7.9 The Great Depression

The Great Depression was the most severe economic crisis in American history, lasting roughly from 1929 to 1941. During this period, the United States experienced high unemployment, poverty, and social upheaval that transformed American society and government.

Depiction of the Great Depression, courtesy of Britanica

What to Know About the Great Depression

• Prosperity in the 1920s was uneven: cities and some industries boomed while rural areas struggled, and consumers could not afford everything farms and factories produced.
• Stock purchases made with borrowed money helped fuel a speculative bubble that crashed in 1929; bank failures and falling consumer spending then deepened the Depression.
• Unemployment reached approximately 25% by 1933, while drought and poor farming practices caused Dust Bowl storms that drove thousands of families from their farms.
• Hoover resisted direct federal relief but created the Reconstruction Finance Corporation to lend to banks and businesses; his limited response drew anger, including the Bonus Army protest.
• Roosevelt won the 1932 election promising a New Deal, marking a shift toward a more active federal government and greater public support for a safety net and economic regulation.

Economic Background

America was changing from a farming economy to an industrial one dominated by big businesses. This shift created new problems that would contribute to the Depression. While cities and some industries boomed during the 1920s, farmers and rural areas were already struggling long before the stock market crash.

The economic conditions before the Depression included:

• The "Roaring Twenties" featured uneven prosperity, with some industries and urban areas booming while agriculture and rural areas struggled
• Wealth inequality increased dramatically, with the richest 1% of Americans controlling approximately 40% of the nation's wealth
• Consumer purchasing power couldn't keep pace with productive capacity, creating economic imbalances
• The financial system lacked adequate regulation and stability mechanisms. Recurring bouts of unstable credit and unstable markets in the early 20th century, above all the Great Depression, led many Americans to demand stronger financial regulation.

Causes of the Great Depression

The Depression wasn't caused by just one thing, but by several problems happening at the same time. These issues fed into each other, making the economic collapse much worse than any previous downturn in American history. The problems ranged from too many goods being produced to risky stock market gambling to banks making bad loans.

Overproduction

• Industries and farms produced more goods than consumers could afford to purchase
• Agricultural sector had been overproducing since the end of World War I when European farms resumed production
• Manufacturing capacity expanded beyond sustainable market demand

Stock Market Speculation

• Stock prices rose dramatically throughout the 1920s, creating a speculative bubble
• Many investors bought stocks "on margin," paying as little as 10% down and borrowing the rest
• When the market began to fall, investors received "margin calls" forcing them to sell stocks, driving prices down further
• The stock market crashed on "Black Tuesday," October 29, 1929, with the Dow Jones losing nearly 25% of its value in two days

Banking System Failures

• Banks made risky loans during the 1920s with little oversight
• When economic conditions deteriorated, many loans defaulted
• "Bank runs" occurred as depositors rushed to withdraw their savings
• By 1933, thousands of banks had failed, wiping out the savings of millions of Americans
• The Federal Reserve failed to act as a "lender of last resort," tightening money supply instead of expanding it

Reduction in Consumer Spending

• As unemployment rose, consumers had less money to spend
• Businesses cut production and laid off more workers in response
• This created a devastating economic cycle that drove the economy deeper into depression

Depth and Impact of the Depression

The Depression affected nearly every part of American life and was far worse than any economic downturn before or since. Millions lost their jobs, homes, and savings. Many Americans went hungry, and some became homeless, living in shantytowns nicknamed "Hoovervilles" after President Herbert Hoover.

The economic collapse affected virtually every aspect of American life:

• Unemployment reached approximately 25% by 1933 (compared to 3-4% before the crash)
• Industrial production fell by nearly 45% between 1929 and 1932
• The national income dropped by more than 50%
• Homelessness increased dramatically, with makeshift settlements called "Hoovervilles" appearing across the country
• Farmers were hit by both the economic crisis and environmental disaster when the Dust Bowl devastated the Great Plains

The Dust Bowl

On top of the economic crisis, a terrible environmental disaster struck America's farmland. Years of poor farming practices combined with severe drought turned the Great Plains into a "Dust Bowl." Massive dust storms destroyed farms and forced thousands of families to abandon their homes and seek work elsewhere.

Environmental catastrophe compounded economic hardship:

• Severe drought combined with decades of inappropriate farming techniques
• Massive dust storms swept across the Great Plains throughout the 1930s
• Thousands of families, especially in Oklahoma, Texas, and Kansas, lost their farms
• Many migrated to California and other western states, becoming known as "Okies"
• The environmental disaster highlighted the need for sustainable agricultural practices

Hoover's Response

President Herbert Hoover tried to address the Depression but his efforts were too limited. He believed in self-help and worried that too much government assistance would make people dependent. As conditions worsened, Americans grew increasingly frustrated with what they saw as Hoover's lack of action.

President Herbert Hoover's approach to the crisis reflected traditional Republican values but proved inadequate:

• Initially believed the Depression would be short-lived and self-correcting
• Resisted direct federal relief to individuals, believing it would weaken American self-reliance
• Created the Reconstruction Finance Corporation (RFC) to provide loans to banks and businesses
• Supported the Federal Home Loan Bank Act to help prevent home foreclosures
• Signed the Hawley-Smoot Tariff, which raised import duties to protect American industries but triggered retaliatory tariffs from other nations, further reducing international trade
• Encouraged voluntary cooperation among businesses to maintain wages and employment

Public Reaction to Hoover

As the Depression worsened, people became angry with President Hoover. Many Americans felt he wasn't doing enough to help ordinary people who were suffering. This anger showed in the nickname "Hoovervilles" for homeless camps and in protests like the Bonus Army march on Washington.

As conditions worsened, Americans grew increasingly frustrated with Hoover's limited response:

• Homeless encampments mockingly named "Hoovervilles" appeared in cities nationwide
• The "Bonus Army" of World War I veterans marched on Washington in 1932, demanding early payment of service bonuses
• When some veterans refused to leave, Hoover ordered the army to clear their encampment, creating a public relations disaster
• Hoover became a symbol of government indifference, though historians now recognize he did more than his predecessors would have done

Election of 1932

The 1932 election represented a turning point in American politics. Franklin D. Roosevelt won by promising a "New Deal" to help Americans suffering from the Depression. His victory signaled that voters wanted the government to take a more active role in addressing economic problems.

The economic crisis transformed American politics:

• Democrat Franklin D. Roosevelt won the presidency in a landslide, promising a "New Deal" for the American people
• During his inaugural address in March 1933, FDR famously declared that "the only thing we have to fear is fear itself"
• Roosevelt's election marked the beginning of a significant shift in the role of the federal government in American society
• His First Hundred Days featured unprecedented legislative action to address the crisis

Lasting Impact

The Great Depression completely changed how Americans viewed the government's role in the economy. Before the crisis, many people thought the federal government should play a limited role in economic matters. After experiencing the Depression, many Americans supported a more active government that would provide a safety net during hard times and regulate the economy to prevent future crises. During the 1930s, policymakers answered mass unemployment and social turmoil with programs that made the United States a limited welfare state, offering some protection from hardship without guaranteeing everyone's well-being.

The Great Depression fundamentally altered Americans' expectations of government. Before the crisis, most Americans believed economic problems should be addressed by individuals, private charity, or local government. By 1932, with traditional approaches failing, voters were ready to accept a more active federal government. This shift would profoundly influence American politics and society throughout the remainder of the 20th century. It also reshaped modern American liberalism, whose aims came to center on federal responsibility for economic security and on regulation of the economy.