US.45 Analyze the causes of the Great Depression, including the following: (E, H) the economic cycle driven by overextension of credit, overproduction in agriculture and manufacturing, laissez faire politics, buying on margin, excess consumerism, rising unemployment, the crash of the stock market, high tariffs
US.46 Describe the steps taken by President Hoover to combat the economic depression, including his philosophy of “rugged individualism,” the Reconstruction Finance Corporation, and the response to the “Bonus Army.” (E, P)
US.48 Analyze the causes and consequences of the Dust Bowl of the 1930’s. (C, E, H, G)
Lesson 28. (US.45,46) The Great Depression Begins
a. The Economic Cycle
b. The Stock Market Crash & Over Extension of Credit
c. Overproduction During the Depression
d. Effects of the Depression
e. Rugged Individualism
f. Reconstruction Finance Corporation
g. Bonus Army
h. Dust Bowl
Economic downturns occur when there is a shock to the economic system, such as a natural disaster, a war, or a sudden rise in taxes or interest rates. In these situations, the aggregate demand curve shifts left. In other words, consumers are not willing to buy as much, at any given price, as they were before.
If this happened in an individual market, a producer would simply lower prices to increase demand. However, when demand falls for all goods and services, it is not so easy for all producers to lower their prices.
In the short run, producers can lower supply by cutting their production. Because they are producing less, they don't need as many workers. When many firms begin cutting production, unemployment increases, and the Gross Domestic Product (GDP) declines.
When the GDP declines for six months or more, an economy is in a recession. The recession continues until prices across the economy start to fall, so that demand and then production increases again. This is called an upturn, or recovery, in the economy.
If a recession lasts a long time and the decrease in GDP is severe, the downturn is called a depression.
The booming economy of the 1920's was especially evident in the stock market. As thousands of new individuals invested, most of these new investors were buying their stocks on margin. When a person buys stock on margin, they are only paying for a fraction of the stock's worth with a promise to pay the rest once the stock is sold. Eventually, this practice caused the market values of all stocks to drop at the same time.
The stock market had begun to slide. The stock market lost much of its value, beginning on October 24, 1929 (known as Black Thursday) and, even more, on October 29 (Black Tuesday). Investors panicked. The stock market crash of 1929 signaled a decade of economic recession, or downturn, in the U.S. economy.
By 1932, the Great Depression, a ten-year recession, was in full swing. The stock market had crashed because people had bought stocks on credit. Those people had borrowed money from banks, but could not repay the loans. The banks had also invested in the stock market and had lost money in the crash.
When people with money in banks realized that banks were in a crisis they rushed to withdraw their funds. These "runs" on the banks almost completely destroyed the U.S. banking system. Two-fifths of the nation's banks failed between 1929 and 1933.
The crash revealed a great disparity of wealth fueled by the cheap credit available during the 1920s. Distrust in the economy spread. Textile, railroad, lumber, and mining industries experienced difficulties and unemployment.
Farmers and homeowners who had bought property on credit faced eviction. Though prices and income fell by as much as 50%, debts remained at the same dollar amount.
After the stock market crash of 1929, President Herbert Hoover's policies were not successful in renewing faith in the US economy or in providing jobs for millions of unemployed Americans. He was criticized for believing that the problem was temporary, and for leaving too much of the responsibility for fixing the problems in the hands of the states. States lacked Herbert Hoover was president from the funds to make much difference in the economy.
By 1932, 24% of all American workers, some 12 million people, were unemployed. In some parts of the country, such as the Harlem neighborhood in New York City, the unemployment rate was as high as 50%. Of those who remained employed, many worked reduced hours for a reduced wage. The unemployment rate averaged 18% throughout the decade. Overall, more than half of all Americans felt the effects of the Great Depression. Many were without work for several years.
In an effort to save every penny, people turned off their electricity, lived on eggs, sold apples for 5 cents on New York streets, and left their homes to live with relatives or sought shelter in abandoned cars and cardboard boxes.
With no money, people could not afford housing, and shantytowns were common. These were places where thousands of people lived in tents and shacks. Because many Americans blamed President Hoover for these conditions, they called the shantytowns “Hoovervilles." Children quit school for lack of clothes and supplies. Many children suffered from malnutrition and such diseases as typhoid and diphtheria, illnesses associated with poverty.
When people realized that banks were in a crisis, they rushed to withdraw their funds. These "runs" on the banks almost completely destroyed the U.S. banking system. Two-fifths of the nation's banks failed between 1929 and 1933. Farmers had little advantage over city dwellers. Many farmers were unable to make payments due on their buildings and equipment. They defaulted on their loans, losing their land and becoming homeless. Between 1929 and 1932, three-fourths of all rural banks closed, compounding farmers' problems.
The Dust Bowl is a term for the farmlands of the prairie states that were damaged or destroyed in the 1930s. When crop prices dropped, farmers over-planted their fields to make more money. This caused the soil to erode and blow away. At the same time, a drought caused huge dust storms to blow over the prairies. Hundreds of thousands of people began moving to California. However, when they got to California, little economic opportunity awaited them. In addition, many unemployed people in the South took trains north to look for factory jobs. Many moved to Detroit to work in car factories. Because of this migration, or movement of people from one area to another, American society changed. Before the migration, America was still largely a country of farmers and people living in small towns. Today, that figure is about 21%. Almost 80% of people now live in or near cities.
In 1932, thousands of unemployed World War I veterans known as the Bonus Army occupied empty buildings in Washington, D.C., and built a shantytown in nearby Maryland to protest the government's failure to pay them "bonus" money immediately. Since this was during the Depression, the veterans were suffering economic hardship and needed their money sooner than the government's pay date of 1945. The Bonus Army's temporary homes were eventually stormed by federal troops, causing casualties and the dispersal of the Bonus Army veterans.
Rugged individualism, derived from "individualism", is a term that indicates the virtuous ideal where an individual is totally self-reliant and independent from outside assistance. Often associated with the notion of laissez-faire and its supporters, the term was actually coined by the interventionist American President Herbert Hoover, a Progressive Republican who presided over the beginning of the Great Depression.
A main cause of the Great Depression was overproduction. Factories and farms were producing more goods than the people could afford to buy. As a result, prices fell, factories closed and workers were laid off.