The Cause, Effect and Aftermath of the Great Depression

The Great Depression in the United States brought an end to a long era of economic expansion and social progress which had been in full bloom since the 1890s (Mitchell 1947). There had been monetary recessions in 1907, 1913 and 1921, but these reversals were never severe enough or long enough to shake the deeply rooted confidence in the American economic system or to generate any widespread national discontent. Many history books tell of the depression of the ’30s; they often begin with the stock market crash of October 1929 (Estey 1950).

Among economists, a tendency to decry the importance of the crash as a cause of the depression: “The crash was part of the froth, rather than the substance of the situation” (Shannon 1960). The fundamental difficulty was America’s failure to readjust to the developments arising from World War I, which culminated in the depression of 1929. One cannot overlook the profound importance of the Wall Street crash. It shrank the supply of investment funds and at the same time shook the confidence on which investment expenditures depend (Hacker and Zahler 1952).

Personal expenditures were reduced and international trade and capital flows were disrupted. There were many complicated forces that combined to cause the depression. To clearly understand the circumstances preceding the depression, these influences must be explained. In the first place, there was the familiar business cycle recession (Galbraith 1954). For industry, the 1920s had been marked by prolonged prosperity. This was particularly notable in the field of construction and other capital production.

During this period, there was an unusually large expansion of credit because of easy-credit policies which resulted in increased profits (Soule 1947). As often happens following a period of prosperity, cumulative strains brought about a downturn in the economy. The production of the nation exceeded its capacity to consume. Since there were no restrictions by the Federal Reserve Board, too much credit was used for speculation on the market (Soule 1947). In the second place, the economies of many countries were still suffering from dislocations caused by World War I.

Although the world had begun to resume its normal progress, the international economy remained unstable. After receiving help with its trade deficits, war debts, and reparation obligations, Western Europe became financially dependent on the United States (Hacker and Zahler 1952). During World War I, all belligerent countries went off the gold standard and experienced various degrees of inflation. The postwar years brought periods of deflation and devaluation, causing hardship to the business communities and resulting in the redistribution of national incomes (Wector 1948).

Different valuations were placed on currency as the gold standard was reestablished in different countries. This created inequalities in import and export relations, compounding the problems afflicting business (Link 1955). While gold began to stockpile in some countries, it was almost completely depleted in others. At the end of the decade, France and the United States had the major share of the world’s gold. This unusual distribution caused falling prices in other countries and produced a chronic economic depression (Nevins and Commager 1956).

These factors, precipitated by the war, weakened the economic stability of the world and made it difficult to restore prosperity. Another factor stimulated by increased war production was technological improvement. These improvements made necessary the shifting of resources, both capital and labor (Wright 1949). The speed of these advances outran industry’s capacity for normal absorption. There was difficulty in re-employing workers displaced by new technology. Agriculture was hardest hit by technological change.

Mechanization and other improvements made additional cultivation possible in all kinds of soils and climates. The depletion of agricultural staples caused by the war demanded greater annual outputs. The reduction in demand at the end of the war brought about a considerable fall in agricultural prices which proved to be both serious and long-lasting (Mitchell 1947). The continuing effects of higher agricultural yields forced prices still lower. The prolonged depression in agriculture, according to J. A.

Estey, greatly weakened the general economic structure, not only in agricultural countries, but in all parts of the world: “In the past, periods of depression have been brief when agriculture has been prosperous; and in the United States, good crops and high purchasing power of the farmers have always been looked for as the force pulling a country out of a slump. When agriculture becomes involved in a crisis of its own, then depressions seem likely to be of long duration and exceptional severity (Estey 1950). ” All these developments made the economic system less able to make the necessary readjustments to vast changes.

There must be flexibility so that capital, labor and management can continually flow as needed (Soule 1947). It is necessary for resources to be constantly shifted for best use and effective continuation of production. Economic inflexibility was an important factor in increasing the intensity of the depression that was to come. The following is a summary of the circumstances that contributed to the depression: 1) the business cycle recession, 2) dislocation of world economy, 3) a downward trend in prices, 4) technological change, especially in agriculture, 5) and inflexibility in wages, prices, and production (Galbraith 1954).

