1 RESEARCH QUESTION: How far was the Wall Street Crash the main cause for the GreatDepression? A. Plan of the Investigation B. Summary of Evidence C. Evaluation of Sources D. Analysis E. Conclusion F. Bibliography 1 1 3 5 7 8 2 A. Plan of the investigation The investigation considers the extent to which the Wall Street Crash was the main cause for the Great Depression that hit the Unites States throughout the 1930s, whose effects were spread worldwide. For this purpose the investigation assesses the significance of the crash in the stock market in relation to other factors that were also relevant. Through the selection and summary of relevant written sources, the investigation examines the 1920’s the domestic and international problems during the “prosperous” years that triggered the crisis. In order to reach a conclusion two of the sources: The Great Depression by Lionel Robbins and The Great Depression and The New Deal by Robert F. Himmelberg are evaluated for their origin, purpose, values and limitations. Word count: 120 B. Summary of evidence By the time the United States entered the First World War in 1917, the USA was the world’s biggest economic power1. Its role in providing extra equipment and a supply of fresh soldiers was instrumental in the final Allied victory2. The artificial prosperity of the war years was followed by an inevitable collapse3. After a short recession between 1920 and 1922, the USA began a long period of uninterrupted prosperity and economic expansion4. By the end of 1922 many industries were again recording capacity business5. When weekly wages were insufficient to purchase personal goods, credit was available to the consumer. For the businessman and the investor the twenties offered golden returns. Never before had corporations profits reached such heights, and never before had the security markets indicated such values for common stock.6 11 Murphy, Derrick and Cooper, Kathryn. 2008. United States 1917-2008 and Civil Rights 1865-1992. London. Collins, p.12 2 Ibid., p. 96 Underwood Faulkner, Harold. 1965. American Political and Social History. 7th Edition. New York. Appleton-Century-Crofts, p. 797 4 Brinkley, Alan. 2007. A Survey American History. Twelfth Edition. New York. McGraw-Hill Company, p.642 5 Underwood Faulkner, op. cit., p. 797 Leopold, Richard W. and Link, Arthur S. 1957. Problems in American History. New Jersey. Prentice-Hall, p. 607; 6 3 3 Although lots of people were doing well during the “Roaring Twenties”, the wealth was not shared out equally. Firstly, farmers were not sharing in the general prosperity; during the 1920s prices of farm produce gradually fell7. Some industries such as coalmining were suffering competition from oil, and many workers were laid off 8. In addition, most African-Americans in the Old South led a poverty-stricken existence and occupied the lowest economic position. Those who migrated to the North tended to get the worst paid jobs9. The mal distribution of income can be seen in two main facts: by 1929, one third of the nation’s income was in the hands of only 5 per cent of the population and just over 70 per cent of the population received an income below $2500 a year10. Overproduction resulted from this mal distribution. The United States had not reached a stage of economic development in which it was possible to produce more than the American people as a whole would like to consume11. The American economy became unable to generate sufficient “purchasing power” to buy the flood of foods it was creating12. In addition, Republican Administrations included too little regulation of business. Low taxes made the mal distribution of wealth greater and low capital gains tax encouraged share speculation13. In 1920 there had been only 4 million share owners in America while by 1929 they had risen to 20 million out of a population of 120 million. Around 600.000 new investors were speculators. unwise loans.15 By the end of WWI all the European nations that had been allied with the United States owed large sums of money to American banks. The American government refused to forgive or reduce the debts. Instead, American banks began making large loans to European governments to pay off their earlier loans. At the same time, high American protective tariffs, such as the Emergency Tariff 7 14 Also, large banks were in trouble. Some of the nation’s biggest banks were investing recklessly in the stock market making Lowe, Norman. 2005. Fourth Edition. Mastering Modern World History. London. Palgrave Macmillan, p.459 8 Ibid., p.460 9 10 11 12 Murphy and Cooper, op.cit., p.45 Traynor, John. 2001. Mastering Modern United States History. New York. Palgrave, p.109 Leopold and Link, op.cit., p. 615 Himmelberg, Robert F. 2001. The Great Depression and the New Deal. Westport. Greenwood Press, p.24. Murphy and Cooper, op.cit., p. 47 Walsh, Ben. 2005. GCSE Modern World History. Second Edition. London. Hodder Murray, p. 211 Brinkley, op.cit., p.669 13 14 15 4 Act (May 1921) and the Fordney-McCumber Tariff (March 1922), were making it difficult for the European nations to sell their goods in American markets. 