Causes of the Great Depression
For Kids - Dominos of the Great Depression
Have you ever set dominos on their bottoms and lined them up in just the right position, so when you tipped one over, they all fell over, one after another? Here is an example of the domino effect created by 11,000 dominos by a classroom of kids at the Baltimore Science Center: 11,000 dominos. The Great Depression was like a bunch of dominoes, one knocking over the next. Some of the causes were overproduction, too much buying on credit, problems in agriculture, decreased international trade, a flawed banking system, and the stock market crash. Under normal circumstances, the economy would have recovered. A healthy economy can recover from reversals. But in the 1930s, the American economy was the victim of a domino effect.
Dominos: The Stock Market Crash of 1929. There were many wonderful products and new inventions to buy in the 1920s, like refrigerators that ran on electricity. But how many refrigerators does any one family really need? After a few years, many people slowed down their buying craze. Many businesses were affected by this slowdown in spending. Professional investors began selling their stocks. The price of stocks began slowly to fall. As a result, other investors tried to sell the stocks they held. By then, they had to sell their stock at a price considerably less than they had paid for it. Many of these investors, especially the smaller investors, had bought on margin - they had borrowed money from brokerage houses to buy stock. As stock prices fell, brokerage houses began to make large-scale margin calls, demanding that investors repay their loans immediately. There was no installment plan with margins. When you borrowed from a brokerage firm, if you did not have enough money in your brokerage account or enough value in the stocks you held to cover your losses, the brokerage house would demand full payment immediately of any loans due to them. Stock prices fell even further. On Tuesday, October 29, 1929, nicknamed Black Tuesday, stock prices collapsed. Around $15 billion dollars was lost in one day due to falling stock prices. The crash lasted for four days. At the end, the stock market had lost more money in four days than was spent on the entire war effort in World War I. Millions of people lost money in the stock market crash. Some lost their entire life savings, their homes, their cars, their businesses, everything. It was a disaster for many.
Dominos: Overproduction. Factories and farms had already produced more goods than people could afford to buy. As a result of the stock market crash, more people stopped spending. Factories slowed production. Workers were laid off. Some companies went out of business because they had invested in the stock market and could no longer keep their doors open. Those workers lost their jobs as well.
Dominos: Banks failed. In the 1930s, if a bank failed and closed their doors, the money in any accounts people had in that bank were lost. With the crash of the stock market and headlines in the newspapers screaming of banks that had invested in stocks and were now in big trouble, people pulled out their savings. They did not trust the banks. No bank can operate without cash, and no bank keeps much cash on hand. Cash is invested in loans and other business transactions. Banks in trouble applied to the Federal Reserve Banks for a loan. But their request in many cases was not granted. Banks began to fail.
Dominos: Decrease in consumer spending. In the 1930s, so many banks failed that about 1/3 of the people in the United States lost their savings. As a result, there was another fall in spending. More factories stopped producing goods. More companies went out of business. More people found themselves out of work.
Dominos: Unemployment in one part of the economy led to unemployment in another part of the economy People stopped buying luxury goods like new cars. Many car salesmen were out of work. Autoworkers were out of work. Steel workers were out of work. The sale of houses went down so people in the building industry were out of work. Furniture workers were out of work. Textile workers were laid off. One domino after another collapsed until about 28% of people in the United States were unemployed. That number did not count women who lost their jobs. Many people who were still "employed" found their jobs reduced to part-time.
Dominos: Too much credit. During the booming Roaring 20s, people could buy, for the first time, goods on credit. Credit was a loan. People could pay loans back using the new installment system. This system allowed them to pay a small amount each week or month out of their paycheck, sums that included interest, until they paid back their loan in full. This allowed people to afford to buy houses, cars, furniture, and other goods without waiting until they saved enough money to pay for their purposes in full. In the 1920s, things were prosperous. Banks and businesses were generous with credit. In the 1930s, when people lost their savings or their jobs or both, many people could not pay their installments and defaulted on their loans. They lost their homes, their farms, their businesses, and other goods. The banks and businesses who had granted credit were also hurt. Many closed. Others sent collectors to take back property that was in default and to kick people out of their homes. It did not do them much good. Few people had money to buy what they recovered.
Dominos: The Dust Bowl. Dust storms devastated the Mid-west for 10 years! Crops died in the fields in several states from drought and dust. Without being able to grow crops, people lost their farms and their homes. Dust got into everything - their food, their clothes, everything. People were getting sick. There was a massive migration of people out of the affected area. But when they arrived somewhere else, there was no work.
Dominos: Decreased International Trade. In 1930, Herbert Hoover, President of the United States, made what turned out to be a very bad decision - he signed the Smoot-Hawley Act into law. That act raised taxes on imported goods. Hoover's plan was to make foreign goods more expensive than American made goods. This would make Americans buy goods made in America. That would increase sales and put Americans back to work. But the depression was not limited to the United States. Many countries were in the midst of a depression. Other nations were so angry about the increased import tax that they stopped buying American made goods. This led to decreased international trade, and in some cases a full halt. As American exports declined, more workers were laid off.
Millions of Dominos: The result of the combined causes of the Great Depression was not that eleven thousand people became homeless - but that millions of people became homeless. Many were starving. Millions of people had lost their jobs. Farms were in trouble. Food production was down. Thousands of banks had failed. Millions of people had lost their savings. People all over the country were affected. The Stock Market Crash of 1929 was not the only cause of the Great Depression, but it signaled the beginning. The Great Depression lasted for 10 years. It was a decade of misery for many millions of people.
1930's Life on the Farm during the Great Depression
Not everyone felt the effects of the depression in the same manner. People who had little to begin with had always coped.