The Great Depression - A Look at Significant Events

This article is the third in a three-part series, the previous article discusses events leading up to the stock market crash of 1929. This article is a short history refresher on some of the major events that contributed to the crash, as well as how the government's past actions or lack of actions may have contributed to the severity and longevity of the Great Depression.

I would also like to point out that many economic historians don't agree on which events played a bigger part in the historic financial crisis of the 1930's, so these events are not listed in any particular order - but many do agree that it was a combination of economic, political, and social policies that made recovery from the Great Depression so difficult. And then, we'll look at some of the ways our present government has reacted to the current financial crisis.

Uneven Distribution of Wealth Among Citizens and Industries
There was a wide gap between the wealthy and the lower-income consumers. According to a study done by the Brookings Institute, in 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%. That same top 0.1% of Americans in 1929 controlled 34% of all savings, while 80% of Americans had no savings at all. 75% of the population would spend nearly all their income on consumer goods such as food, clothing, housing, radios and cars - and also relied heavily on credit to fund some of these purchases.

With the wealthy in control of most of the cash, hard times proved that the majority of consumers could simply not keep spending to prop up the economy. And though the wealthy had plenty of money, they were a relatively small percentage of the population and bought proportionately fewer consumer goods than the middle and lower-income group.

Business and manufacturing had been booming, and the stock market grew unchecked through wild speculation. Credit was cheap and city-dwellers generally enjoyed prosperous times. But the wealth was also unevenly distributed among industries. The auto and radio industries, in particular, were experiencing the most growth during the boom of the 1920's. The nation's economy was very dependant on businesses related to the growth of these two industries. But since a family back then only needed a limited number of cars or radios, usually just one, those industries could not continue to grow at the rate they had during peak times, and had actually overspent on growing their businesses during 1925-1929.

All the while, the agriculture industry continued to slide as the government refused to give much help. Farmers had been suffering financially for most of the 1920's, after the loss of government subsidies from World War I coupled with the high demand of food during the war. Also, the ill-effects of newly-developed farming machinary, that while it helped to increase production, it also caused a massive glut that forced prices of produce down. There was plenty of food, but farmers couldn't sell it at a profit. Congress considered raising import tariffs to limit imports to help the farmers, as President Hoover had promised when running for the presidency in 1928.

The Smoot-Hawley Tariff Act
Congress had talked about the Smoot-Hawley Tariff Act in the months leading up to the initial stock market crash of 1929, and that is suspected by some historians to be part of the reason for the market's volatility through the crash, as well as long-term ill-effects on the market and economy.

The bill's original intendion was to help American agriculture, but eventually evolved to include industrial sectors after pressure from special interest groups. The bill came under much scrutiny as the wrong thing to do, and 1,000 economists signed a petition begging Congress not to pass it. Nonetheless, Smoot-Hawley was signed into law by President Hoover in June 1930 and is likely to have contributed to the extended downturn, pushing what may have been a normal recession into a deep depression.

According to the calculations of Jakob B. Madsen of the Economics Department of Monash University, Australia, the Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States", quadrupling previous tariff rates. This made it difficult for European countries to sell their goods to pay off their debts from World War I, and 60 foreign governments retaliated by imposing high tariffs on American imports.

The U.S. Department of State says that international trade declined overall by about 66% between 1929 and 1934. "More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations." The collapse in world trade cost millions of workers their jobs, causing severe economic problems for the U.S. and countries dependant on trade with the U.S.

Bank Failures and the Federal Reserve
Some experts, including the current Federal Reserve chairman Ben Bernanke, put much of the blame for the Great Depression on the Federal Reserve's failure to provide emergency funding to banks. After some large, public bank failures, especially that of the New York Bank of the United States, bank customers panicked, and rushed to withdraw their funds from the smaller local banks. There was no federal insurance for bank deposits during that time, and if a bank went under, the customer lost most or all of their money.

The money supply, as measured by savings deposits, shrunk by one-third from 1929 to 1933. These bank panics and the dwindling money supply caused many banks to go under, and businesses followed downward as they had difficulty in gaining credit. One of the reasons the Federal Reserve couldn't act faster in providing emergency funding was that much of their gold reserves had been depleted due to mass hoarding, and regulations required that the Fed have partial gold backing for issued credit. Several years into the Great Depression it was made illegal for individuals to own gold and the Fed's gold reserves were later replenished.