16 What is more, the US economy could not expand its foreign markets as rapidly as it could increase its production. Manufacturing output increased 50 per cent between 1920 and 1929, but exports rose only 38 per cent17. The economic depression, which first hit the United States and then the world, began with the collapse of share prices on the New York Stock Exchange in October 1929. During October a record of 16 million shares changed hands at very low prices18. In the fall of 1929 a panic on the New York stock market caused the greatest destruction of security values and the largest capital losses to individuals that had ever occurred in time of peace19. Word count: 619 C. Evaluation of Sources Robbins, Lionel. 1934. The Great Depression. London. Macmillan and Co. The Great Depression presents the orthodox20 point of view of Lionel Robbins, “one of the giants amongst British economists over the past century and a Star at the London School of Economics”21. This analysis was completed in 1934 and aimed at “furnishing a succinct commentary on the more conspicuous features of the slump and its antecedents”22. The main value of this source lies in the fact that it is a primary source that provides a foreigner´s interpretation. Besides, it offers a balanced analysis of the American economy by a reknown economist. Yet, Robbins cautions the reader about the 16 17 18 19 20 Brinkley, op.cit., p. 670 Murphy and Cooper, op.cit., p. 47. Ibid., p. 45. Soule, George. 1947. Prosperity Decade.From War to Depression:1917-1929.Volume VIII. New York. Holt, Rineheart and Winston, p.290. Lionel Robbins gives a special mention in the Preface of the book to the “aid of what is sometimes called “orthodox” economics” [Robbins, Lionel. 1934. The Great Depression. London. Macmillan and Co, p.vii] Orthodox economics “outcomes as equilibria in which individuals have done as well for themselves as they could given their preferences and the constraints on their choices”[ Hausman, Daniel M. “Economics, Philosophy”. (Online). Available http://philosophy.wisc.edu/hausman/papers/67.htm, Accessed on July 7, 2009] 21 Robbins, Lionel. 1934. The Great Depression. London. Macmillan and Co, p. xiii 22 Robbins, op.cit., p.vii 5 difficulties of the topic undertaken23 and warns that “the subject is highly controversial”24. Its limitations can be seen in the nationality of the author and year of publication. I mean, The Great Depression offers the interpretation of one British economist and his closeness to the event does not give him much possibility of hindsight analysis. At the time when he wrote the book, the effects of the depression were different all over the world, and each one could have a different view towards the causes that led to its burst. Himmelberg, Robert F. 2001. The Great Depression and the New Deal. Westport. Greenwood Press. The Great Depression and the New Deal is a book written by Robert F. Himmelberg, a specialist in the political and economic history of this subject25, in 2001. The purpose of this book is to provide interesting and useful information about the major issues involved in interpreting the period26. This source has value because the author is not emotionally involved with the event, he is detached, and also because he counts with “lengthy and up-to-date bibliography”27. Himmelberg has had time to do research and a great availability of material to base his investigation on. Besides, the author is an expert on the topic and his book deals exclusively with the subject of this investigation. Thus, it provides a new perspective on the Crisis that considers previous interpretations objectively. Still, we find limitations when considering the author´s remoteness from the event. Moreover, this source does not contribute details about the social aspects that contributed to the Depression. In fact, Himmelberg is specialized in political and economic history. Word count: 384 D. Analysis 23 24 25 26 27 Ibid., p.vii Ibid., p.vii Himmelberg, op.cit., p.185 Ibid., p. xiii Ibid., p. xiv. 6 The sudden collapse of the New York Stock Exchange in October 1929 has come to symbolize the start of the Great Depression.28 Economic historian Sidney Pollard (1978) states that the ‘avalanche’ began in the United States, and ‘with increasing speed it took more and more economies into the abyss’.29 Thus, the severity of this crisis was felt all over the world. In capitalist economies “periodic recessions are a normal feature”30 Still, what was remarkable of this one