| Causes of the Great Depression (1924-1929) |
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Sections:- Historiography
- Mellon's Tax Bill
- The New Tax Law
- Calvin Coolidge Sixth Annual Message to Congress
- Hamlin Memorandum
- Leading up to the Crash of 1929
- Black Thursday
- New York Times Articles on the Crash of 1929
- Herbert Hoover Inaugural Address
- Herbert Hoover State of the Union Address
- Lesson Plans
- PowerPoint
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| Although this article was written by financial scholars, it is insightful for understanding the general economic causes of the Great Depression. Of interest here is the Friedman-Schwartz hypothesis which argues that a more adaptive monetary policy would have greatly diminished the intensity of the Great Depression. To test this hypothesis, the authors utilize economic data from the 1920’s and 1930’s and propose an alternative fiscal policy. What becomes evident is that the dramatic downturn in the economy was due to a move away from private liabilities such as desposit toward market currency. The economy was further impaired because the market power of the American worker had also increased vis-à-vis others. Interestingly, the authors simulate a different scenario utilizing a hypothetical fiscal policy and conclude that the severity of the Depression could have been reduced.
Lawrence J. Christiano, Roberto Motto and Massimo Rostagno, “The Great Depression and the Friedman-Schwartz Hypothesis,” Journal of Money, Credit, and Banking, V. 35, N. 6, December 2003, p. 1119-1197.
This monograph concentrates the sixteen years encompassing the Great Depression, the New Deal and the Second World War and how the American populis responded to these events. Relying on published accounts and primary sources, the author ties together the epoch’s social, economic and political history into a grand syntheis. He offers many new interpretations such as disavowing a clear link between the Stock Market Crash and the ensuing Great Depression. He also argues that Hoover has been unfairly maligned by history because the President was restricted by a gold standed that limited money suppy, an unregulated speculative stock market that created excessive credit fostering bank failures and widespread unemployment. Althought the New Deal did not end the Depression, it did, however, create lasting pillars of American society like Social Security, unemployment insurance, banking and stock reforms and public relief works. In the end, however, it was the Second World War that ultimately ended economic stagnation.
David Kennedy, Freedom from Fear: The American People in Depression and War, 1929-1945, (New York: Oxford University Press, 2000).
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| The Revenue Acts of 1924, 1926, and 1928, known collectively as the Mellon Tax Bill, were pivotal pieces of economic legislation in the 1920's. They were introduced by Andrew Mellon, who served as Secretary of the Treasury from 1921 through 1931. In 1924, Mellon published Taxation: The People’s Business, promoting his ideas. The following quote, summarizes the goals of his proposed legislation.
“ The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.” – Andrew Mellon, Taxation: The People’s Business (1924).
The tax bills, driven by supply-side economics, were intended to put more money into the hands of the consumers by lowering the federal income tax. They later learn that the tax bill contributed to the rampant spending trend of consumers, which in turn led to over production of goods.The image below shows President Coolidge signing the Mellon Tax Bill into law. |
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| | The tax bills introduced by Mellon greatly impacted the public. They instantly became fodder for the media, who kept citizens abreast of the subject at hand. The first article addresses the tax law signed by President Coolidge. At the time the tax bill was appreciated by all. This article acknowledges the need for the income tax reduction, but also outlines the foreseeable problems that result from this law. The second article stresses President Coolidge's views on taxation. As the first article does, this too acknowledges the need and importance of the income tax reduction, but sights some objections to the bill. Questions to consider:
1. What are the problems the first author foresees with the tax bill?
2. How will this tax bill benefit the people?
3. What objections does the second author have to the tax bill? How is this reflected in Coolidge's views of taxes?
4. How do these objections compare to those of the author of the preceding article?
5. What are the benefits of this bill, as suggested by the second author? |
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| | Americans in the 1920's witnessed a proliferation of scientific and technical innovations that came to be known by historians as the "Second Industrial Revolution." WWI stimulated development and investment in new technology that contributed to the business boom in the inter-war period. As electricity became widespread and industrial production became more efficient, a range of mass produced consumer goods became available to the public at attainable prices. For the first time, consumers across the nation were reading many of the same books and news stories and purchasing the same goods. Communication innovations in radio, advertising, and film also contributed to the homogenization of ideas that led to the advent of national popular culture. In the years following World War One. In his Sixth Annual Message to Congress, President Coolidge discusses the great economic prosperity of the nation. He attributes this prosperity to the good relationships between wage earners and employers, the tax cuts, and conservation of our natural resources. In this address he also discusses the growing surplus problem facing the nation, the states' responsibility regarding the surplus problem, and commerce. A full length photograph of President Coolidge follows below. Questions to consider:
