1. Causes of the Great Depression in US

The economic depression, which first affected the United States and then the whole world, started with the collapse of share prices on the Wall Street Stock Exchange in New York, October 1929. However, in order to understand why this event led to such a severe depression, it is necessary to look at the weaknesses in the US economy in the 1920s and the political failures that allowed these weaknesses to exist.

Guiding questions:

What were the reasons for the economic boom of the 1920s?

How genuine was the prosperity of the 1920s?

Why did Wall Street crash?

Why did the Crash cause a depression?

1. What were the reasons for the economic boom of the 1920s?

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A 1910 Model T Ford car

We have more cars, more bathtubs, oil furnaces, silk stockings, bank accounts than any other people on Earth... I have no fears for the future of our country. It is bright with hope. (Hoover's Inaugural Address in March 1929)

Starter

Discuss in pairs the meaning of these economic terms. Look up any terms that you are unsure of.

  • Supply and demand
  • Overproduction
  • Speculation
  • Protectionism
  • Mixed economy
  • Tariffs
  • Market economy
  • Capitalism
  • Economic depression
  • Credit
  • Economic recession

In the 1920s, and up until the Wall Street Crash of 1929, the USA experienced a period of unparalleled economic prosperity. There were several reasons for this.

Technical advances in industrial production; the innovation of the assembly line and the adoption of effective management techniques led to dramatic increases in productivity. Rising wages, low taxation and widespread consumer credit allowed ordinary people to benefit from the wide range of manufactured consumer goods now available. These goods included the motor car and a wide range of electrical goods. Henry Ford led the way in production techniques.  By 1925, the price of a Ford car was only $290 and Henry Ford's factory could produce one car every 10 seconds. Connected industries such as oil, rubber and glass, along with road building, developed rapidly.

Task One

ATL: Thinking skills

Watch the following video from 15 minutes until 30 minutes and answer these questions:

  1. What was the impact of electricity?
  2. What was the impact of the invention of the car?
  3. What was the impact of easy credit?
  4. Why was the radio the most desired object?

Task Two

ATL: Research and communication skills

Get into pairs and small groups. Each pair should research further one of the following topics and prepare a brief presentation to the rest of the class focusing on the impact that it had on the lives of Americans.

Make sure that you include images and statistics in your presentation.

  • The car industry
  • The growth of electricity
  • The cinema and radio
  • New business and manufacturing methods
  • Advertising

Government policies helped fuel this boom. In the 1920s, Calvin Coolidge, following his belief that 'The chief business of the American people is business', and believing in the free market kept regulations to the minimum. This was known as 'laissez-faire'. However the government did in fact intervene but it was to support business with benevolent policies.

Task Three

ATL: Thinking skills

Consider the following actions of the government.

1. Explain how each one would have helped the growth of industry in the US. (click on the eye for hints)

2. What do you think could be the disadvantages of each of these actions?

  • High tariffs on goods coming in from other countries e.g. the Fordney-McCumber Act of 1922
  • Tax reductions - especially for the wealthy
  • Few regulations on how businesses carried out their affairs
  • Limited intervention in foreign affairs
  • Making it easy to obtain credit
  • Anti trade union actions; 'no-strike' agreements  or 'yellow-dog' contracts were supported by the courts

High tariffs protected American manufacturers against foreign competition - Americans bought only US made goods which stimulated the economy.

Tax reductions favoured the rich and large corporations who saw a drop in tax from 50% to 20% - this encouraged development of business.

Fewer regulations meant businesses were left to carry on their affairs as they saw fit.

The US reluctance to engage in foreign affairs meant that investors could easily invest in countries without any ill-feeling towards their companies.

Consumers could buy goods that they would not otherwise have been able to afford.

Management could have greater control over their workforces.

High tariffs meant that other countries imposed tariffs on US goods; this made it hard for companies to see surplus goods to other countries; they were dependent on the domestic market and continuing domestic demand. Markets were also closed for US farm produce.

