What Caused the Great Depression?
Like with all influential forces, the New Deal has been the subject of intense debate. Many people, myself included, view it as a wonderful vehicle through which the progressive vision of the Founding Fathers survived into the 20th and 21st centuries. Others believe it to be a dishonest betrayal of what the founders proposed and that didn't even work in the short-term pursuit of ending the Great Depression. That said, the New Deal was caused by the Great Depression, and the reasons we endured the Great Depression in the first place are just as divisive. Different historians will assert different opinions. Separate economists will devote the same amount of energy and rhetoric to separate hypotheses. I, as someone with a strong passion for US history, have found the Great Depression to be one of the most fascinating regions of my country's past. For this reason, I have spent days studying its causes, course, and conclusion. The following article will detail what I've learned in regard to the causes of the Great Depression.
The foundation for the Great Depression began to be laid on June 28, 1914, when Gavrilo Princip assassinated Franz Ferdinand, the heir to the Austro-Hungarian throne. Princip, although Bosnian by birth, had Serbian ancestry, often traveled to Serbia, held pro-Serbian political views, and even used a Serbian gun to kill the archduke. This left Austria-Hungary suspecting that Serbia was involved in Princip's actions. Thus, on July 28, 1914, Vienna declared war on Belgrade. This conflict, which seemed like it would be a brief skirmish between two irrelevant lands isolated in the wilderness and mountains of the Balkan dimension, quickly spiraled into World War 1 as more and more allies of Serbia and Austria-Hungary declared their sides. Thus, European farmers began abandoning their farms in order to fight in the war. A gap in food production opened up, which the American agriculture sector plugged. In the short term, this created a wonderful era of financial prosperity for American farmers. Soon, however, it would prove to be the most oppressive of all curses.
US President Woodrow Wilson was determined to keep his beloved America out of Europe's curious bloodbath. This dream was shattered in February and March of 1917 when it was revealed that Germany (one of Austria-Hungary's allies) was planning to help Mexico invade the US and re-capture lost territories if ever America announced its support for the Entente. On April 2, 1917, Wilson went to Congress and requested a declaration of war, a wish that was granted on April 6, 1917. America now had to dedicate energy, resources, time, and money to an irrelevant war that represented the most sickly and Kafka-esque manifestation of European countries' ancient, obsessive need to dominate one another. Among the resources that now had to be diverted to this conflict was food. On August 10, 1917, Wilson issued an executive order that created the United Food Administration. Chaired by future-President Herbert Hoover, the USFA worked to ensure that American soldiers received all the food they needed. During its brief existence, the USFA famously promoted "Meatless Mondays", "Wheatless Wednesdays", and "Sweetless Saturdays" as a means of preserving food for the war effort. Of course, farmers had to produce even more food to help the USFA, adding to the glut of crops and meats.
By the autumn of 1918, it was apparent that there was no way the Central Powers - i.e. Austria-Hungary and its allies - could win the war. For this reason, members of the Central Powers began to surrender, starting with Bulgaria on September 29, 1918. Germany became the last element of the Central Powers to resign from the war effort, announcing its choice on November 11, 1918. World War 1 was over, even if its full legacy was only now coming into being. Throughout the war, numerous European governments borrowed money from the US government. By the end of the war, Wilson realized that it would take years for these debts to be repaid to any significant extent. Thus, he barred European leaders from borrowing any more of the federal government's money. This limited Europe's spending power, locking American agricultural goods within US borders, something which added to the overproduction affair. On February 25, 1919, Wilson founded the American Relief Administration, a government agency that provided free aid to postwar Europe. Like the USFA, the ARA required additional work from American farmers, amplifying the overproduction.
Like I stated previously, the giant surge in agricultural activity was initially great for American farmers! However, as is a basic principle of economics, the more of a product in existence, the less the average instance of that product is worth. As more and more goods were piled onto the glut of new crops and meats, average food prices declined. Again, at first, this was wonderful, since more people could buy more of what the US farming class was creating. But before long, prices declined so much that it became difficult for farmers to sustain themselves. By the 1920s, the American agriculture sector was teetering on the brink of collapse. In 1920, Republican Warren G. Harding faced off against Democrat James M. Cox (who, interestingly, selected FDR as his running mate) in that year's presidential election. Capitalizing on how chaotic the world was under the Democrat Wilson's watch and how exhausted that rendered the average American, Harding easily defeated Cox. He replaced Wilson as president on March 4, 1921.
Soon into the Harding Administration's existence, America entered a period of unprecedented economic health known as the Roaring 20s. Because of this fact, corporations started receiving massive profits, which endured produced similarly-fruitful profits for their shareholders. As more and more Americans learned of this fact, they began desiring their own stocks. However, the value of the average stock was so high that shares became prohibitively expensive, even with the Roaring 20s and subsequent financial growth in mind. For this reason, Americans began purchasing stocks via a practice known as buying on margin, through which people borrow money and use that money to buy stocks. No one really worried about this fact when it first became a pillar of the stock market, but it would eventually prove to be the source of much economic rot and decay. 2 years into his presidency, Harding died on August 2, 1923, propelling his vice president - Calvin Coolidge - to the White House. Both Harding and Coolidge were opposed to large-scale government intervention in the economy, a resistance thought by many to facilitate the Roaring 20s. For this reason, Coolidge was, without hesitation, gifted by the people with a new term in the 1924 election, taking the oath of office for the second time on March 4, 1925.
