The Great Depression

1929 Stock Market Crash & 1920s economy

Often erroneously believed to be the cause of the Great Depression (GD). Not necessarily true; a case of correlation =/= causation. GD certainly happened following the Stock Market Crash, however, it was not because of it.
Economic state of the USA was not ideal throughout the 1920s. Consumerism had increased considerably, which was good for American industry. However, this consumption was fueled by credit and installment buying - totally unsustainable.
Argiculture had also suffered in the 1920s. Farms had expanded throughout First World War to feed soldiers; the expansion created a need to develop more farm mechanics (harvesters etc). These mechanics were expensive, meaning farmers got into debt in order to fuel their expansion.
By 1925, the growth of car manufacturing and residential construction had slowed considerably.
"By 1929 commerical bankers were in the unusual position of loaning more money for stock market and real estate investment than for commercial ventures." - David Kennedy
What made the GD the GD was mass unemployment and realted hardship, which didn't really come about until the early 1930s.
Only 3% of Americans actually owned stock at the time of the market crash and markets had actually recovered a lot of value by 1930.

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Despite the formation of the Federal Reserve System in 1913, most banks were still small, independent companies that had to rely on their own resources.
When depositers panicked and withdrew a lot of money, a bank would go under if it didn't have enough money on reserve.
A series of bank failures occured across several states and led to despositers rushing to withdraw their money before banks went under. This meant that banks had to call in loans, which ultimately led ot the freezing up of credit.
Frozen credit meant that less money was in circulation - which in turn led to deflation.
Deflation meant that prices dropped, which meant companies needed to reduce costs in order to maintain profit. The most effective way to do this was to reduce the payroll, which resulted in many people losing their jobs.
This loss of employment meant a loss of disposable income, further leading to an inability to buy goods. This meant a pile up of inventory, which lead to further deflation.
Banks were no longer able to lend money, which meant that many businesses could no longer afford to maintain their payroll, leading many to go bankrupt. This lead to unemployment en masse.

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The First World War created a 'web of debt and reparations', for example the Treaty of Versailles demanded that Germany pay the equivalent of $33billion in reparations, mostly to Britain and France. Germany could not afford this debt and therefore had to borrow from American banks.
USA was owed around $10billion in reparations from Great Britain and France herself, some of which was paid back with German reporations (i.e. the money borrowed from the USA in the first place).
After American credit dried up in the wake of Stock Market Crash and bank failures, the economies of Britain, France and Germany also failed. With the largest non-American industrial economies failing, world trade ground to a standstill.
The Hawley-Smoot Tariff (1930), raised tariffs to the highest they'd ever been. This aimed to protect American industry; however, Europe responded by raising their own tariffs. This ultimatley led to a smaller market for American goods, less trade, fewer sales and, ultimately, fewer jobs.
Central bankers in Europe and the USA refused to let go of the Gold Standard, which would have allowed governments to devalue their currenct and pump much needed money into their economy. Britain did this in 1931 however, USA did not follow suit and world financial markets simply froze up even further

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Federal Reserve raised their discount rates, making credit even harder to come by.
By the ended of 1931, 2,294 American banks had gone under. This was twice the number which had failed in the preceeding year.

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President Hoover didn't really do enough. He believed the best course of action was to "use the powers of government to cushion the situation"
He persuaded a large number of industrialists in a White House meeting to maintain wage rates. He also convinced the Federal Farm Board to support agricultural production and secured congressional approval for $140mill in new public works.
Between 1929 and 1931, he almost doubled the expenditure of the Federal Public Works.
However, he didn't allow federal government to take over the situation completely. Instead, he relied on private businesses and state/local governments to stimulate the economy.
He also hiked taxes in order to stabilise banks by balancing the federal budget.
Created the Reconstruction Finance Corporation in 1932; essentially a federal bailout company that borrowed borrowed money to provide emergency loans to banks, building societies, railroads and agricultural corporations.
However, this was a case of too little too late; the GD was well underway by 1932, and by the end of this year over 10million people were unemployed - around 20% of the country's workforce.
This was worse in big cities and especially affected POC - in Chicago, 4% of the population was African-American, yet they made up 16% of the unemployed.

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