Yuliana Ramazzini

The Great Depression

“The parties were bigger, the pace was faster, the shows were broader, the buildings
were higher, the morals were looser, and the liquor was cheaper.” F. Scott Fitzgerald,
The Great Gatsby

The Roaring 20´s were the decade of the American (USA) culture. As Scott
Fitzgerald stated in his novel The Great Gatsby, those were the years of greatness and
luxury. It is said that the Americans became “Americans” since that time. Everybody
remembers that decade, mostly because of what happened in the late twenties: The
Great Depression. “By the end of the decade, prosperity was completely eclipsed, these
years were viewed retrospectively, especially by writers and intellectuals, as a
materialistic, feverish, and philistine era, and at the same time insubstantial and
ephemeral, without merit of a single solid human embodiment.” (Johnson, 1983) This
was a worldwide economic crisis that lasted 10 years. Around 12.9 million shares were
sold in a day, but in the next 3 days they fell by 23%. It was known as the stock market
crash.1 It is important to mention that the breaking point was in the late twenties, but the
crisis worsen through the early thirties. History was marked by this event. So many
economists, sociologists, and others, tried to understand the causes of this breakdown
after some many years of greatness. There is no consensus about what caused that
crisis in 1929, but there are some events that can be analyzed that are believed created
the path for it to develop. Of course, it can’t be left aside in this study, how did the
country recovered through the years and its effects.

1
The Great Depression: What happened, what caused it, how did it end?
https://www.thebalance.com/the-great-depression-of-1929-3306033
 At the beginning of the twenties and after the liberal/corrupt leading of Harding,
Calvin Coolidge, the father of the modern times in the United States, lead the country. It
is said that he was the president that started these 180 degree changes, or in other
words, the creation of the culture. “During Harding's rule, and even more so in Coolidge,
the United States enjoyed a general prosperity that was unique in its own history or in
that of any other country.” (Johnson, 1983) He enforced the fundamental principles of
the “northamericanism”. So, the changes were not only in the economic area, but in the
social and political area too. In order to get a more precise idea of what might lead to
the Great Depression, it is necessary to take into consideration each aspect of the
American society of the time. Since it was a decade of luxury and spending, nobody
would’ve imagine that an economic breakdown was going to happen at in the late
decade.

First, the economy started to grow. Personal income rose and the era of
consumerism began. “The growth was spectacular. On the basis of an index 100
corresponding to 1933-1938, it was 58 in 1921 and surpassed the level of 110 in 1929.
This implied an increase of the national income that went from 59.4 billion to 87.2 billion
dollars in eight years, with an increase in real per capita income from $ 522 to $ 716;
was not Babylonian luxury, but a modest comfort that had never before been possible.”
(Johnson, 1983)2 Coolidge believed that businesses and the government should be
separated. He had the idea of laissez-faire. That meant that the government would take
care of its main tasks: economy and national structure. This contributed to the
flourishing of the economy. As an effect of the good economy, people started to earn
more money which means they wanted to spend more. They didn't want to have a life
with basic necessities, they started to demand better things such as great food, parties,
alcohol, cabarets, more entertainment. Actually, it is fine to affirm that people was
working so hard that entertainment became a whole industry. The towns started to

2
Citing: George Soule, Prosperity Decade from War to Depression 1917-1929, Nueva York,
1947.
urbanize thanks to the prosperity its citizens were experiencing. Credits to start
businesses were easy to get. The Industrial Belt was born. Also, fashion became
something important, everyone wanted to dress brands and spend money on that. It is
important to mention that the lifestyle the Americans were adapting to, made them to
forget Europe, the great occidental modern culture every country looked forward to. All
of this, of course, created a lot of opportunities to employ people. So nobody had the
chance to be unemployed and earn money to spend. The cycle was clear for
consumerism. In addition to all the flourishing economy and the changes in culture,
migration increased. People from other countries were attracted to all the magic the
twenties were radiating. Also, another important fact to mention is that consumerism
was in its great apogee that everybody wanted more money to spend. Even though
Unions were in its weakest point, they created the open closed shops unions in order to
get more money to consume.

Nonetheless, the consumerism of all the entertainment industries had no back in

production. All the credits that were lent in order to start any kind of business was
nonexistent money. Basically all the luxury was just a pretty mask that was hiding all the
mess that was coming behind it. Nobody paid attention to what was happening, not
even Coolidge. “Coolidge assumed that the crisis would have proportions like those of
1920 and that it would be possible to save it by an analogous phase of masterful
inactivity” (Johnson, 1983). Though, he thought he wasn’t the correct person to fix
anything else that might come ahead. He said that spending was necessary, but the
perfect man to impulse this was Hoover.