The growth of large corporations with huge marketing power meant that smaller businesses suffered; the government was also not prepared to help out failing industrial concerns.

Failure to regulate the economy meant that excessive consumer borrowing and overspeculation were not controlled. It also meant less protection for workers. Trade Unionism declined in this period.

The US was investing in countries that were carrying out controversial/aggressive policies e.g. Japan.

Easy credit meant that many people and companies got into debt; this would be a problem if they could not repay.

Task Four

Thinking and self-management skills

1. Using the information above and what you have learned from your class presentations, create a flow diagram to show the causes of prosperity in America and the impact of this prosperity on many Americans by the mid-1920s.

2. What do you regard as the most important reason for the economic boom of the 1920s?

2. How genuine was the prosperity of the 1920s?

A Republican leaflet from the 1928 election

Task One

ATL: Thinking skills

With reference to origin, purpose and content, what are the value and limitations of this source for a historian studying the US in the 1920s?

From A Republican Party election leaflet, 1928

During eight years of rule we have built more homes, erected more skyscrapers, passed more laws to regulate and purify immigration, done more to increase production, expand export markets, and reduce industrial and human junk piles, than in any previous quarter century. prosperity is written on fuller wage packets, written in factory chimney smoke, written on walls of new constructions, written in bank books, written in business profit sheets, and written in the record value of shares.

Wages, dividends progress and prosperity say, 'Vote for Hoover'

(Go to this website for the full leaflet)

Although the economy seemed to be booming, there were many warning signs that the prosperity was in fact quite fragile. During the 1920s industrial capacity in many areas of the economy steadily increased; however, due to inequalities in the distribution of income, the purchasing power of many Americans was unable to keep up - and this meant there was a problem of overproduction. Indeed, there were several groups that had missed out on the economic prosperity entirely. Very real poverty continued to exist in the large cities among the unskilled immigrants; it also existed among farmers and among the African Americans - both in the North and the South. In fact, it has been estimated that about 70 million out of 110 million Americans were living below the poverty line in the 1920s.

In addition to the problem of overproduction and inequality of wealth, the banking system was fragile. In the early 1920s, there were over 30 000 banks in existence and many of these were small with limited capital - unable to withstand poor economic conditions or mass withdrawals of money such as that which happened in 1929. almost 5000 of them collapsed between 1923 and 1930; after this time with the impact of the Wall Street crash, the banking crisis would spread rapidly from rural to urban areas.

A further issue regarding the economic well-being of America lay in the state of the international economy. During the First World War, America had made huge loans to European powers; however following the war, these countries struggled to repay these loans. The high tariffs imposed by the US, such as in the Smoot-Hawley tariff, meant that they could not sell their goods in America - which would have helped them to pay back their debts.

Task One

ATL: Research and communication skills

Consider the following facts regarding farmers in the US in the 1920s. You may also want to do further research.

Write a response by a farmer to the Republican Party leaflet above explaining the situation faced by farmers and why they are not sharing in the 'progress and prosperity' highlighted in the leaflet.

  • The boom experienced by farmers during the First World War when demand and prices had risen had ended by 1920; the fall in demand, as countries such as Britain which had imported large amounts of US farm produce during the war recovered, led to falling prices
  • There was increasing competition in world markets from Argentina and Canada
  • The Fordney-McCumber Act of 1922 led other countries to raise tariffs which made it difficult to export surplus farm produce
  • Prohibition in the 1920s meant that there was no demand for grain from distillers and brewers
  • Growth of mechanisation greatly increased production which drove prices further down
  • Greater use of tractors meant that fewer horses were necessary and this led to a decrease in demand for animal food
  • American farmers borrowed $2,000 million in mortgages
  • Between 1919 - 1921, farm income fell from $10 billion to $4 billion; as prices fell farmers were unable to pay off their loans
  • Possibly as many as 66% of farms operated at a loss in the 1920s
  • Around 6 million Americans left the countryside for the cities in the 1920s. 13 million acres were taken out of production in the 1920s. Farm population fell by 5% yet production increased by 9% - but overproduction meant that prices remained low.

