The Great Depression in America was one of the most crippling events in the history of the country. Those who are alive today and who had experienced the Great Depression; their habits and outlook on life has been shaped to a large degree, from this moment in their lives. The Great Depression lasted from 1929 until, some historians believe, did not end until the end of World War II in 1945. That marked sixteen years of a crippled and maimed economy in which the hopes and dreams of a large percentage of the population, was forced to be put on hold.
The Great Depression centered around the inability of the American economy to support itself and those who have never invested a dime in Wall Street and who knew little about the stock market, were still affected by it a great deal. There had been other financial down turns in America before. The 1893-1897 economic depression which ironically was referred to at the time as ‘The Great Depression” now is viewed as merely a down turn in comparison to what the country suffered in 1930’s America.
The economic effects can be divided into three categories: the factors which led to the Great Depression, how the Great Depression affected Americans as it happened and the enduring economic results of the Great Depression. There are many factors which led to the crash of the stock market in the fall of 1929 and no one study could encompass every factor in detail. However, at least in urban areas, the exponential rise in the stock market, a rise which can never sustain itself and often is a precursor for a down turn in the market, was occurring during the 1920’s.
Not until the 1950’s and then later in the “dot com” boom of the late 1990’s, would the same increase be enjoyed by investors would be bested. By 1927 and 1928, America was suffering from over production. Car sales had peaked in 1928 as well as other consumer goods which had saturated the market for the last ten years. (Burns, 1999) Another factor, and one which today would seem very foolish but which speaks to the lust for riches which has always been a part of the American spirit, either as an impediment or as a strength of our capitalist economy; Americans were wanting to, and were being supported by the banks, to buy stocks on credit.
John Jacob Rathskob, the campaign manager of the Al Smith Presidential campaign as well as a famous banker who was instrumental in the construction of the Empire State Building, encouraged such speculation in the October 1928 edition of the Ladies Home Journal. Such speculation, if the stock market took a turn south, would of course ruin the investor. However, this, according to Rathskob and a surprising number of others, believed that this was not a just reality. The private investor was then allowed to borrow as much as 70% and sometimes as much as 90% of the face value of the stock.
A stock market that was based upon such unstable economic principles was doomed to failure. However, with the lust for money in their eyes and hearts, hardly an investor believed that economic doom would follow such practices. The banks would eventually call in their loan and the stock market plummeted. This created such panic on the part of millions of investors, that more continued to take their money out of the stock market. The Bank of Morgan pledged to pump more than $100 million into the stock market in order to stop the negative tide.
This did not have the positive and lasting effect that the country was hoping to receive and the stock market on October 29, 1929, lost more than $16 billion in value and in a single day, more than eight million shares had been traded. (Burns, 1999) The stock ticker did not stop until five hours after the final bell had rung. It would be a dubious record which would not be bested until 1969. There would be very minor and fleeting upturns in the market in 1930 but by 1931, the country was in a full fledged depression.
People who had never heard of the stock market and who certainly would not have thought to invest their own money in an institution in which they did not understand, soon discovered how interdependent the success of the stock market was on the financial success of the country. It was soon learned that there was a number of other institutions that were woven into the success of others. The unemployment rate rose as high as 25%. ? of the work force was not working and since there was no system of welfare in place in America, many were forced to rely upon bread lines and charity from religious organizations in order to simply survive.
Sadly, many did not survive and slowly starved to death. (Bernake, 2000 pg. 82) Also, one of the crippling effects of the Great Depression was the fact that banks did not have in place at that time, any safety nets for the investor. Up to 20% of the available money that was being housed in banks, was destroyed by what was known as bank failures. (Woodard, 2007) Individuals could no longer afford to pay back their loans and foreclosures rose as people lost their homes from the inability to pay off their mortgages.
The lifeblood of the bank, of any bank, is in the loans that they are able to make and when that falls through, as well as the fact that the amount of their deposits continued to fall, the failure of the bank is the next conclusion. The Federal Reserve, which has dominion over the banks of the country, did not ensure the loans that the banks gave, nor in the deposits which were housed at their separate location. If an individual had his life savings in a bank, a life savings which totaled $1000, all or most of that was now lost when the bank that he or she used to house their money, failed.
Another economic effect of the Great Depression was the increase in the trade deficit which began to increase greatly after 1930. The Smooth-Tariff Act of 1930, not only increased the crippling power of the Great Depression upon the United States but also had an adverse effect upon the economy of other European countries who depended heavily upon foreign trade. American exports declined from $5. 2 billion in 1929 to $1. 7 billion in 1933. (Woodard, 2007) The hardest hit were the farms, who unlike the urban areas during the 1920’s had not experienced a period of economic success and had barely survived.
The Great Depression served as the final death blow to thousands of farms across the United States. The Smooth Tariff Act was instrumental in this as exports of cotton, tobacco, lumber and wheat came to a virtual stand still. With the failure of thousands of farms across the country, the individual owners of these farms could no longer feed their families, nor could they turn a profit by selling their crop to the American or European governments. There was no, as their is now, bank insurance in which the government promised the investor that their money is insured if the bank should fail.
