While we are in the midst of this horrendous
recession, it would be of value to compare the causes of our current economic
doldrums with the convergence of factors that brought on the Great Depression
of 1929. Although the specific
conditions and circumstances may vary, the similarities are striking.
The economic depression of 1929 catapulted the
national economy into a devastating tailspin from the seeming prosperity of the
1920s. The rapid decline occurred as a
direct result of many factors that were all interconnected. The so-called Great Depression lasted from
1929 through 1938.
The precipitous decline that so defined the
Great Depression began on what is referred to as Black Tuesday – October 29
1929 - when 16 million shares were traded and the industrial stock index
dropped 43 points negating all the gains made over the previous twelve months. By the middle of November of that year, the
market had lost a third of its entire value or 40% of all the stock that was
traded on the Exchange. The reasons for
this sudden and calamitous event were multi-faceted.
The seeming prosperity that was a hallmark of
the 1920s was, in fact, not representative of the majority of Americans. Following the hard times imposed by World War
I, economic production markedly increased, especially in regards to
automobiles, home appliances and construction.
In addition, overseas investment doubled to 7.5 billion dollars by
1929. Although consumer spending
increased markedly during this period, individuals were buying beyond their
means, placing themselves in a precarious position regarding personal
indebtedness.
In addition, the distribution of wealth was
skewed markedly to the wealthy. In 1929,
the top 0.1% of American households collectively had as much wealth as 42% of
the population and possessed one-third of all the savings. As a matter of fact, it has been estimated
that 80% of the population had no savings at all.
By 1929, investments in the stock market
increased far more than any other indicator, and, more to the point,
outstripped actual production or sales of manufactured goods. One aspect of this marked increase in
transactions on the stock exchange was the practice of “buying on margin.” Using this approach, an investor determined
to purchase $1,000 worth of stock valued at $10 per share, was legally enabled
to pay his broker as little as 10% of the actual worth of the stock or
$100. This practice was common in the
1920s; because, the value of stock seemed to be always increasing. With this in mind, the investor could then
wait until the value of the stock rose, sell it at a significant profit, pay
his broker and pocket the difference.
This kind of gambling persisted; until, the inevitable happened – the
bubble burst. To some extent, the
unraveling began in Great Britain when the country raised its interest rates to
lure back domestic investors. Aware of
the significance of this policy change, foreign and U.S. investors began
dumping U.S. stocks.
Following Black Tuesday, the economic situation
worsened as the nation inexorably slid into depression. Within three years, the so-called industrial
index – a quantitative measure of the performance of shares in major industries
such as automobiles – dropped from 452 in September of 1929 to 58 by July of
1932. It must be remembered that it has
been estimated that only 2.5% of the entire population actually invested in the
stock market; therefore the reason for the depression must have resided
elsewhere. The causes for the depression
itself can be explained by the following factors:
·
Decline in Industrial Production – Much of the
economic growth during this era can be directly related to two major
industries, the production of automobiles and construction. By the end of the 20s, both of these facets
of the economy were in decline.
·
Poverty and Personal Indebtedness – Poverty
was, in fact, widespread and personal debt was high as well. The wages of individual workers had only
increased by 8%; whereas, the productivity of the individual worker increased
by an estimated 32%. These data
translated into the economic reality that individuals could not afford to
purchase the products of industrial output.
This convergence of factors inevitably led to mass unemployment.
·
Bank Failures - Since banks were heavily
engaged in speculation on the stock market and since the banks were using the
savings of their customers for these questionable investments, they were unable
to effectively deal with rush on the banks when people wished to withdraw their
savings en masse. As a result, thousands
of banks failed and many lost their life savings.
Adding
to the economic deterioration as outlined above, the Dust Bowl of the 1930’s
had a devastating impact on farmers of the Great Plains. After years of farming without adequate
rotation of crops, an unusual period of extreme drought together with harsh
weather conditions resulted in the topsoil being literally blown away. Between 1933 and 1938, three to four inches
of topsoil were lost to the winds and created what was referred to as “Black
Blizzards.” As a result, 500,000
residents of the Great Plains became homeless and 2.5 million moved out of the
region by 1940.
The
government’s response to this deepening crisis was inadequate. Although President Herbert Hoover felt
compassion for the millions who were suffering and although he attempted to use
some of the government’s resources to address the issue – he requested 2.25
billion dollars from the Congress for public works progress - his political
philosophy constrained his efforts in this regard. He felt strongly that the government should
not be involved in direct relief by providing resources to those or were poor,
starving and unemployed. He felt that,
“It is not the function of the government to relieve individuals of their
responsibilities to their neighbors, or to relieve private institutions of
their responsibilities to the public.” In
the general election of 1932, the people chose Franklin Delano Roosevelt as
their next president, who promised a New Deal.
The fundamental focus of the New Deal was threefold – the so-called 3 Rs
– relief, recovery and reform. In order
to accomplish these ambitious goals, fifteen major pieces of legislation were
submitted to Congress from spring to early summer.
In spite
of all these efforts, it was the onset of World War II that effectively brought
the country out of the Great Depression.
