Saylor.org HIST212: "Origins of the Great Depression"

Today we're going to be focusing on the origins of the Great Depression of the 1930s. In the last lecture we looked at America's consumer society and some of the other trends of the 1920s, and in a way the consumer society of the 20s certainly played a role in contributing to the origins of the Great Depression in the 1930s. Today we're going to be focusing on some of the long-term factors that led to the Depression. We're also going to discuss some of the short-term causes of the Depression, and we're going to look at the long-term consequences of the Depression and what happened as a result of this economic collapse that begins in the year 1929 and continues really through the end of the 1930s. So before we get too much further into this, we need to take a step back and discuss some of the long-term factors that led the United States economy, which was a pretty strong and stable economy during much of the 1920s, to suddenly collapse, to almost in a sense fall off a cliff and go into freefall for a period of really almost three years, and an economic collapse that really is only rivaled by the economic collapse that took place in 2008 through 2010 in the American economy. And so this is a very dramatic, dramatic economic collapse that affects every American, Americans of all walks of life. To focus on it, we have to speak about, of course, the long-term causes of the Depression. The Depression begins in 1929, but you can certainly see the causes going back well into the 1920s. Partly they were a response to how Republicans who were running the nation during the 1920s, in the presidency and in Congress, were running and regulating the economy in the sense that they were really hands-off. They were approaching the economy from a very hands-off perspective, which of course allowed corporations and corporate leaders to pretty much do whatever they wanted to. And one of the – certainly the factors was a lot of corporate fraud in the 1920s, corporations cooking the books, saying that they were making money when they weren't or using money inappropriately or irresponsibly, mismanaging money in many different ways. Another of these long-term causes had to do with banking and that many banks during the 20s were playing fast and loose with the money that was being deposited in them by hardworking Americans. They were issuing too many loans. They weren't keeping enough money back in reserves in order to give people their money back. If people went into the bank in large numbers and wanted their cash, banks should always be able to give back the money that people have invested. But banks were playing with the money. They were making questionable loans or they were taking the money and playing with it in the stock market and doing all sorts of irresponsible practices. That meant that they were becoming overextended, and in any case where a bank is overextended, the least little bit of economic trouble can lead that bank to collapse. And that's exactly what happened in many banks after the beginning of the Great Depression. Finally, certainly there were international factors, international long-term factors that played a big role in the Great Depression as well. And certainly some of these had to do with – in Europe, there was a collapse by the end of the 1920s in demand for American products. And so Europeans just weren't spending money on American products anymore, which meant that American corporations weren't making as much money and were having to sort of cut back production. There was a growing sense in Europe of protectionism, which meant that European nations were passing laws that made it more expensive to buy American goods. And Americans, in response, were passing laws to make it more expensive to buy European goods, which of course meant that for everybody, it was making it expensive to buy internationally. So people were buying less, or they were simply buying domestic, which had an impact on the world economy. And then finally this issue of war reparations, that Germany at the end of the war was tasked with paying back a huge amount of money to England and France for its responsibility in the war. And Germany, in order to do so, was borrowing huge amounts of money from American banks. And so the US banks were giving money to Germany, who in turn was giving money to the United Kingdom, in other words England and France, who were then paying back loans to the United States. So it was just creating one big money circle. That, the reality was, was not necessarily helpful for the overall economy. And so American banks were getting hurt in this kind of international money circle that had developed. Well, these are some, like I said, some of the long-term consequences that made both the United States economy and also the world economy far less stable by the end of the 1920s than it had been at the very beginning of the 1920s. But the crisis itself, the crisis that brings about the Great Depression, really took place in 1929. And what happens in 1929 is that on October 24th, the United States, the New York Stock Exchange, the New York stock market just collapses. Here we have a graph that shows it going up and up and up and up, and then suddenly here in 1929, it just collapses. Black Thursday is the 24th of October. Black Tuesday is the following Tuesday when there's a second huge market drop. And then as you can see in the long term here, the market just drops and drops and drops and drops until it hits basically 1933 at the bottom. The only way to describe this is the sense that people who began the day as millionaires, at least on paper, ended the day bankrupt. The value of stocks just collapsed. Stock