From January to October of 1930, 744 banks failed and in the entire decade of the 1930’s more than 9,000 banks failed. (Collins, 2004 pg. 75) More than $140 billion simply disappeared, thus leaving the investor financially ruined and in most cases, unable to simply replace that money with the income from their job. (Burns, 1999) The banks that were able to survive, became very conservative and would not loan out any money unless that individual was able to prove that they possessed a very stable financial life in which to be able to pay back the loan, even in such rough times.
This definition was only applicable to the very rich and those who had steady and well paying jobs in the midst of the Great Depression, which to the dismay of the banks as well as those who are affected by our capitalist economy, constituted only a small portion of the American public. When people are not able to borrow in which to build and to increase, both their financial success and the success of the country, what many believed was a recession, becomes a depression by 1933.
Due to the fact that the Hoover Administration (1929-1933) either did not feel that the economic down turn was as serious as it really was, or from the belief in laissez faire economics, did almost nothing to help stem the tide of the economic downturn that was gripping the country. President Hoover, it was believed by most voters, was simply out of touch with the American people and as a result, lost in a landslide in the presidential election to the former governor of New York, Franklin Roosevelt.
It was Roosevelt, who was elected out of an anger towards big business who raised the taxes of big business in order to pump more money into the economy and help stem the tide of the Great Depression. The crippling effects of the Great Depression, coupled with a new ideology in the White House, created some of the most notable economic effects of the Great Depression. This resulted in an exponential increase in the power and interference that the federal government would have in the lives of its people.
Many who would have previously objected to this unconstitutional increase in the power of the government, seeing their financial situation as hopeless, continued to reelect Roosevelt for a record four successive terms. The economic effects of the Great Depression resulted in a number of very important pieces of legislation to come out of Washington. This was due in part, to the belief that the country needed to get out and stay out in the future, of other similar economic down turns.
There have been other recessions in America since, but none have had the crippling power that the Great Depression had on the country. A variety of financial safety nets were then put in place and continued to be updated in order that such does not happen again. The Securities Act of 1933 is one of the most important of the New Deal legislations. The FDIC, which is still in use today, insures every bank deposit up to $150,000 and in some cases, $200,000 of every individual.
People can then trust the banks with their money and the days of mistrust in the banks which would later provoke Americans to keep their life savings in between the mattresses in their house, are no longer necessary. This piece of legislation has now become sacrosanct and many cannot fathom a time when this was not part of the bank’s promise to each of its customers. Had this not been put in place, mistrust of the bank would have kept customers from placing their money in the bank which in turn, would prevent the bank from making loans to those who want to buy a new house or others who wanted to start a new business.
Both of the aforementioned contribute greatly to the financial health of the American economy. With its absence, what was originally seen as a fleeting economic down turn, was now regarded as a crippling economic crash. In that same spirit, one of the positive economic effects of the Great Depression was the belief that the government had some responsibility to offer a safe haven for those individuals who, despite their best efforts and desire for hard work, could not make ends meet.
Even though many of the pieces of legislation which were to come out of the Great Depression were deemed unconstitutional by the Supreme Court, there were a few which were able to last and had it not been for the Great Depression, the country would not have seen a need to implement such measures for decades, if at all. The most important legislation to come out of the economic ruin brought on by the Great Depression was the Social Securities Act of 1935.
Despite the fact that its future is currently in doubt, for the past seventy years, the American people have agreed that protection of this country’s senior citizens is something that we should be involved in. Before the SSA of 1935, there was no official age of retirement. If people did not have their families to reply upon, that person continued to work until they died. Only prisons and insane asylums and the occasional church relief society, could give relief to those who were past the age of work.
With the two former suggestions not being viewed as a viable option, the responsibility of the care of senior citizens fell upon the families. However, this was not always a suitable result. There might have been a falling out between the families or the offspring did not have the rations to support another person or the offspring had previously died. The Social Securities Act of 1935 stated that senior citizens will be given a monthly stipend from the government in which to independently continue life on their own.
The funding of the program would come from the taxes of the working men and women of this country. Even today, those who are employed by somebody else, have on their pay stub, money which is taken out and is used to fund the Social Security Program. Suggestions to change Social Security; a recent and necessary development, however are greeted with much suspicion and disdain as Social Security has become so highly regarded in the American society and culture, that the necessity for its future existence is not in question, only how it will be funded for future generations.
The Great Depression would not end until the end of the second World War. People who had previously been out of work, were anxiously put to work in order to make the supplies and weapons in order to win the war against Hitler. Millions of people were put to work and the country would go on to enjoy one of the greatest periods of economic prosperity in the years following the end of the WWII. The effects of the Great Depression would not end with the upturn in the market.
Millions of people who were forced to endure the Great Depression, even decades after it had ended, were still affected by it. Kathy McGaghie, still residing in the Chicago suburbs at the age of 88, still remembers the Great Depression. “The only job that I could get was picking weeds for 5 cents an hour. We lived on nothing. That is why I am so thrifty to this day. You cannot experience such poverty for an entire decade and not be forever affected. ” (Page 2005 pg. A16) This was the experience for millions of people who were forced to suffer through the Great Depression.