Causes and New Deal Responses to the Great Depression

Introduction: The Great Depression's Origins

The Great Depression was one of the worst events in American history, as well as the most damaging episode in the track record of capitalism itself. Causing great suffering for over a decade, the Great Depression resulted from poor banking practices and rampant speculation that together produced a widespread global financial disaster. Initial government efforts to curb it did not meet with success; however, the policies implemented in the Second New Deal proved considerably more effective.

The Great Depression was the worst economic disaster in American history. What led to such a massive economic collapse was not one primary factor but a multitude of combining factors: "It was not just one factor, but instead a combination of domestic and worldwide conditions that led to the Great Depression" (Kelly 1). It produced massive unemployment, with entire fortunes lost at the whim of market conditions. Millions of Americans were forced into dire living conditions, with many left homeless and reliant on the government for basic necessities such as food and shelter. It was a very dark time in American history, one that took years to overcome. The Depression itself lasted approximately a decade, until World War II brought wartime prosperity back to American business, which was then filtered into individual American wealth.

Agricultural Crisis and Wealth Inequality in the 1920s

Many believe that an earlier agricultural depression helped pave the way for the more widespread panic of the Great Depression. According to research, "an independent depression in agriculture helped to cause the stock market crash, the decline in industrial output, and the banking collapse" (Kindleberger 70). This agricultural depression was set off primarily by the overproduction of particular farm products, which flooded the market and forced profits through the floor. Additionally, earlier in the decade, a series of natural droughts had decimated much of American agriculture, triggering a recession in the industry. These severe drought conditions in the Midwest led to massive exoduses of people into larger cities, where they searched for work after their crops failed and their farms were repossessed. When the Great Depression struck, there was therefore a multitude of poor, out-of-work farmers flooding the cities and straining local budgets for social programs. Had there not been so many mouths to feed as a result of agricultural failures, the Depression might not have had such dramatic consequences.

The 1920s are typically thought of as a time of great wealth and prosperity, but what few people realize is that this was true for only a small portion of the population. In fact, "money was distributed disparately between the rich and the middle class, between industry and agriculture within the United States, and between the U.S. and Europe" (Gusmorino 1). During the years before the market crash, major innovations in industry were causing serious increases in production levels, generating massive profits for American business. Yet these profits were rarely shared with the individual workers who performed the labor in the manufacturing process. According to research, "from 1923–1929 the average output per worker increased 32% in manufacturing. During that same period of time, average wages for manufacturing jobs increased only 8%" (Gusmorino 1). The culture of the United States at the time was seemingly accepting of this great misdistribution of wealth. The rich were growing richer, and the divide between themselves and the poorer classes was becoming wider than ever in American history. Thus, "this imbalance of wealth created an unstable economy" (Gusmorino 1). With such an unstable economy at the heart of American life and culture, it was only a matter of time before things utterly collapsed.

The Stock Market Crash and Banking Collapse

One of the primary economic causes of the Great Depression was the stock market crash of October 29, 1929. The crash was largely due to high speculation: "the excessive speculation in the late 1920s kept the stock market artificially high, but eventually led to a large market crash" (Gusmorino 1). The stock market had been artificially inflated by increasing speculation, and as is typical in such patterns, a crash was inevitable. This signaled the beginning of the crumbling of the capitalist system that had made the nation so prosperous earlier in the decade, and "two months after the original crash in October, stockholders had lost more than $40 billion dollars" (Kelly 1). Even though the stock market eventually recouped some of its massive losses, it was not enough, and as 1930 arrived, the Great Depression hit the country hard.

After the Depression became official, the economic situation only worsened. Over the entire decade of the 1930s, there were more than 9,000 local and national bank failures (Kelly 1). This spelled dire circumstances for many Americans who had their entire savings in the banking system, for "bank deposits were uninsured and thus as banks failed, people simply lost their savings" (Kelly 1).

Moreover, many banks failed in their duty to properly caution against high-risk investments, allowing businessmen to invest recklessly without adequate oversight or regulation. According to research, "businessmen were misled by bank credit inflation to invest too much in higher-order capital goods, which could only be prosperously sustained through lower time preferences and greater savings and investment" (Rothbard 11). Yet the necessary conditions for generating profit in such a limited market were soon undermined by the instability of the American economy. "Therefore, as soon as the inflation permeates into the mass of the people, the old consumption-investment proportion is reestablished, and business investments in the higher orders are seen to have been wasteful" (Rothbard 11). Many businessmen invested their entire fortunes in an unstable marketplace, only to have them completely depleted when the stock market crashed.

Additionally, when the Great Depression struck, people tightened their grip on whatever money they had not already lost. According to research, "with the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items" (Kelly 1). This put American businesses in an extremely difficult position, as sales dropped through the floor. In order to survive, many American companies cut their workforces. This led to a massive increase in unemployment, with some estimates placing the unemployment rate as high as 25% (Kelly 1). Thousands of Americans found themselves out of work and draining national resources for basic necessities such as food and shelter.