Great Depression And Its Causes

The causes of the Great Depression of the 1920's and 1930's has been argued about for generations. Most people agree on several key topics and that it was the severity and length of time the Depression lasted that was actually the most remarkable. Hoover made many noteworthy attempts to try and solve this crisis, yet in the end it was President Roosevelt and his "New Deal", that brought many Americans hope for the future.

The first factor in the start of the Depression was the lack of diversity in the American Economy. It relied strongly on only a few basic industries, notably the construction and automobile industries. In the 1920's those 2 industries began a rapid decline: construction became scarce and fell from 11 billion to under 9 billion between 1926 and 1929. The automotive industry fell more than one third in the first nine months of 1929. Second, there was a maldistribution of purchasing power, and as a result a weakness in consumer demand. As major industries increased, the percent of profits going to consumers was to small to create adequate market for the goods the economy was producing. A third major problem was the credit structure of the economy. Farmers were greatly in debt, and crop prices were extremely low. Small banks were in trouble, many customers defaulting on their loans. Big banks were in trouble as well, many investing recklessly in the stock market then losing it all when the stock market crashed in 1929. The fourth factor was Americas position in the international trade market. In the late 20's, Europe's demand for American goods began to decline, partly because their industry was becoming more productive and partially because their economy was destabilized from the international debt structure that emerged in the aftermath of WW1. The international debt structure was a fifth and final factor contributing to the Great Depression. At the end of the war in 1918, all the European nations that had been allied with the US owed large sums of money to American banks and could not repay them with their shattered economies. The reparation payments were needed greatly from Germany and Austria, yet they were no more able to pay than the Allies were. This caused American banks to begin making large loans to European governments which they used to pay off their earlier loans, really only piling up debts. The collapse of the international credit structure in 1931 was one of the reasons the Depression spread to Europe.

Hoover made many noteworthy attempts to try and combat the Depression. His first response was to attempt to restore public confidence in the economy. He implored businessmen not to cut production or lay off workers. He talked labor leaders into forgoing demands of better wages and hours. But by mid 1931, the structure of voluntary cooperation he had constructed had collapsed. Hoover then proposed the Presidents Organization for Unemployment Relief, $432 million granted to states for public works and recreation. But the spending was not nearly enough in the face of such devastating problems. He proposed the Hawley Smoot Tariff in 1930, containing increased protection on 75 farm products. Also, in 1929 he proposed the Agricultural Marketing Act, which established the first major government program to help farmers maintain air prices. But neither of these attempts ultimately helped Americas farmers significantly.

Americans were starting to see Hoover as "aloof" and "out of touch", not really with it. The Federal budget was running into the red and into a deficit. Hoover then went to Congress and asked for tax hikes to balance the budget. In January of 1932, the most innovative idea to come out of the Hoover administration was enacted. It was known as the RFC, the Reconstruction Finance Corporation a government agency whose purpose was to provide federal loans to troubled businesses, banks and railroads. Struggling industries could now take out loans, with the belief that the economic benefits would extend to all Americans creating more jobs than spending. This was the first time the Federal government became involved with the economy during a time of peace. Yet, the new agency failed to deal directly and forcefully enough with the real problems facing the economy from the Depression. It really only lent money to the institutions with sufficient collateral and those public works projects that promised to pay for themselves like public housing and toll bridges.

The worst four months of the Depression happened in 1933,