The Great Depression

Introduction

The Great Depression was preceded by widespread economic struggles in the decade following World War I. The Versailles Treaty, which formally ended the war in 1919, required Germany to pay heavy reparations to the Allied powers. This severely weakened the German economy and disrupted the entire European industrial economy that had relied on Germany as a key trading partner before the war.

In the 1920s, European nations struggled to rebuild from the devastation of World War I. Agricultural production declined and industrial growth stalled due to reduced demand, trade barriers, and tight credit. The United States emerged from the war relatively unscathed and became the world’s leading lender and exporter in the 1920s. However, this growth was largely fueled by credit and speculative investing. The U.S. stock market reached dizzying heights in the late 1920s untethered from the underlying economic fundamentals.

This turbulence left the world economy on shaky footing on the eve of the 1929 stock market crash. The crash triggered financial crises and an economic downward spiral that would become known as the Great Depression. The economic malaise quickly spread worldwide due to the interconnected nature of global trade and lending. The struggling European economies were the first to succumb, but the depression soon reached even prosperous countries like the United States.

Stock Market Crash of 1929

The stock market crash of 1929 was a pivotal event that contributed to the start of the Great Depression. In the years leading up to the crash, a speculation frenzy grew on Wall Street, fueled in part by Republican policies that were friendly to big business and hostile to regulation. Stock prices rose far beyond the real value of the shares, and investors were allowed to buy stocks “on margin” by putting down just a fraction of the stock’s price and borrowing the rest from their brokers.

When confidence in the market dwindled in October 1929, investors rushed to sell their stocks, causing prices to plummet. Panic selling caused the Dow Jones Industrial Average to fall 25% in just two days. Billions of dollars in wealth evaporated almost instantly. The crash showed the weakness and volatility of the U.S. economy, triggering bank failures and widespread insolvency. It marked the beginning of a downward economic spiral that would persist for years. The Republican policies and unregulated margin buying contributed directly to the speculative bubble that burst in 1929, sending the nation into crisis.

Onset of the Great Depression

The stock market crash triggered a deepening economic crisis worldwide, now known as the Great Depression. This period was characterized by catastrophic and persistent unemployment, urban poverty, a precipitous drop in farm income, and widespread corporate failures.

Unemployment skyrocketed, reaching nearly 25% at the Depression’s worst point. This meant that one in four able and willing workers could not find jobs. Unemployed individuals and families suffered greatly, often lacking food, healthcare, housing, and other basic necessities. Many were forced to live in shantytowns dubbed “Hoovervilles” that sprung up on the outskirts of major cities.

Farmers were also devastated by the Great Depression. As domestic and global demand plunged, commodity prices collapsed. Between 1929 to 1932, farm income decreased by over 50%. Many family farms went bankrupt and were foreclosed upon, displacing struggling rural communities.

The Great Depression took a heavy toll on American businesses as well. Corporate profits plummeted and many major companies went bankrupt, causing stocks to lose nearly 90% of their value compared to the pre-crash peak. This corporate collapse put even more Americans out of work and eliminated wealth held in company shares.

The widespread poverty, unemployment, and business failures that defined the Great Depression era brought intense economic suffering and uncertainty across America. The downturn went far beyond a typical recession in both its magnitude and duration. It would take unprecedented government intervention under the New Deal to begin alleviating this catastrophe.

Hoover Administration Response

The Hoover administration responded to the deepening economic crisis with various measures aimed at stimulating the economy. Hoover’s approach centered on voluntarism and a belief that government intervention should be limited.

One key initiative was the establishment of the Reconstruction Finance Corporation (RFC) in 1932, which provided loans to banks, railroads, and other large businesses in an effort to prop up major industries. The RFC was unprecedented in its scale of lending and signaled a shift toward more direct federal involvement in the economy.

Hoover also favored a “trickle down” approach rooted in the theory that assisting big business would create jobs and prosperity that would eventually make its way down to average Americans. Tax cuts aimed at the wealthy and major corporations were one example of this philosophy.

However, Hoover resisted more aggressive federal relief programs, believing the dole would sap individual initiative. He worried too much intervention would destroy the foundations of democracy. Hoover’s strong commitment to a balanced budget also constrained his response.

As conditions continued to deteriorate, Hoover’s voluntary and trickle down policies were criticized as inadequate. Unemployment persisted at catastrophic levels, protests erupted, and Hoover’s popularity declined as Americans grew increasingly frustrated. This set the stage for a decisive political realignment in the 1932 election.

Causes of the Economic Catastrophe

The onset of the Great Depression cannot be attributed to one single event or factor. Rather, it was the result of a confluence of vulnerabilities in the American and global economy at the time. Several key causes contributed to the downward spiral into economic catastrophe in the early 1930s:

• The Plight of American Farmers - Agricultural producers faced falling incomes and prices through the 1920s. Mechanization led to overproduction, while demand for agricultural products fell in Europe due to economic struggles there. These factors led to chronic oversupply issues in American farming. The situation worsened as the Depression hit, exacerbating issues with debt and foreclosures in the farming sector.

• Unstable Foreign Trade - The global economy remained volatile following World War I. When American loans to foreign governments dried up, it deprived U.S. farmers and manufacturers of critical export markets. This unstable trade environment left America’s economy exposed when crisis hit.

• Abandonment of the Gold Standard - In the late 1920s, central banks in Europe began abandoning the gold standard. This led to falling demand for U.S. agricultural products, while making American goods more expensive abroad. It was both symptomatic of deeper issues globally, while further destabilizing international trade.

