The Great Depression was the longest and most devastating economic collapse ever experienced in the industrialized world. Many mark its beginning with the stock market crash--"Black Tuesday" October 29, 1929. While the stock market crash and Great Depression were closely related, it is inaccurate to state that the Great Depression was caused solely by the stock market crash.

The United States experienced an economic peak in the 1920's. Production output, consumer spending and business investment were all high. In order to keep the economic boom going consumer spending had to keep up with increased output. However, while businesses were making increased profits, employee wages did not increase. From 1923 to 1929 output per person increased by 32 percent. During that same time, employee wages only rose 8 percent. The unequal distribution of wealth was furthered by large tax cuts for the wealthiest citizens.

Strategies used to build support for the war were adopted into more advanced advertising. The advent of credit allowed Americans to spend more than they earned. Eventually consumer debt and unbalanced wages halted consumer spending, which was no longer able to keep up with output. This disruption in the circular flow of the economy was a primary cause of the Great Depression.

Decreased consumer demand led to the closures of many manufacturing businesses. The manufacturing output decreased by almost half from 1929 to 1932. As these businesses closed, employees were laid off. Unemployment increased from 3.2 percent to 24.9 percent between 1929 and 1932. More than 15 million Americans were unemployed. At the height of the recession, one out of every four individuals in the labor force was unemployed.

CS Question #1: How did the availability of credit contribute to the Great Depression?

The increased income among the wealthiest Americans led to increased investment in the stock market. Between 1927 and 1929 the amount of investment in the stock market was staggering. Stocks prices increased beyond their worth. Millions of shares of stock were sold "on the margin", a credit-like arrangement where the investor pays a percentage of the stock price and borrows the rest. The U.S. Federal Reserve raised interest rates in 1928 and 1929 trying to discourage the stock investment fever that was inflating the market. By raising interest rates, borrowing money to purchase stock "on the margin" became more difficult. Some economists theorize that the raising of interest rates brought upon the initial recession that led to the Great Depression. In response to the contractionary policy, the stock market made a dramatic decline in October of 1929. Investors began selling stock, the most active day of unloading shares came on "Black Tuesday" October 29, 1929. An estimated $10 to $15 billion was lost in stock value. Within the next month, the overall losses were estimated at $30 billion. By the end of 1932 stock values were approximately 20 percent of what they had been prior to the crash.

European nations were responsible for paying World War I debts and reparations. Banks in the United States became important creditors for these nations. Not experienced in this kind of lending, U.S. banks irresponsibly lent a great deal to these nations. The foreign nations' inability to repay these debts created instability in the U.S. banking system. Individuals who had savings deposited in banks, began withdrawing them to cope with their own economic problems. Many banks were unable to liquidate these accounts which caused panic among account holders. Runs were made on banks where depositors demanded their cash. Such bank runs bankrupted 5,000 banks and millions of individuals' savings by early 1933.

CS Question #2: Do you think the stock market crash could happen again? Why or why not?

The Great Depression was devastating to the nation's farmers. Farmers had been struggling economically since 1920. Between 1929 and 1932 there was a 50 percent drop in already decreased agriculture prices. Despite the nation's growing hunger problems, farmers were unable to sell surplus crops for a profit. In 1930, a drought spread across the Great Plains. This drought turned soil to dust which was swept across the plains by strong winds. The dust often piled up against houses, barns and vehicles like snowdrifts. This crisis was called the Dust Bowl and affected Arkansas, Kansas, Oklahoma, Texas, New Mexico and Colorado. The Dust Bowl created a migration of farmers toward California looking for work.

Increased unemployment, loses in household savings and farm foreclosures caused a dramatic increase in the homeless population. Individuals began living in groups of temporary residences called "Hoovervilles". The name was a criticism of President Herbert Hoover. Hoover initiated government work projects such as the construction of the Hoover Dam in Nevada. He also took a more active approach supporting industry and growth, and he encouraged businesses not to lay off employees. However, these actions were not enough to change the direction of the economy. Hoover was criticized for the Smoot-Hawley Act of 1930, which increased import duties on many foreign-made goods and services and brought international trade to a virtual standstill. Other industrial nations instituted high tariffs hoping to protect domestic economies. These tariffs had harmful economic effects due to the interdependent nature of international trade. Between 1929 and 1932 world trade declined by more than 50 percent. Many experts feel that the Smoot-Hawley Act of 1930 was directly responsible for the extended length and intensity of the Great Depression.

CS Question #3: Do you think the economy would have recovered on its own if not for the added economic burden caused by the Smoot-Hawley Act of 1930? Explain your answer.

Franklin Delano Roosevelt's New Deal created social and economic assistance programs with the aim of bailing the nation out of the Great Depression. The New Deal significantly increased the role of the federal government and reformed industry and agriculture. Programs to improve labor and housing were also undertaken. Part of the New Deal reforms included the creation of the Federal Deposit Insurance Corporation (FDIC) to avoid another crisis like the collapse of the banking system in 1933. The New Deal also created the Social Security system. Roosevelt instituted fireside chats were he broadcast reassuring messages to Americans, calming anxiety about the Great Depression.

Economist John Maynard Keynes wrote The General Theory of Employment, Interest and Money in 1935. It was his view that in order to save a failing economy the government must intervene. His advice to end the Great Depression was that the government should take monetary and fiscal action to solve the crisis. He believed that the government should become a stabilizing force in the economy. Though Roosevelt did create many monetary policies, he did not accept Keynes' ideas. Roosevelt was unwilling to sacrifice the federal budget to the degree it would require to fully institute Keynes' recommendation. Although the United States did not enter the war until 1941, they began selling arms to Britain and France at the very beginning of the war. Industries began producing equipment for war such as tanks, planes, ammunition and weapons. The Great Depression was declared officially over in response to the increased demand and increased spending created by World War II.

CS Question #4: Do you think Roosevelt should have accepted Keynes' recommendation to increase government intervention by completely sacrificing the federal budget? Explain your answer.

Further Thought:

1. What is your opinion of the level of government involvement in the economy during the Great Depression?
2. Which cause of the Great Depression do you think had the most impact on the duration and intensity of the Great Depression? Explain your answer.
3. Two of the web links provided at the beginning of this case study have photographs from the Great Depression and the Dust Bowl. Look at some of these photographs and then write a brief statement explaining your thoughts about the images.