The Great Depression was coming just around the corner. As it was mentioned
before, it was an economic crisis that started when 12.9 million shares were sold in a
day, but in the next 3 days they fell by 23%. According to Ben Bernanke, Chairman of
the Board of Governors of the Federal Reserve System the Bank was the one to blame
for the crisis. The policies they proposed were tight monetary policies, and Bernanke
pointed out five mistakes of the process:
 1. The Fed began raising the fed funds rate in the spring of 1928. It kept increasing
it through a recession that began August 1929. That's what caused the stock
market crash in October 1929.
2. When the stock market crashed, investors turned to the currency markets. At
that time, the gold standard supported the value of the dollars held by the U.S.
government. Speculators began trading in their dollars for gold September 1931.
That created a run on the dollar.
3. The Fed raised interest rates again to preserve the dollar's value. That further
restricted the availability of money for businesses. More bankruptcies followed.
4. The Fed did not increase the supply of money to combat deflation.
5. Investors withdrew all their deposits from banks. The failure of the banks created
more panic. The Fed ignored the banks' plight. This situation destroyed any of
consumers’ remaining confidence in financial institutions. Most people withdrew
their cash and put it under their mattresses. That further decreased the money
supply. 3

Of course, this happened after the commercial banks looked back to de

Federal Reserve because of the problem they had with liquidity. Since they gave a lot of
credits, pretending they had all the money they were lending, they ended needing
someone who could save them. It is important to mention that in the same way they
were behaving nationally, the international policies followed the same line. Most of
European countries were in need of money after the Great War and of course, a
blossoming country –such as the United States– could lend them money. Obviously the
levels of inflation were rising and rising. “The increase in productivity should have been
reflected in the fall in prices. To the extent that it did not, it reflected the level of inflation
brought about by the administration of the economy in order to achieve stabilization. It is
true that if prices had not been administered, wages would also have fallen. But the
decline in prices would have been more accentuated and therefore real wages -
purchasing power - would have increased steadily, pari passu with productivity.”
(Johnson, 1983). As a consequence, the stocks were inflated too. But no one could see

3
https://www.thebalance.com/the-great-depression-of-1929-3306033
this and rationalized that they were heading into bankruptcy. They were more interested
in spending rather than in saving and preserving the economy.

Life during the depression was exactly the opposite of all the great experiences
lived at the beginning of the decade. By the time of its peak -1933- “unemployment had
risen from 3 percent to 25 percent of the nation’s workforce. Wages for those who still
had jobs fell 42 percent. Gross domestic product was cut in half, from $103 billion to
$55 billion. That was partly because of deflation. Prices fell 10 percent each year.” (The
Balance, 2017) In consequence, President Hoover passed the Smoot- Hawley tariff to
protect jobs and industries. Basically it increased 900 import tariffs by almost 50%. “
Most economists blame it for worsening the Great Depression. That means it also
contributed to the start of World War II.” (The Balance, 2017) Another thing that started
the path and also worsened the crisis was the drought known as the Dust Bowl. A lot of
towns were covered by dust killing all the crops and causing real damage to agriculture.
4
“Many ended up living as homeless “hobos.” Others moved to shantytowns called
“Hoovervilles," named after then-President Herbert Hoover. For more, see Timeline of
the Great Depression.” (The Balance, 2017)

The reason that the crisis persisted throughout the years were the actions
Hoover, in other words, the government was making in order to “stop” the depression.
That is why Johnson wrote in his book: “Consequently, from the very beginning Hoover
agreed to intervene in the business cycle and to press upon it with all official resources.
He wrote: "Before, no president ever believed that there was an official responsibility in
such cases ... so we had to explore a new field." 53 Once again he promoted credit
5
inflation and the federal reserve added almost 300 million credit dollars only during the
last week of October 1929.” (Johnson, 1983) Also, since he wanted to take people out
of poverty he raised the salaries as if they had all the money in the world. Of course in
between the crisis, production wasn’t in its optimum condition. Additionally he reduced
4
Causes of the Great Depression
https://www.thoughtco.com/causes-of-the-great-depression-104686
5
the taxes just a Keynes would’ve recommended. It is true that Hoover excluded direct
aid and provided that he could channel official money through the banks, rather than
transferring it directly to corporations and individuals. But there is no doubt that he tried
6
to use official funds to revive the economy.

