Issues to Consider
A high school economics teacher was recently looking at the pictures
of the Great Depression on this year's Essay Contest poster. She
asked, "Is three pages enough space to write about one of the
most profound events of the 20th century?" Her point was well
taken. Not only is the Great Depression a weighty topic, so is the
question posed with the pictures: Could it happen again? We recommend
that students read the following sections to help them focus their
research on either a potential cause and/or one of the responses
to the Great Depression. From understanding their research on one
aspect of the Great Depression, students can speculate on whether
another depression could occur.
Causes of the Great Depression
Between 1929 and 1933, employment fell about 25 percent and total
production of goods and services dropped by 30 percent. What conditions
or events caused this steep decline in economic activity? The short
answer is that economists don't agree on a single cause. In some ways
the cause of the Great Depression is a mystery which has yet to be
solved. Nevertheless, there are several events that economists have
discussed as potential causes; here are a few examples.
The stock market crashed.
The 1920s were dubbed the "Roaring Twenties" due to strong
levels of economic activity and a great deal of speculative activity.
Investing money in the stock market became the hope for many to
make a fortune. Stock prices rose as investors poured their life
savings into the market. Prices came tumbling down on Black Thursday,
Oct. 24, 1929, when the New York Stock Exchange crashed. Over the
following three years stock prices fell to about 20 percent of their
1929 value. Did the stock market crash cause the Great Depression?
Some economists argue that while the stock market crash itself may
not have caused the Great Depression, it reflected the instability
of the economy and the boom-bust mentality of the time.
The money supply decreased and prices dropped.
The Federal Reserve is responsible for regulating the U.S. money supply,
called monetary policy. Changes in the money supply can affect the overall
price level. If the money supply grows too fast, prices will increase,
causing inflation. Conversely, if the money supply grows too slowly,
prices will decrease, causing deflation. When prices are stable, businesses
and consumers can more easily determine the relative value of goods
and services, providing an environment for economic growth. Therefore,
a primary goal of the Federal Reserve is to maintain price stability.
Some economists argue that the Federal Reserve missed its chance to
regulate the money supply during the early years of the Great Depression.
At a time when the money supply was decreasing and prices were plummeting,
the Federal Reserve might not have acted quickly enough to boost the
money supply to achieve price stability. These economists argue that
the contraction in the money supply deepened the economic decline.
Many banks failed.
Instability in the banking system increased during the Great Depression.
Many bank customers withdrew their funds from banks and buried it in
their back yards or hid it under mattresses. Banks were further stressed
by low returns on investments and an ailing farm sector. By 1933, 11,000
of the 25,000 banks in the United States failed. Instability in the
banking system disrupted saving and investment and may have contributed
to the economic collapse.
Low agricultural prices hurt farmers.
While the Depression hit the majority of the American population in
1930, farmers had been struggling since the early 1920s. While crop
and livestock production levels from World War I remained the same,
demand decreased during the 1920s, causing agricultural prices to drop.
Conditions for farmers didn't improve during the 1930s. Even though
many people needed food, they didn't have enough money to buy it and
prices remained low. Problems for some farmers were made worse by the
extreme drought and soil erosion caused by the "Dust Bowl."
International trade slowed.
In early 1930, the Smoot-Hawley Tariff was passed, against the wishes
of over 1,000 economists from 46 states. The tariff imposed a 100 percent
tax on raw materials entering the United States. As a result, most other
countries passed similar tariffs, severely slowing worldwide trade.
The effects the economists foretold became reality. Businesses and farmers
were not able to sell their products abroad. Accompanied by increased
unemployment and the inability of farmers to sell their crops, the Great
Responses to the Great Depression
The Great Depression stalled economic activity and left many people
out of work. In an attempt to get people back on their feet and
the economy moving again, President Franklin D. Roosevelt directed
the passage of an "alphabet soup" of social and public assistance
programs, called the New Deal. Many of these programs gave people
jobs and income. For example, the Civilian Conservation Corps allowed
young men to earn $30 a week plus room and board, and in turn they
built bridges, planted trees and restored national forests. The
Tennessee Valley Authority and Public Works Administration also
employed people in large-scale construction projects, such as dams,
buildings and roads. Not only were these programs intended to help
people directly, but according to Keynesian theory, they were also
an attempt to prime the pump of the economy.
Congress and the Roosevelt administration created regulatory agencies
and safety nets to assist people who were unemployed and living in poverty
- many still exist today. Some agencies and programs were direct responses
to causes of the Great Depression. A few are listed below.
Securities Exchange Commission
During the 1920s, many investors didn't pay much attention to the risks
on their investments; countless investors lost their fortunes after
the market plummeted. After the crash, Congress passed the Securities
Act of 1933 and the Securities Exchange Act of 1934. These laws were
designed to restore investor confidence in our capital markets by providing
more structure and government oversight. The laws provided that companies
publicly offering securities must tell the public the truth about their
businesses, the securities they sell and the risks involved in investing.
Also, people who sell and trade securities - brokers, dealers and exchanges
- must treat investors fairly. Congress established the Securities and
Exchange Commission (SEC) in 1934 to enforce the new securities laws.
Emergency Banking Act
Roosevelt felt it prudent to salvage the banking system, if only to
calm the fears of the public. The Emergency Banking Act was passed in
1933 and the gold standard, that is, the policy under which currency
could be exchanged for a certain amount of gold, was abolished. The
currency of the United States became fiat money, backed by the confidence
of the American people in the value of the dollar, not precious metals.
The Reconstruction Finance Corp. assumed banks' debts and helped to
inspect banks to be sure they complied with the new banking guidelines.
Finally, the Federal Deposit Insurance Corp. (FDIC) was created to protect
depositors' savings, should a bank fail.
Agricultural Adjustment Administration
The Agricultural Adjustment Administration (AAA) was created in 1933
to help farmers, in part by reducing supply to boost prices. AAA made
payments to farmers to cut back production. In addition, severe drought
and soil erosion during the 1930s helped to reduce supply. While AAA
policies helped boost farm income, they were sharply criticized during
a period of widespread hunger. On one hand, homeless and hungry people
couldn't afford to buy food. On the other hand, many farmers slaughtered
pigs and plowed under cropland to help boost low agricultural prices.
These seemingly conflicting scenarios provoke questions about how markets
work and the role of government in response.
In short, the government took many steps in response to the potential
causes of the Great Depression. Did the government response go far
enough to prevent another depression from happening? Or did the government
go too far? Some economists argue that some of the government programs
may have had unintended consequences and actually lengthened the duration
of the economic downturn. These are important questions. The Great
Depression taught us that changes in the economy have a profound effect
on the livelihood of individuals. Today we can see how positive developments
in the economy have helped individuals. With a strong economy over
the past 20 years, a higher percent of U.S. citizens have jobs and
a lower percent are living in poverty. However, can we count on the
current prosperity to continue, or could it happen again?