values are based on how many people want to purchase that stock. So stocks that were worth $100 a share because people were willing to pay that to gain a share of the corporation end the day at $0.10 a share. And so if you bought lots of stock at $100 a share and then the price just falls because nobody is willing to buy that stock, you end the day with nothing. And you can't do anything with that stock because nobody is willing to buy it. So you've just lost all the money you spent. Money just evaporates. People panic. They freak out. In some cases, people even commit suicide, jump off the windows of the buildings because they've lost everything in this market crash. Billions and billions of dollars, probably close to $10 billion in value, a billion with a B, disappear between Black Thursday and Black Tuesday. And ultimately what happens is panic sets in. People just panic because many people have invested their life savings in the stock market and they're now bankrupt. Many corporations had put a lot of money in the stock market and banks in particular had put a huge amount of money into the stock market. And they had nothing and they had nothing to show for it. And there were lots of people who were investors who wanted their money back from these banks and they couldn't get it because the banks are out of business. People panic as we're here. Somebody's being willing to sell this very fancy car for $100 because he had loans to pay off because he borrowed all this money to invest in the stock market. And this was the story for a lot of people is that they had spent money they shouldn't have spent. They had made risks and gambled. They had gambled money away that they shouldn't have gambled. And when the market crashed in 1929, they were absolutely out of luck. The broader impact of course of this market crash is more than just the people who were investing money in the New York Stock Exchange because it led to a decline in consumer confidence. People began to start worrying about the economy. They start worrying about their jobs. And because they start worrying about their jobs, they don't spend as much money. They stop buying things that they don't absolutely need. But once they stop spending money, many businesses have to cut back because they're not selling as much. And industry has to cut back because industry is not selling as much and so they don't want to make as much. And when they cut back, of course, people lose their jobs or their wages are cut or their hours are cut. And it's a vicious cycle because once again, as jobs are cut and they decrease, it has an impact on consumer confidence. And so consumer confidence just drops. It plummets beginning in 1929 and through the early 1930s. But more than that, of course, there are real impacts because not only are people not willing to spend money, but in many cases they lose their jobs and they're unable to spend money. They can't pay their loans back for the cars they purchased or the homes they purchased or the consumer goods that they purchased. The banks simply say, we can't pay because we don't actually have any money to pay. And so as a result, the banks begin to fail. And it's sort of like a giant domino effect. One domino tips over the next domino and pretty soon the entire American economy is on the verge of collapse. Certainly by the early 1930s, by 1931 and 1932, the American economy is just in horrible, horrible shape. And as a result, the depression deepens and deepens and gets worse and gets worse until by about 1932, America really hits rock bottom. To give you a sense of the numbers, 11 million unemployed, 11 million people without work, and that equates to about a 25% unemployment rate, huge unemployment rate. Of course, because people had no money to spend, prices collapsed. People couldn't – companies couldn't sell stuff because nobody wanted to buy it. Prices dropped by over 40%. But again, people don't have any money, so they can't buy anything. America's GNP, our gross national product, that's the value of all the stuff sold in the United States, falls by nearly a third, just a dramatic collapse in the amount of money that was being made by the American economy. And of course, while millions of people are out of work, millions and millions more are underemployed or basically are scraping by, can't afford their mortgage, can't afford their rent, can't afford to buy food. And as a result of this, people lose their homes. They lose their businesses. They lose their farms. They're forced to sell out and move on. And the number of unemployed and homeless or kind of barely employed and almost homeless climbs. We have examples of people at coffee and donut kitchens or selling apples on the street for a nickel to try to at least make some money so they could help with their kids. And this joke here, we have, excuse me, buddy, is this a bread line? In other words, is this a place to get food or is it a run on the bank? Is it people panicking because they heard a bank is going to go out of business and they're trying to get all their money out before the bank collapses? And so as a result, the American population is just in horrible, horrible shape by the early 1930s. Unemployment rate here, we have 29, August 29, just before the stock market crash, and it peaks in August of 1932. And this is where you have this 11 million people are employed, and it only gradually declines until World War II begins. Actually, this is shortly after World War II begins. Well, one of the consequences of this is that in a sense, the American way of life is sort of this notion that Americans have developed in 1920s about how people should live. Everyone should have two cars in their garage, should have