Slow Response From the Federal Government
President Hoover did not want to get involved in the nation's economic problems, thinking that the market would work out its problems on its own. He encouraged businesses not to cut wages and to continue on as usual, even though they couldn't sell the surplus inventory on their shelves - and a lack of investor confindence meant that businesses didn't have the funding they needed to grow their businesses. As a man who took pride in his own self-reliance, he didn't want to give federal assistance to the struggling citizens out of fear that they would become lazy and come to depend on government programs. He assured the public repeatedly that prosperity was just around the corner.

As millions of people lost their jobs and their homes and gathered in shantytowns - villages of make-shift shelters made of scrap materials, Hoover stood firm to his belief that assistance to the people should come from charities and state and local governmnets, even though these organizations didn't have enough resources to deal with such an extensive problem. Poverty-stricken men, women, and children waited in long lines at soup kitchens or a for handout of stale bread from bakeries, and people who lived in the country grew, raised, or caught their food.

Near the end of his term, Hoover did attempt to support a series of legislative solutions, by starting federal construction projects to provide jobs, and by taking steps to stabilize the banking system. Most importantly, the administration provided $2 billion to the Reconstruction Finance Corporation to shore up banks, farmers, railroads, and factories. But it really was too little, too late - the Great Depresion persisted until late 1941, when government spending increased to fund World War II.

And, finally, what it looks like in America today...
According to Wikipedia, in the United States at the end of 2001, 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40% owned less than 1% of the nation's wealth. So there's still a pretty wide gap between the wealthy and the middle and lower-income groups, and the over-use of credit is still a major concern among consumers and the financial institutions that have extended credit to these borrowers.

But, on the bright side, our economy is much more diverse and resilient than it was in the 1920s-1930s; much of the world was still recovering from the financial burdens of WWI, and back then the U.S. economy was heavily dependant on just a few industries. Approximately 78% of the nation's GDP in 2007 was service-related, meaning that industries can more easily adapt as times change.

Now some are very concerned with President-elect Barack Obama's plans for "fair trade" as they see it as a possible repetition of the high tariffs and protectionist policies that prevented the world economies from recovering until the start of World War II. We can probably do better with some carefully thought-out changes in trade agreements to benefit our citizens. But Senator Barack Obama has to know that extreme cuts in trade would do more damage to the economy, and only time will tell what types of trade policy changes are actually enacted, and to what extent.

The Fed took quick action in providing liquidity to the global financial system to ease the credit crunch, and the FDIC (and NCUA) temporary increased federal deposit insurance from $100,000 to $250,000. This was a combined effort to foster confidence in the American banking system and to prevent a repeat of the 1930's bank panics that sapped cash out of the financial system.

Government programs such as Social Security, unemployment insurnace, medicaid, food stamps, and housing assistance are in place to ensure that our country's poor don't have to go without the basics. These programs were started as a legacy of the Depression-era and still serve needy citizens today. Also, new programs have been implemented to assist families that are likely to suffer during these difficult economic times - such as the HOPE for Homeowners program to deal specifically with the troubled mortgages that borrowers are having problems with.

We are still very far away from the horrible conditions of the Great Depression.
The unemployment rate back then, at a time when there was no unemployment insurance, was 25% at its high in 1933. We're at about 6.1% right now, and though unemployment insurance isn't as good as having a job, it's much better than simply being out of luck and out of money. 9,000 banks (mostly small-town banks) failed in the 1930's, and there was no FDIC or NCUA insurance. We've had numerous failures of massive banks in the past year, but no one has ever lost a dime of federally-insured deposits, so the little guy isn't going to lose his life savings as people did in the Depression-era.

Also, about 50% of mortgages were in default in the 1930's, whereas about 4% of today's homeowners (mostly sub-prime borrowers) are having difficulty with paying their mortgages. So even though it doesn't look good for us right now, it really isn't anything like it was during the Great Depression. The federal deficit and our future tax bills may grow substantially, but we'll still be able to feed our families and keep a roof over our heads.



Sources:
wikipedia.org
amatecon.com
gusmorino.com
businessweek.com
future.state.gov
u-s-history.com