Since America’s prosperity was largely dependent on the smooth running of its economic machinery, the slowing down of the basic cogs had an immediate and alarming effect on all segments of the economy: the stock market, the financial and business communities, the railroads, agriculture, and industrial production and employment (Soule 1947). Between 1929 and 1932 more than 4,000 banks closed and over 100,000 commercial firms failed (Wector 1948). The economic decline created an even more serious crisis for railroads. From 1929 to 1933, systems totaling 45,000 miles of rails passed into receivership (Wector 1948).

Timely federal assistance saved other large systems from bankruptcy. Freight shipments and car loadings declined 50 percent from 1929 to 1932 (Galbraith 1954). Hundreds of thousands of workers were discharged; work weeks were drastically reduced for those lucky enough to remain employed. The railroads virtually ceased purchasing new equipment. Already in desperate straits by 1929, American farmers lost more cash income and economic standing than any other group. Between 1929 and 1932, gross farm income shrank from $11 million to $5 million (Shannon 1960).

The social impact of the depression was felt by all segments of the economy. Hundreds of thousands of formerly employed women returned home. Most middle-class families had to give up domestic servants; women planted vegetable gardens, canned and made soap (Link 1955). Some people reacted rather curiously. They practically stopped buying new automobiles but did not give up their old cars; instead, there was an increase in the sale of gasoline (Hacker and Zahler 1952). Jewelry sales declined sharply, but not radios or silk and rayon hosiery.

Families had to double up in homes and apartments, resulting in increased family tensions (Hacker and Zahler 1952). There was a sharp decline in marriage and birth rates and an upswing in the number of divorces. Schools and colleges were profoundly affected. People tried desperately to maintain school facilities, equipment and salaries. School expenditures declined about 18 percent from 1930 to 1934 (Hacker and Zahler 1952). In many states, the decrease exceeded 30 percent. During the same period, capital for new school buildings declined 84 percent; many rural counties reduced school terms one-fifth to one-half.

All states but Rhode Island decreased the salaries of their teachers, by as much as 43 percent in some states (Hacker and Zahler 1952). One of the most important and lasting effects was the shift of financial responsibility from private to public for the care of the needy. City and state governments formed emergency relief administrations and took the responsibility from the old philanthropic agencies (Link 1955). However, cities and states could not meet the relief emergency. The tremendous financial burden forced them to default on obligations and pay public employees in script.

By the winter of 1932, the nation’s destitute lived in cardboard shacks on the outskirts of cities in so-called “Hoovervilles;” others roamed the country in search of employment, on foot or in boxcars (Link 1955). Hunger was widespread, but there was little outright starvation because of breadlines and soup kitchens provided by the cities. The malnutrition rate among patients admitted to certain community health centers in Philadelphia and New York City increased 60 percent (Link 1955). The federal government finally stepped in, but Hoover’s program for relief and recovery was far from effective.

Farmers, the unemployed and bankrupt businesspeople demanded bolder federal action than Hoover was willing to approve (Nevins and Commager 1956). Talk of social revolution was common in 1931 and 1932. In November 1932, the people switched from Herbert Hoover and the Republican Party to Franklin D. Roosevelt and the Democratic Party (Nevins and Commager 1956). It would require major documentation to detail the programs and measures comprising the “New Deal Era. ” In brief, the New Deal pledged to stimulate economic recovery by promoting cooperation in agriculture and industry (Shannon 1960).

The National Recovery Act (NRA) of June 16, 1933, set up rules and regulations for improved labor conditions. These included codes to set working hours and wages, abolish sweatshops and child labor. It gave labor the right to bargain with employers through their own representatives (Shannon 1960). Government assumed control of some major industries and required businesspeople to open their books to government inspectors (Shannon 1960). The Agricultural Adjustment Act (AAA) passed May 12, 1933. This law raised farm product prices and relieved farmers of mortgage indebtedness (Shannon 1960).