Even though there were damages by these actions, Hoover still believed he
was making the correct thing. So he expressed in his speech:

"We could have done nothing. That would have led us to total ruin. On the other hand,
we face the situation with proposals formulated to the private company and the
Congress, in relation to the most gigantic program of defense and economic
counterattacks ever developed in the history of this republic ... For the first time in the
history of the crisis, dividends, profits and the cost of living have been reduced before
they suffer wages ... They were held until profits had virtually disappeared. They are
now the highest real wages in the world ... Some reactionary economists suggested
that we allow the liquidation process to continue until we hit bottom ... We came to the
conclusion that we could not apply the liquidationists' advice to and see how the entire
body of American debtors went bankrupt and destroyed the savings of our people ...
"(October 1932)7

The crisis was tough, not only for the poor but for everyone. Studied people,
intellectuals, great economists, watched as their precious roaring twenties were slipping
out and nobody was doing anything but making it worse. “The intellectuals
contemplated bitter their own difficult situation and the general misery that reflected.
Some simply reported what they saw. In one of the best articles written during the crisis,
"New York during the third winter," James Thurber pointed out the contrasts and ironies:
of the eighty-six serious theaters of the city, works were performed only in twenty-eight;
but O'Neill's Electra mourned O'Hare, had even sold the $ 6 seats. Approximately 1,600
of the 20,000 taxis had disappeared, but the rest looked much better as a result of the
6
Modern Times, Paul Johnson
7
Hoover’s Acceptance Sppech, 1932
more intense competition. Both the Ritz and Pierre had lowered the rates of their
cheaper rooms to a humiliating $ 6.” (Johnson, 1983)

All of these actions did affect terribly the crisis instead of helping it to get through
until the New Deal. This program was created by Franklin D. Roosevelt while he was in
charge. It represented a turning point in the policy that was proposed by Hoover. This
deal is a branch of the Keynesianism in which “Roosevelt’s administration saw the
passage of the banking reform laws, emergency relief programs, work relief programs,
and agricultural programs. Later, a second New Deal was to evolve; it included union
protection programs, the Social Security Act, and programs to aid tenant farmers and
migrant workers.” (USA Congress ) Roosevelt’s plan actually made a difference, but
since it was mentioned before, there was never a consensus about this whole problem
of the Great Depression. So, some others say that World War II was the fact that ended
the crisis. Because if the creator of the New Deal would have spent as much money as
he did in the War, the New Deal would have actually ended the crisis. “In the nine years
between the launch of the New Deal and the attack on Pearl Harbor, FDR increased the
debt by $3 billion. In 1942, defense spending added $23 billion to the debt. In 1943, it
added another $64 billion. For more, see U.S. Debt by President.” (The Balance, 2017)

To conclude, it is important to mention all the political implications the Depression

left in the American country. First of all, let's recall Coolidge’s government in which he
separated the government from the businesses. At that time the government was
dedicated only to its only duty: national structure and preserving the economy. But
during the Depression, with Hoover, the government interventions increased by far.
Later, Roosevelt came with his New Deal to save all the society out of the crisis. A lot of
reforms and laws impinge on the spending of the government, a lot of social aid such as
funds for the unemployed, work projects, mortgage financing, insurances, security in
transactions, etc. “The New Deal programs that built on existing national government
programs included providing funds for highways and roads; reclamation and irrigation;
flood control and improved navigation; benefits to veterans; building of post offices and
federal buildings; mortgage loans and emergency crop and feed loans for farmers;
education; agricultural experimentation, extension, and advanced education; and
national defense spending. Some of the activities went back to the 1790s.” (Price V.
Fishback, 2012)

Also, the unstable context the United Stated lived during the late twenties and
early thirties, left an untrustworthy image of the country to the world. Investors were
scared of making businesses there, so there was not much investment. Of course,
through the time and in part because of the New Deal and because of the War, the USA
recovered and became the number one economy in the world.

Bibliogrphy
Johnson, P. (1983). Modern Times. LIBERDÚPLEX S.L.

Price V. Fishback, J. J. (2012). What was new about the New Deal? NATIONAL BUREAU OF
ECONOMIC RESEARCH.

The Balance. (2017). The Balance. Retrieved from https://www.thebalance.com/the-great-

depression-of-1929-3306033

USA Congress . (n.d.). Library of Congress. Retrieved from Library of Congress:

http://www.loc.gov/teachers/classroommaterials/presentationsandactivities/presentations/
timeline/depwwii/newdeal/