The situation in farming meant that African Americans, many of whom worked as sharecroppers in the South, suffered particularly badly and many migrated north to look for work in the cities. However, here they faced discrimination in housing and employment. Often they were concentrated in 'ghetto' areas such as Harlem in New York where they experienced overcrowding and poor living conditions; the African American population here grew from 50,000 in 1914 to 165 000 in 1930.

3. Why did Wall Street crash?

Note that 'Dow, is a stock market index that shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market' (Wikipedia)

Starter:

1. In pairs, or small groups brainstorm the problems of the US economy that you have found out about so far.

2. What can you lean from the graph above about the state of the US stock market 1928 - 1929?

A further problem that existed in the late 1920s was the instability created by speculation in the stock markets and the aim of many Americans to 'get-rich-quick', even if it meant borrowing money to do so.

Task One

ATL: Thinking skills

Watch the following video from 4 minutes until 27 minutes. Click on the eye below to see the questions to answer or download the PDF.

  1. What impact did Liberty Bonds from the war have on people's attitudes towards investing in securities?
  2. How did bankers take advantage of this situation?
  3. How did technology make the purchase of shares easier/more attractive?
  4. What were some of the 'hot' stocks to buy?
  5. Why and how did buying stocks and shares 'grip the public's imagination'?
  6. Who were the new superstars?
  7. What did 'buying on the margin' mean?
  8. Why did women get involved in buying stocks and shares?
  9. What was the attitude of the government to this speculation and the power of the bankers?
  10. Why did the government not regulate the banks?
  11. What was the lack of government regulation to lead to?
  12. Why were the ordinary public (average investors) at risk from this unregulated situation?
  13. What was Paul Warburg's prediction?
  14. Once the crash in shares starts, how do bankers try to restore confidence?

Note that there is another very good analysis of the impact of speculation and the reasons for the stock market crash in the documentary by Roche Productions which can be found on the video page for this topic: 4. The Great Depression and the Americas: videos 

Task Two

ATL: Thinking and communication skills

Having seen the video(s), in pairs discuss the following questions:

  • What factors made buying shares so attractive to Americans in the late 1920s?
  • Why was this speculation more of a risk than was thought at the time?
  • What factors were to blame for the crash?
  • Which groups were in a more advantageous position to survive the crash?

By the late 1920s, some of the problems that you have already identified were becoming worse: there were other factors affecting the economy as well:

  • the demand for new houses had slowed down meaning less need for building materials and construction working
  • consumers were buying fewer consumer goods such as cars; however companies still had many goods to sell. Workers had to be laid off
  • farm incomes had fallen to $8 billion by 1928 (from $22 billion in 1919)
  • The wealthy were spending huge amounts on the stock market rather than manufactured goods
  • Despite the profits of businesses, wages of workers had not not been raised
  • high tariffs had meant other countries also putting up tariffs; they were thus buying fewer US goods
  • the USA was giving loans to Germany to help it repay reparations to Britain and France after the Treaty of Versailles; Britain needed the money from Germany to pay back the US their war debts to the US banks!

Task Three

ATL: Thinking skills

In pairs discuss how the factors above would impact on:

a. the situation of workers

b. the ability of businesses to sell their goods

c. the stability of the US banks

4. Why did the Crash cause a depression?


 

Crowds outside the New York stock exchange after the 1929 crash

'The stock market debacle dealt Americans both a financial and an emotional body blow...Within one year, GNP declined from $87.8 billion to $75.7 billion. The slide into economic chaos had begun and the Great Crash had played something more than a minor role'. Michael Parrish "Anxious Decades: America in Prosperity and Depression, 1920 - 1941.'

