Saturday, November 28, 2020

Causes of the Great Depression

Overproduction Led to Inflated Stock and Corporate Valuation

Dec 4, 2009 Michael Streich

The laissez faire policies of Calvin Coolidge and Treasury Secretary Mellon led to a cycle of catastrophic economic failures resulting in the Great Depression.

Herbert Hoover was inaugurated President of the United States in 1929, the same year of the great stock market crash that served as the catalyst for the coming Great Depression. Although Hoover won election largely because “Coolidge Prosperity” defined a prosperous economy, the causes of catastrophic economic failure were not readily apparent or were ignored. The growing wave of bank failures as well as other key financial institutions resulted in widespread loss of confidence and set into motion unprecedented unemployment figures. Yet the overall causes of the Great Depression predated the fateful events of late 1929

The Coolidge Years and the Façade of Wealth

The expansion of consumer credit in the years following World War I enabled a spectacular increase in American consumerism. This encouraged overproduction as new technologies in manufacturing allowed businesses to produce more goods. The consequence of this was an inflated value of industrial capitalization. Stock prices, which kept rising, inflated the real value of corporations. In 1929 a share of Montgomery Ward stock sold at $439.00 – far higher than the actual value of the retailer.

World War I left many other nations facing depression. Many of these nations were tied to American financial investments and potential customers of American products. High tariffs, however, exacerbated a smooth flow of trade, creating an imbalance. The 1930 Smoot-Hawley Tariff, for example – coming after the 1929 crash, featured the highest tariff rate in U.S. history. American foreign interests were also jeopardized by social and political unrest in some of the most lucrative and important foreign markets.

The Coolidge years represented unfettered laissez faire for American business. Without federal regulation and oversight, financial institutions and banks were left to their own devices, even if that represented potential threats to the stability of the economy. Neither the Federal Trade Commission nor the Interstate Commerce Committee exercised enforcement. Even the Supreme Court, led by arch-conservative William Howard Taft, ruled against minimum wage laws, child labor, and government regulation of utility companies.

Failure to Address the Needs of Farmers

President Coolidge was not a friend of the American farmer. His response to victims of flooding was, “the government is not an insurer of its citizens against the hazards of the elements.” He also vetoed the McNary-Haugen Farm Relief Act which was presented three times during the Coolidge presidency. The administration’s failure to address the needs of farmers led to the resurgence of the Progressive Party in 1924, led by Bob La Follette of Wisconsin and Burton Wheeler of Montana. The stock market crash and resulting depression fell particularly hard on farmers who saw agricultural prices drop dramatically. Wheat, which had sold for $1.05 a bushel, fell to 35 cents.

The Snowball Effect of the Stock Market Crash

One of the more important causes of the Great Depression was psychological. The widespread loss of confidence led to a cycle of steps that worsened the overall impact of financial collapse. The October 29th crash erased 90 billion dollars and caused the market to lose 75% of its value. Financial institutions immediately tightened credit and stopped making loans.

Despite pleas from President Hoover to maintain wages and workforce numbers, American businesses began to lay-off employees. By 1933 one third of the work force was unemployed representing 15 million people. As people lost jobs, consumerism evaporated. Without consumer spending, manufacturers and retailers were forced to cut inventories and laborers.