The Great Depression summary

In 1928, the Federal Reserve System raised the discount rate it charged on loans to member banks in order to raise interest rates in the United States, which would stem the outflow of American gold and dampen the booming stock market. As a result, the United States began to receive shipments of gold.

By 1929, as countries around the world move their gold reserves to France and the United States, these countries' governments initiated deflationary policies to stem their gold outflows and keep the gold standard. These deflationary policies were designed to restrict economic activity and reduce price levels, and that is exactly what they did. The international action in regard to gold standard made the spreading of Great Depression worldwide.

The beginning of the crisis was actually a stock market crash. Despite caution of the dangers of speculation, many believed that the market could sustain high price levels. Shortly before the crash, economist Irving Fisher famously proclaimed, "Stock prices have reached what looks like a permanently high plateau." What a monumental mistake!

Stock market crash in 1929
The optimism of the bull market was shattered on Tuesday, October 29. Almost all share prices on the New York Stock Exchange collapsed. Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor, determining that strong buy activity on leading blue chip stocks could ease the panic. U.S. Steel stock was the preferred choice. Unfortunately for them and everyone else who invested in the market, the collapse was only temporarily halted and carried on the next day.

The fall actually continued at an unprecedented rate for a full month. One of the stock market problems were extremely low margin requirements around 10%. Brokerage firms would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits. Seeing several major banks close caused another panic wave across the country.

Afraid they would lose their own savings, ordinary people rushed to banks that were still open to withdraw their money. This massive simultaneous withdrawal of cash forced additional banks to close, as well as put tremendous pressure on the entire financial industry. Since there was no way for a bank's clients to recover any of their savings once the bank had closed, those who didn't reach the bank in time also became bankrupt.

Hoovervilles and Dust Bowl effect
Millions of Americans lost their jobs and their homes, and shack towns dubbed "Hoovervilles" began to spring up throughout the country. These homeless encampments during the Great Depression were named after President Herbert Hoover and the Republican Party that people held responsible for the economic crisis. There were hundreds throughout the country, each testifying to the housing market crisis that accompanied the employment crisis. Seattle's main Hooverville was one of the largest with a population of up to 1,200.

Industrial production fell and with the closing of numerous factories came the massive layoffs. Unemployed would search for a job all over the country, usually with the little success. The farmers were also in debt, borrowing money for seed and paying it back when their crops came in. They were about to face a different kind of adversity.

In 1929 numerous dust storms damaged the crops, preventing the farmers to pay back their debt and much worse, spreading hunger through the land. Many farms foreclosed due to the dust storms damage and the entire phenomena became known as the Dust Bowl. It was actually the combination of drought and poor land use practice that created the environmental disaster. Over three million people left their farms on the Great Plains and more than half a million migrated during the Dust Bowl. Despite the worsening economic plight in the entire country, President Hoover still refused to provide any direct federal assistance to relieve the suffering.

Protests, elections and the New Deal
President Hoover authorized the army to use force to remove 20,000 members of the Bonus Army, a group of World War I veterans and their families who marched on the United States Capitol demanding economic relief. Although protests were common, the protesters numbers constantly increased and the crisis soon reached the boiling point. By 1932, Americans were fed up with Hoover's lack of economic assistance and voted him out of office.

The new optimistic President Franklin Delano Roosevelt rallied the Democratic majority in Congress and pushed for the passage of a bundle of laws known collectively as the New Deal. Taking a calculated risk, Roosevelt formed the New Deal policies around the unproven theories of British economist John Maynard Keynes, who believed that planned deficit spending by the federal government will jump-start the economy again.

Next: The Great Depression aftermath