1. What, if any, indications does President Coolidge give that there may be economic trouble looming on the horizon?
2. What suggestions does he give for the surplus problem? |
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| | In 1916, Charles Hamlin became the first Chairman of the Federal Reserve. His background in American economic policy and theory made him an important figure during the boom years and the economic depression. Alexander Goldenweiser, a Russian native, was a prominent Anthropologist in the United States. In the following memorandum from Mr. Hamlin to Mr. Goldenweiser, Mr. Hamlin discusses the role the open market system played in the current banking situation. This memorandum is an example of the discussion between the federal reserve board and policy makers regarding the banking system. Questions to consider:
1. How does Hamlin relate the open market system to the banks? Is it a positive or negative association?
2. If this memorandum had been written several months later, do you think the opinion would have been different? |
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| This document outlines the important events that lead up to the stock market crash of 1929. It includes a graph that depicts the rise and fall of the Dow Jones Industrial Average.
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| The rapid increase in American industrialization was fueling growth in the economy, and technology improvements had the leading economists believing that the up rise would continue. During this boom period, wages increased along with consumer spending, and stock prices began to rise as well. Billions of dollars were invested in the stock market as people began speculating on the rising stock prices and buying on margin.
The enormous amount of unsecured consumer debt created by this speculation left the stock market essentially off-balance. Many investors, caught up in the race to make a killing, invested their life savings, mortgaged their homes, and cashed in safer investments such as treasury bonds and bank accounts. As the prices continued to rise, some economic analysts began to warn of an impending correction, but they were largely ignored by the leading pundits. Many banks, eager to increase their profits, began speculating dangerously with their investments as well. Finally, in October 1929, the buying craze began to dwindle, and was followed by an even wilder selling craze.
On Thursday, October 24, 1929, the bottom began to fall out. Prices dropped precipitously as more and more investors tried to sell their holdings. By the end of the day, the New York Stock Exchange had lost four billion dollars, and it took exchange clerks until five o'clock AM the next day to clear all the transactions. By the following Monday, the realization of what had happened began to sink in, and a full-blown panic ensued. Thousands of investors—many of them ordinary working people, not serious "players"—were financially ruined. By the end of the year, stock values had dropped by fifteen billion dollars.
Many of the banks which had speculated heavily with their deposits were wiped out by the falling prices, and these bank failures sparked a "run" on the banking system. Each failed bank, factory, business, and investor contributed to the downward spiral that would drag the world into the Great Depression. This photo was taken outside of the New York Stock Exchange building on October 24, 1929 (Black Thursday). |
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| | As the stock market began to crash, investors along with the general public began to panic, especially as the stock market crashed for a third day in a row. The eight articles in the document below were printed in the New York times on October 29, 1929 (Black Tuesday). Questions to consider:
For the following questions imagine that you are an investor looking at stock reports during the Crash.
1. How do you think your reactions would compare to those of actual investors?
2. How will this Crash affect your personal decisions?
3. Do you believe that the market will rally? |
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| | Upon accepting the Republican nomination for President in 1928, Herbert Hoover predicted that “We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us.” Hoover won the presidency that year, but his time in office belied his optimistic assertion. Within eight months of his inauguration, the stock market crashed, signifying the beginning of the Great Depression, the most severe economic crisis the United States had ever known. Rightly or wrongly, Hoover’s efforts to combat the Great Depression have defined his presidency and his place in American history. In his inaugural address, Herbert Hoover, discussed the progress of our nation, the realtionship between business and government, and how the government will cooperate in producing a more stable economy. A photograph of the president follows below. Questions to consider:
1. What plan does Herbert Hoover have for producing a more stable economy?
2. How will this plan be affected by the realtionship between the government and businesses?
3. How will the progress of the nation play into establishing a more stable economy? |
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| | This State of the Union Address follows the Stock Market Crash of 1929. In this address, President Hoover, address the current economic state of the nation along with government finances and tax reduction. Questions to consider:
1. What does Hoover plan to do with the tax surplus?
2. President Hoover mentions further tax cuts to stimulate the economy, how effective will this be given the repercussions of the previous tax cuts?
3. Overall how do you think the current economic situation will affect policy making? |
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| | The following lesson plan addresses the subjects in this module. |
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| | The following Power Point address the topics covered in this teaching module. |
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