Causes and Political Responses to the Great Depression

Overview of the Great Depression

The Great Depression refers to a ten-year slump in the global economy that most severely affected industrialized nations. A combination of interrelated factors caused the Depression, which struck Australia, Western Europe, and North America. The primary causes include overproduction and surplus, market and stock speculation, immature government regulation of artificial economic growth, income disparity, and false optimism. Black Tuesday symbolizes the Great Depression, even though the stock market crash did not itself cause the ensuing crisis. Rather, the Wall Street crash reflected the failure of speculative spending and exposed core weaknesses in global economic policy. The United States felt the brunt of the Depression most acutely because of its devastating effects on the agricultural sector. The political responses of Presidents Hoover and Roosevelt also transformed American domestic and foreign policy, as Hoover's hands-off approach gave way to Roosevelt's brand of big government.

Speculation artificially inflated the U.S. and global economy throughout the 1920s. Investors pumped up stock prices on borrowed funds — a short-sighted approach that would lead to enormous production surpluses. With too many consumer goods and too little consumer purchasing power, almost all key industries faced collapse, including technology and agriculture. The prevailing economic doctrine presumed that all booms and busts were inevitable and that the crisis would subside on its own. However, the Great Depression forced economists and politicians to rethink the role of the market economy and global trade.

Speculation, the Gold Standard, and Structural Weaknesses

The national currencies of industrialized nations were backed by the gold standard: each banknote was essentially a promissory note for a specific value of bullion. By linking currency to gold, economies restricted the value and quantity of money available. If the money supply circulating through the economy was limited to a nation's gold deposits, then any hoarding would severely curtail spending and stagnate economic activity.

The gold standard proved too inflexible to allow a burgeoning, interdependent global market to survive the initial economic recession. Had economies been more flexible, industrialized nations might have been able to curb the crisis and prevent a recession from becoming a full-scale depression. Being tied to the gold standard therefore harmed prospects for a speedy recovery in the United States and abroad. Gold had stabilized in price and underpinned the economies of most industrialized nations (Gupta & Lee, 1996). A lasting legacy of the Great Depression was its virtual obliteration of the gold standard.

Hoover also blindly trusted existing institutions such as the Federal Reserve Board. Many banks were not even members of the Fed, rendering the institution powerless. The Fed had failed to prevent the artificial boom of the 1920s (Gupta & Lee, 1996). Lowering interest rates produced a flood of investors who helped stimulate industrial and agricultural production at a time when purchasing power for the average consumer was low — making those investments unwise and unfounded, and resulting in inflation. Before becoming president, Hoover served as Secretary of Commerce under Coolidge. Coolidge ignored Hoover's early warnings about market speculation; the unwavering belief in perpetual prosperity led to a laissez-faire response to the impending crisis. Adding to the problem, Wall Street investment bankers refused to heed the Fed's proposals to cease speculation. Weak governmental intervention and stubborn responses by overzealous investors ultimately led to the stock market crash of October 1929. Non-existent money artificially inflated stock prices and caused firms to produce more than they could sell. When reality set in, it was too late to prevent the market from collapsing.

Hoover's Response and Policy Failures

One of Hoover's most disastrous responses to the Great Depression was the Smoot-Hawley Tariff. Intended as protectionist legislation, the tariff deeply curtailed the flow of international trade and damaged the global economy. Passed in 1930 in the wake of Black Tuesday, the Smoot-Hawley Tariff imposed a 50% tax on all imported goods and triggered a strong retaliatory response from America's trading partners. With international trade at a standstill, surplus goods could not be circulated through the economy, and the tariff thus deepened the Depression.

Hoover also responded by stimulating construction and public works projects. He urged firms to keep wages steady and relatively high, cut taxes, and increased allocations for public spending. He was initially praised for his approach and for his recognition of ancillary factors causing the recession, including his criticism of rampant stock speculation. His reputation fell sharply after the Smoot-Hawley Tariff. Moreover, his pro-development policies did not resolve the problem of surplus goods. Oversupply and under-demand remained core issues that needed to be addressed. Worker wages stayed too low to stimulate meaningful consumer spending. In the absence of unemployment insurance or welfare assistance programs, many Americans went hungry even amid abundant surplus goods.