Because of the economic prosperity, corporations amassed such large profits that they created more products than they could sell. Of course, this caused the price of items to plunge, damaging the income of most companies. As a result, throughout the mid- and late 1920s, money and resources had to be diverted away from meaningful financial contributions and toward destroying these massive gluts of excess product. This added yet more strain to the imminent clouds of economic sorrow. Still, no one paid attention to the gathering storm clouds, preferring to sip champagne and rejoice in what there was. Herbert Hoover, who had served as secretary of commerce under both Harding and Coolidge, went on to easily defeat Democrat Al Smith in the 1928 election, riding both his association with the previous 2 popular administrations and his humanitarian efforts following WW1 to the White House. On March 4, 1929, he swore the oath of office, replacing Coolidge as president.
As Hoover adapted to life in the White House, the Federal Reserve began to understand just how dangerous buying on margin was. Thus, to discourage the practice, it raised interest rates from 5% to 6% in August 1929, a policy that made debts far more burdensome to bear. Had the Federal Reserve made this choice in 1921, 1922, or maybe even as late as 1923/1924, this would have been a great move successful in averting monetary calamity. But by 1928 and 1929, buying on margin constituted the whole of stock activity. Consequently, raising interest rates largely killed the growth of the stock market. The dominoes had been set with agricultural and industrial excess during WW1 and the Roaring 20s, and now the increased interest rates caused the first bricks to fall. On September 3, 1929, the stock market peaked, beginning to decline for the first time in almost a decade on September 4, 1929. This fact created panic among shareholders, who now were receiving fewer profits with which to pay off their debts. Throughout September and October 1929, Americans began reversing stock purchases en masse, using the refunds to liquidate personal debts.
The massive rescissions of stock purchases caused average share values to plunge even further, with the stock market officially crashing on October 29, 1929. The Great Depression had begun. While news of stock values declining in the first place spread like wildfire among shareholders, the entire country was subjected to the reality of the stock market collapse. Americans were terrified that an economic collapse was imminent and that such a collapse would cause mass bank failures. At the time, the dissolution of a bank meant the permanent loss of any money stored in that institution, so this prospect rendered Americans aghast. Thus, a massive wave of bank runs commenced, as people flocked to banks in enormous numbers, withdrawing their deposits to keep them safe and secure in case of a banking collapse. Unfortunately, bank runs actually did cause financial institutes to run out of money, touching off genuine desolation in the banking industry. An already-disastrous economic development had now become apocalyptic.
Hoover, just like Harding and Coolidge, was not comfortable with the idea of large government regulation or extensive intervention in the economy. But he knew something had to be done to prevent the full-on evaporation of the economy. So, at the end of 1929, he called a meeting of numerous important government officials where he urged them not to fire their employees, a decision that would be tempting amidst the Great Depression. Throughout his time in the White House, Hoover also called on the states to work with charities and commission public works projects to boost employment. The latter idea became a pillar of Franklin D. Roosevelt's New Deal, which actually did end the Great Depression. Yet Hoover doomed his own legacy by refusing to enforce these important ideas. Further, not everything Hoover did was benign or null. At times, his policies were actively harmful. For instance, he raised taxes, which only added to the financial misery.
When Hoover was still on the campaign trail, he promised struggling American farmers, desperate to end all the competition with European businesses, increased tariffs that would protect their floundering property. By the time he formally took office, that desire, previously confined to the farming class, had extended to most of the populace. Then, when the Great Depression threatened the stability of the economy, the suggestion that a tariff be implemented transformed into demands that a tariff be implemented. On June 17, 1930, Hoover signed the Smoot-Hawley Tariff. Harding had already set tariff rates at 40%, but Hoover's bill increased that already-high percentage by 20 points, leaving import taxes at an astonishing 60%. The rest of the world felt offended by the Smoot-Hawley Tariff, believing that Hoover was insulting their manufacturing capacity by claiming it wasn't good enough for the US. So, throughout the summer of 1930, they enacted their own tariffs against America, basically killing world trade and amplifying the effects of the Great Depression.
Like practically all important events in world history, no single issue can be accurately labeled as the lone cause of the Great Depression. The foundation for the Stock Market Crash of 1929 was set up all the way back in 1914 when World War 1 began and American farmers had to plug the resulting gap in crop production. This glut of crops and meats only began inflating to more absurd proportions when German recklessness ultimately sucked America into the war as well. The Roaring 20s seemed to be the solution to all the chaos of World War 1, but its excesses caused Americans to become complacent. When industrial excesses and rising interest rates entered the scene, the decadence of the 1920s instantly withered away into the Great Depression. Bank runs and trade wars, like worms, burrowed into what was left and ate the remaining crums of financial safety. A decade of economic turmoil was now inevitable.
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