three full meals a day. The mothers should stay at home and take care of the kids. The kids go to school. Parent, father should work. That entire notion of what the American dream was just collapses. And as a result, unemployment becomes the norm. Soup kitchens. People depend on soup kitchens and depend on selling apples on the street. And all these other kind of things to make do. This population of homeless, they have to go somewhere, and people start setting up shantytowns around major American cities. The fancy name they call them are Hoovervilles. After Herbert Hoover, who we'll talk about in just a minute, who was the U.S. president at the beginning of the present. Here we have the Hooverville in New York City. This is in Central Park. This is outside Seattle. Here's the one in Washington, D.C. You can see the Capitol in the background. In fact, they were constantly catching on fire. And so this was an embarrassment for many city officials. City officials, of course, were extremely frustrated, too, because they just couldn't care for and deal with this mass of population of underemployed and unemployed. Well, as I said, the initial response to the Great Depression beginning in 1929 is pretty lackluster. It's pretty, pretty unimpressive, partly because of the American president at the time, Herbert Hoover. And Hoover was a Republican. Certainly, he was a very smart man. He was very well-educated. Had extremely – extreme experience in government. Had been in government for years. Had a lot of experience in private industry. Had been a very successful engineer working for mining interests around the world. And he firmly believed that the economy would recover. He was strongly of the opinion that if you gave the United States enough time, the economy would turn around. People would go back to work. Businesses would start rehiring. And the economy – and essentially the Depression would solve itself. The ship that was on the verge of sinking would eventually bail itself out and things would go along just fine. But the reality was is that while the United States did have this boom and bust economic cycle, and certainly in the 19th century there were boom and bust periods, the Great Depression was far worse than anyone had ever experienced. And the economy was sort of in a permanent state of being broken. It wasn't just something that could turn around and fix itself. And especially as the number of Americans who were unemployed grows, who are homeless, jobless, basically giving up hope and becoming a burden on many cities and many communities starts growing, the situation gets worse. Hoover continues to be an advocate of letting the free market just fix itself, not wanting to get the government involved. He doesn't think the government should try to solve this problem. We have kind of a joking cartoon of Hoover prosperity here, which is, of course, in other words, to say no prosperity. People begin complaining about his attitudes. Why can't you give my dad a job? Why can't somebody go back to work? Here we have this very ironic kind of image here taken. The world's highest standard of living and yet you have people standing in a soup line, an employment line, trying to get food for themselves or for their family. And so in a sense, as by 1932, when the economy does hit rock bottom, Herbert Hoover does realize that things are in bad shape and that he has to do something. He has to get Congress to do something, trying to fix the economy. And he finally admits to himself and admits to the general public that he needs to do something. Unfortunately, what he does try to do to fix the economy is kind of too little, too late. In mid-1932, he creates a number of organizations. He and Congress create a number of organizations to try to help deal with the Depression. The first of these is called the RFC, the Reconstruction Finance Corporation, to help bail out failing banks and to help large corporations who are struggling to stay in business. He also goes after people who couldn't pay their mortgage, creates a federal home loan bank to help Americans who are behind on their mortgages be able to cover their mortgages so they wouldn't lose their homes. They wouldn't contribute to the growing rank of the unemployed and the homeless. He also begins to spend federal money on public works projects, putting people to work on things like highway building and bridge construction. But again, it's too little, too late. Americans have just completely lost confidence in Hoover. When the fall of 1932 rolls around and there's a presidential election, people aren't so much voting for Hoover's opponent in the election as they are voting against Herbert Hoover because of his poor handling of the economy. And so ironically, Hoover goes down in history as being a horrible president. In some ways, he was simply a president who was over his head, who simply didn't understand the gravity of the situation and just didn't understand how to respond to it. But certainly this Great Depression that begins in 29 and continues through the 1930s destroys his presidency and sort of destroys his reputation as a smart, intelligent leader of the American people. Well, the Depression certainly continues beyond 1932, but as we'll discuss in the next lecture, in the fall of 1932, the presidential election takes place. The American people reject Herbert Hoover and they turn to his opponent, Franklin D. Roosevelt, who begins a series of projects to try to help the United States recover from the worst experiences and the worst aspects of the Depression. So next lecture, we'll discuss how the United States begins to turn around and recover from this horrible, horrible condition of the Great Depression.