The Great Depression
Causes
While the stock market crash could be viewed as the main cause of the Great Depression, there were many events that also lead to the Great Depression.
The Dust Bowl
In the 30's the mid- and southwest endured a great drought as a result of overproducing crops. This meant the migrant workers and sharecroppers were out of work, and not as many crops were being produced and supply was low.
Supply and Demand
During the Roaring '20s, factories increased production because people bought more of the items. However, when stocks fell, people couldn't buy as many items. The factories had to lower their production rates, and the only way to do this was to layoff workers, until 25% of the population was out of work.
Buying On Margin and Buying On Credit
Buying on margin was when investors bought stocks with money they did not have, with only a 10% down payment, and hold on to it until the stock rose in value, and then sell it for more than they bought it for, making a profit. This system worked until the stock market held steady. When it crashed, people could not afford to pay back the money they bought the stocks with.
Buying on credit is when people buy things they cannot afford. In the '20s all of this new exciting technology was coming out and everyone wanted to buy it, but nobody could afford it. So, they bought items with the promise of them paying it back in the future. When the stock market crashed, and millions of people lost their jobs, people could not pay back their debts, which pushed them into further poverty.
Buying on credit is when people buy things they cannot afford. In the '20s all of this new exciting technology was coming out and everyone wanted to buy it, but nobody could afford it. So, they bought items with the promise of them paying it back in the future. When the stock market crashed, and millions of people lost their jobs, people could not pay back their debts, which pushed them into further poverty.
The Stock Market Crash
Predicting that the great conditions in the stock market might end soon, some investors began selling their stock in the summer of 1929. Following the leader, many other investors did the same. As stock prices fell, President Herbert Hoover declared that the economy was fine. Trusting fellow investors instead of the President, stock prices continues to fall as more and more investors sold their stock. The brokers that lent the investors money began asking for the investors to repay their debts, and when the investors couldn't, the stock prices fell further. On Tuesday, October 29, 1929 the stock price fell tremendously because of desperate sellers and no buyers.
Effects of the Depression On America
- Such difficult economic times greatly affect America.
- Unemployment rose from 3% to 25% by 1933
- Because banks were uninsured, and they had to close, millions of people lost their life savings
- Tax rates for the wealthy rose to 91%
- The gross national product dropped by 33%
The New Deal
When the stock market crashed, President Howard Hoover was credited with doing nothing to intervene with the downward spiral that led to the Great Depression. However, when Franklin Roosevelt accepted presidency in the midst of the economic crisis, he made up a plan called The New Deal. The New Deal consisted of many new policies:
- Reforestation Relief Act- gave 2 million people jobs
- Federal Emergency Relief Act- provided money to states for relief
- Agricultural Adjustment Act and Farm Credit Act- Established prices and provided loans to farmers
- Federal Securities Act- gave the federal government the power to regulate stocks and bonds
- Homeowners Refinancing Act- helped people who defaulted on their mortgages recover
- Banking Act of 1933- creating FDIC which makes sure people's bank deposits are safe
- Securities Exchange Act- establishes Securities and Exchange Commission, and the Federal Housing Administration which provides loans for repairing and building houses
- Emergency Appropriation Act- creates jobs on 'useful projects'
- The National Labor Relations Act, Social Security Act, Bank Act, Public Utilities Act, and Revenue Act- protects elderly and disabled, authorizes regulation of banks and public works, and increases taxes on the wealthy.
- Fair Labor Standards Act- sets minimum wage and a maximum number of hours that can be worked in a week
Legacy of the New Deal
In many ways, the New Deal greatly contributed to pulling America out of the depression. The Deal created jobs, regulated systems that had to be watched over, and provided safety for those who were in need. However, at the end of the day, the main event that helped take America out of the depression was World War Two. The New Deal was the government spending money to make money. World War Two created jobs and fired up factories which completely placed America in an economically secure place.