Great Depression

The Great Depression was an economic downturn of unprecedented proportions. The stock market crashed, [Page 1031]unemployment soared, banks closed their doors, spending on goods and services plummeted, and industrial production went into a tailspin. It is still looked on as a watershed event in our society that ushered in new philosophies and programs relative to the role of government in a market economy. To even begin to understand the depth of this economic downturn, it must be seen against the prosperity that existed just prior to the depression itself.

The period between World War I and the Great Depression was one of unprecedented prosperity. Many people became new millionaires, the stock market soared, and production of goods and services increased dramatically. The United States emerged from World War I economically and physically undamaged, giving it an advantage in world markets. Mass production methods were employed in many industries increasing production of goods and services. Several major new products, such as automobiles and electric power, created many new jobs and markets. Installment buying became popular and, coupled with the widespread use of advertising and new sales techniques, stimulated consumption of these products. Enormous profits could be made in stock market speculation, and low margin requirements made it possible for many people to participate. There were thus many reasons for this prosperity.

All this ended, however, when the bottom dropped out of the economy in 1929 with the start of the Great Depression. Statistics tell only part of the story. Unemployment soared to almost 25% of the workforce, affecting more than 12 million of 52 million workers in a nation of almost 122 million. Consumption spending slid by one fifth, and investment collapsed entirely. Waves of panic struck the banking system from 1930 through 1933, forcing more than 9,000 banks with deposits of $7 billion to close their doors. More than 9 million savings accounts were lost, and thousands of businesses went bankrupt. Panic selling hit the stock market and paper fortunes were lost overnight when the crash began.

There is still debate over the causes of such a drastic change in the fortunes of the country, but several emerge as major reasons for the collapse. The soaring stock market, for instance, was more the result of speculation than of increases in real physical wealth, and low margin requirements encouraged such speculation. People borrowed heavily to buy stocks and participate in the rise of the market. When the psychology of the market changed and investors sensed it had reached a peak, they began selling to get their money out of the market. Panic quickly set in, and the whole speculative structure collapsed rapidly.

The prosperity of the late 1920s was not shared by society's agricultural sector and working classes. Farm purchasing power steadily deteriorated throughout this period, aggravated by the inelastic demand for farm products. Coupled with this problem was a bad and worsening distribution of income. Most of the money in the 1920s went to those who were already wealthy rather than to workers with lower incomes. Smaller proportions of total income went toward wages and salaries. Much of the money received by the wealthy was reinvested in new productive facilities, causing an overextension of factory capacity. People simply could not buy all that the economy was producing.

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