Great Depression

The nations the U.S. had lent money to (Britain, Italy, France, Belgium, Russia, Yugoslavia, Estonia, Poland, and others) were in no position to pay off the debts. The majority of their gold had been sent into the U.S. during and immediately after the war; they couldn’t send more gold without completely ruining their currencies. In the 1920’s the United States was trying to be the world’s banker, food producer, and manufacturer, but bought as little as possible from the rest of the world in return. This attempt to have a “constantly favorable trade balance” could not work for long. If the United States would not buy from our European countries, then there was no way for them to buy from the Americans, or even to pay interest on U.S. loans. The weakness of the international economy certainly contributed to the Great Depression. Europe was dependent upon U.S. loans to buy U.S. goods, and the U.S. needed Europe to buy these goods to do well. From early 1928 to September 1929 the Dow Jones Industrial Average rose greatly. This sort of profit was tempting to investors. Company earnings became of little interest; as long as stock prices continued to rise huge profits could be made. Through the miracle of buying stocks on margin, one could buy stocks without the money to purchase them. Buying stocks on margin worked the same way as buying a car on credit.

Investors’ craze over the plan of profits like this drove the market to extremely high levels. The exploratory boom in the stockmarket was based upon confidence. In the same way, the huge market crashes of 1929 were based on fear. Prices had been drifting downward since early September, but generally people were optimistic. Speculators continued to flock to the market. Then, on Monday October 21 prices started to fall quickly. Investors became fearful. Knowing that prices were falling, but not by how much, they started selling quickly. This caused the collapse to happen faster. Prices stabilized a little on Tuesday and Wednesday, but then on Black Thursday, October 24, everything fell apart again. By this time most major investors had lost confidence in the market. Once enough investors had decided the boom was over, it was over. Partial recovery was achieved on Friday and Saturday when a group of leading bankers stepped in to try to stop the crash. But then on Monday the 28th prices started dropping again. By the end of the day the market had fallen 13%. The next day, Black Tuesday an unprecedented 16.4 million shares changed hands. This stock market crashes acted as a trigger to the already unstable U.S. economy.

Due to the lack of distribution of wealth, the economy of the 1920’s was very much dependent upon confidence. The market crashes damaged this confidence. The rich stopped spending on luxury items, and slowed investments. The middle-class and poor stopped buying things with installment credit for fear of loosing their jobs, and not being able to pay the interest. Industrial production fell by more than 9% between the market crashes in October and December 1929. As a result jobs were lost, and soon people starting failing to pay their interest payment. Thriving industries that had been connected with the automotive and radio industry started falling apart. Without a car people did not need fuel or tires; without a radio people had less need for electricity. To protect the nation’s businesses the U.S. imposed higher trade barriers (Hawley-Smoot Tariff of 1930). Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 1932. The country spiraled quickly into catastrophe. The Great Depression had begun.