On Black Thursday, 24 October, panic began as it became clear that shares were being valued higher than the actual value of companies. 12,894,650 shares were sold on this day. On 29 October, Black Tuesday, a total of 16,410,030 shares were traded. The crash acted as a trigger for general economic collapse.

Task One

ATL: Thinking Skills

Continue watching the video above from 38 minutes (Black Tuesday) to 50 minutes. Answer the following questions as you do so:

1. What was the impact of Black Tuesday?

2. What did the government believe they should do in this situation?

3. What was the impact of the crash on ordinary people?

4. What was the impact on the banks?

5. Why did the crash lead to a much worse economic situation? How were businesses affected?

6. What were Hoovervilles?

Task Two

ATL: Thinking and self-management skills

Using the video (from 46 minutes in) create a flow/circular diagram to show how the Wall Street Crash started a spiral of events that brought about the depression in the economy. Use the following headings. (You may want to add more headings and/or use some headings more than once). Use a large piece of paper (if you have one) to do this.

Explain your diagram to another group or to the rest of the class.

  • Wall Street Crash
  • Reduced spending
  • The banking crisis
  • People lose savings
  • Investment for industry falls
  • Industrial production falls
  • Bankruptcies
  • Unemployment rises
  • Demand for goods falls
  • US unable to sell goods abroad
  • Poverty

Task Three

ATL: Thinking and communication skills

Create a 'live' news documentary on the events of Black Tuesday.

In your documentary you will need to include:

  • An introduction which gives the context to the crisis;
  • Interviews with those affected. These could include: bankers, investors, a government representative, farmers, an economic analyst, a visitor from Britain or Germany;
  • Make sure you cover in your interviews issues such as the reasons for the crash, immediate consequences, possible long-term consequences;
  • You could have live feeds coming in with updates on the state of share selling...

Task Four

ATL: Thinking and communication skills

In small group discuss whether it is possible to blame any groups for the Wall Street Crash. Consider the following:

  • Workers (too willing to spend their earnings on the stock market and too willing to 'buy on the margin'?)
  • Unions (failure to increase membership, highlight inequalities or to fight for higher wages)
  • Big bankers (failure to issue warnings that the market was too high)
  • Businessmen (top executives received high bonus payments, there was evidence of bond price rigging)
  • Europeans (failure to pay their debts to America)
  • US government (lack of government regulation and then Hoover's focus on voluntary methods to solve the crisis  after the Wall Street Crash - see next section)

Task Five

ATL: Thinking skills

In pairs, read the following observations by historians regarding the causes of the depression.

What point is each historian making regarding the causes of the depression? Which of the points do you consider to be the most significant in causing the depression?

'The prosperity of the Coolidge era was huge, real, widespread..... it was not permanent - what prosperity ever is? But it is foolish and unhistorical to judge it insubstantial because we now know what followed later.'

Paul Johnson, A History of the American People, 2000

'The problem [in the economy] was mainly one of maladministration of resources. Productive power raced ahead of buying power. Too large a share of the profits were going into few pockets... High earnings and low taxes permitted huge sums to pile up in the hands of individuals who did not invest the money productively.'

John A Garraty, The American Nation, 1991

'The stock-market crash did play an important role [in causing the Depression], but its larger significance was as a trigger and as a dramatic symptom of deeper and more complicated national and international causes of the depression.'

Donald McCoy, Coming of Age, 1973

'Throughout the 1920s the idea grew that American business had entered a new era of permanent growth. Such naive talk helped promote an array of foolhardy get-rich-quick schemes. Speculative mania fueled the Florida real-estate boom.'

George Tindall and David Shi, America, 1984

'The economic system failed to share out wealth fairly. Too much money went into profits and not enough went into the hands of the workers, who were also the consumers. Factory production increased 43 per cent during the 1920s, but the wage of the industrial workers only rose 11 per cent.'

Divine, Breen, Frederickson and Williams, America Past and Present, 1995

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