472 electoral votes, and winning all but six states. He helped bring optimism to the American people during one of the worst economic times in American history. A believer in Keynesian Economics, Roosevelt thought that free market capitalism has failed to provide a remedy for an economy stuck in a long-lasting depression with mass unemployment. Relying on traditional monetary solutions like lowering interest rates was not enough for him. Roosevelt believed in the three R’s, relief, recovery, and financial reform. He passed many acts to try to help fix the economy. The Emergency Bank Relief Act was an act where banks were closed for three days in order to allow the government to inspect banks to make sure they are operating properly. Another act was the Glass-Steagal Banking Act, which created the Federal Deposit Insurance Corporation. This means the government has to insure up to $250,000 of people’s money in FDIC member banks, in the event the bank fails. Another act was the Federal Securities Act, which makes companies liable for misinformation they provide to the public, These were part of what is known as the first “New Deal”.

The second New Deal included acts such as Social Security Act (Social Security, pension for retired workers), Fair Labor Standards Act (creating minimum wage and maximum hours), etc. all were acts that helped improve the lives of the typical American. Instead of barely doing anything like Hoover, Roosevelt took action to try to fix the country, and it worked. Hoover’s philosophy was that the economy would eventually recover. Even if it would eventually recover, it would take much longer than taking Roosevelt’s plan. Roosevelt believed it’s better to take action now rather than wait until the economy is about to fail. Roosevelt’s New Deals helped the American economy recover. Many of these New Deal Acts are still in existence today. FDIC is one of the biggest. Most major banks are members of the FDIC, so people can feel safe storing their money in those banks, as the money is federally insured. Social Security is another, which takes money out of people’s paycheck and stores it for their retirement. The Fair Labor Standards Act helped establish today’s guidelines of minimum wage and maximum workable hours.

Not only America, but the entire world has learned lessons from the Great Depression. The world learned that the government does have to do at least something if the economy takes a large downturn. The world learned that buying on the margin is a bad thing that will likely lead to a stock market collapse. The government and people know what to do during a recession, and the government knows that changing interest rates to increase or decrease money supply is a good way to control the economy. During bad times, interest rates are lower in order to encourage spending. When the economy is doing well, the government can raise interest rates to increase government revenue. In short, the Great Depression was an event that was one of the biggest financial collapses in history. Despite the horrible times, it did teach the world lessons about how to deal with economic recessions in order to prevent another Great Depression from happening.