• Large Individual and Corporate Debt - By the late 1920s, American consumers and businesses had taken on significant debts that they struggled to repay as economic conditions worsened. From farmers to homeowners to margin investors, high debt levels left both individuals and companies profoundly exposed to economic shocks.

1932 Election and FDR

The 1932 election marked a major turning point in handling the Great Depression, as Democratic nominee Franklin Roosevelt projected a bold image of taking decisive action against the economic crisis. FDR campaigned on a promise of providing a “New Deal” for the American people if elected president.

After three years of worsening Depression under Republican President Herbert Hoover, FDR emerged as a compelling alternative. Roosevelt attacked the failures of the Hoover Administration to revive the economy and ease widespread suffering. He called for greater government intervention, relief programs for the poor, and reforms to the financial system.

FDR won in a landslide against Hoover, carrying 42 of 48 states. The Democrats also won sizeable majorities in both houses of Congress. Roosevelt’s victory signaled an electoral mandate for change and more aggressive federal policies to combat the Depression.

The inauguration of FDR in March 1933 marked a dramatic change in leadership style and vision. Roosevelt inspired hope through his infectious optimism and ambitious proposals. He projected an image of strength and activeness that boosted the nation’s confidence. FDR’s promises of bold, persistent experimentation to address the economic crisis captured the public imagination.

The election of 1932 and FDR’s arrival ushered in a new era of energized government response to the Depression. FDR’s decisive victory and commanding public presence drove expectations for immediate action and lasting reforms. The stage was set for the launch of Roosevelt’s transformative New Deal programs.

The New Deal Revolution

Franklin D. Roosevelt’s election in 1932 marked a turning point in responding to the Great Depression. His victory signaled an appetite for decisive federal action to address the economic crisis and offered hope of relief for struggling Americans.

Upon taking office in 1933, FDR implemented the New Deal - a series of programs and reforms aimed at providing direct federal assistance to the American people. This centralization of power in the federal government, spearheaded by President Roosevelt, represented a revolution in governance.

At the heart of the New Deal was the expansion of federal services designed to put Americans back to work, stabilize prices, and provide a social safety net. This included new agencies and initiatives like the Works Progress Administration (WPA), which employed millions in public works projects, and the Social Security Act, creating a national old-age pension system.

FDR’s leadership style was critical in shaping the impact of the New Deal programs. He projected optimism and confidence through his radio “fireside chats,” explaining complex policies in simple terms to unite Americans behind his recovery vision. FDR also drew on bipartisan support in Congress to enact major New Deal legislation. This enabled the New Deal revolution to take hold without triggering deeper societal upheaval.

While falling short of a true revolution, the New Deal instilled renewed national confidence and implemented lasting controls and safeguards for banking, securities, and labor relations. FDR’s first hundred days in office marked just the beginning of his ambitious agenda to put Americans back to work and catalyze an economic turnaround.

Banking Reforms Provide Initial Success

One of the first acts of FDR’s administration was passing the Emergency Banking Act in March 1933, which aimed to restore confidence in the banking system. This provided the legal basis for FDR to essentially declare a national banking holiday, temporarily closing banks for inspection before reopening only those found financially secure.

FDR leveraged his first fireside chat on radio to explain these actions to the American people. He emphasized the government’s obligation to keep banks safe and defended the inspection process as necessary. This helped ease concerns about bank closures.

Later in 1933, FDR signed the Banking Act which established the Federal Deposit Insurance Corporation (FDIC). This provided government insurance on individual bank deposits up to $2,500, preventing bank runs. By insuring savings, the FDIC helped stabilize banks while restoring citizen confidence.

Together, these banking reforms represented an early New Deal success. FDR demonstrated decisive leadership in shoring up the financial system. The Emergency Banking Act halted panic, while the FDIC ensured citizens need not fear losing their savings. This provided an initial boost of confidence in FDR’s administration.

Assessing the New Deal Impact

The New Deal enacted under FDR did not fully end the Great Depression, but it restored national hope and confidence after years of catastrophe. While unemployment remained high and economic struggles continued through the 1930s, the swift and decisive actions taken by the Roosevelt administration marked a turning point psychologically from the aimless drift of the Hoover years.

FDR’s fireside chats and focus on direct federal action provided a sense of security for everyday Americans weathering the storm. Key New Deal programs and reforms prevented bank failures, insured bank deposits, provided jobs, and implemented financial regulations that restored faith in institutions. The massive scale of New Deal spending, estimated at $500 million in 1933 alone, worked to stimulate economic activity and flow.

Although FDR faced criticisms from both sides - with conservatives denouncing government overreach and liberals wanting even bolder action - the American public responded positively overall. FDR’s landslide 1936 reelection confirmed this, validating his first-term policies. The New Deal spirit pervaded the 1930s, as the White House took an active role in stabilizing an unstable situation.

While the New Deal did not cure the Great Depression, which persisted until the wartime boom, it demonstrated that government could positively intervene in the economy and daily lives. This paradigm shift away from strict laissez-faire policies provided a sense of security and hope that the worst days were behind, even if economic troubles lingered. The New Deal formed the foundation for modern American liberalism, social welfare, and Keynesian economic theories favoring an expanded federal role.

Global Impact

The Great Depression’s global impact stretched from 1929 to 1939, causing protectionism and the breakdown of international trade. It hit nations deeply indebted to the U.S., like Germany and Great Britain, contributing to the rise of militarist governments in Germany and Japan and welfare systems in the U.S. and Britain. The era redefined the role of government and the economy, leaving lasting changes.