was that it was so severe and that it lasted so long31. It is worthy studying this Depression in order to understand the present crisis, to be able to find a solution to it and maybe predict and avoid future crises. Controversy arises over the causes that led to the Great Depression. The Wall Street Crash was an important cause since it marked the beginning of the crisis. Nonetheless, it was only a short-term cause. Other underlying weaknesses in the US economy may have contributed to the Crash and therefore, to the Depression Donald McCoy notes: ‘The stock-market crash did play an important role, but its larger significance was as a trigger and as a dramatic symptom of deeper and more complicated national and international causes of the depression’32 Therefore, although October 1929 might have been the first visible sign of the crisis, the Depression had earlier beginnings and more important causes.33 Brinkley believes that the analysis of the long-term causes in relation to the domestic and international contexts is vital to understand why the Crash took place. Lionel Robbins agrees with McCoy in the idea that the Crash was not the only cause of the Depression: “the fall of prices is, in any sense, a prime cause of the depression’34. He explains that “all falls of prices do not occur spontaneously”35 and introduces maldistribution of income and overproduction as ‘causes of which prices are resultant’36, therefore as causes of The Depression. Moreover, the apparent prosperity during the “Roaring Twenties” and the excessive confidence of investors encouraged Americans to start speculating on shares. H.U. Faulkner states that ‘the twenties began with a depression and ended with one, but 28 29 30 31 32 33 34 35 36 Traynor, op. cit., p.107 Ibid., p.107 Brinkley, op.cit., p. 668 Ibid., p. 668 Murphy and Cooper, op. cit., p.46 Brinkley, op.cit., p.668 Robbins, op.cit., p.13 Ibid., p.13 Ibid., p.13 7 the intervening years had been so active and prosperous that many, forgetting the normal swing of business cycles in a capitalist economy, had predicted an indefinite continuation. Such observers failed to recognize certain fundamental flaws in the economic structure, which worked to undermine the rather widespread prosperity’37. So, it was the context of boom and prosperity between 1922 and 1929 which led to the crisis since excessively confident Americans failed to foresee it. Economic historians agree that by 1929 stock market speculation had reached unhealthy and unrealistic levels. This boom in share prices could not go on forever, and the bubble burst in October 1929.38 Thus, speculation certainly caused the Wall Street Crash, hence, the Depression. Speculation, triggered by the idea of getting rich quickly, led to the massive involvement of business, ordinary Americans and even banks in taking excessive risks without regarding the consequences. In relation to the international context, James T. Patterson talks about an ‘international economic instability of a peculiarly severe nature’39 as a cause of such ‘devastating depression’. The war had left England and France heavily indebted to America and American investors throughout the 1920s poured loans into Germany to help her recovery. Yet, by 1929 Europe’s financial institutions began to weaken, investors throughout the world sought safer places for their money. What’s more, Europe could not buy American products because of the high protective tariffs imposed by the US government. Therefore, it grew difficult for European countries to recover and pay off their debts but it was also almost impossible for the USA to find outlet for her overproduction. In turn, this contributed to the Depression. The US tariff policy combined with the laissez-faire policies of the 1920s Republican administrations are also responsible for the crisis. Norman Lowe states that in order to control the situation the government could have “encouraged overseas countries to buy more American goods by lowering American tariffs instead of raising them […] and limited the amount of credit which the stock market was allowing speculators”40. Thus, the role of the government was also decisive for the outbreak of the crisis. Word count: 710 37 38 39 Underwood Faulkner, op.cit., p. 816 Traynor, op. cit., p.107 Patterson, James T. 1976. America in the Twentieth Century: a History. New York. Harcourt Brace Jovanovich, p.188 40 Lowe, op.cit., p.474 8 E. Conclusion The collapse of the New York Stock Exchange in Wall Street marked the beginning of the Depression that the United States had to face through the 1930s. However, any explanation of the causes of the Depression should not be limited to this event. International economic problems related to the effects of the First World War and the high American protective tariffs added to the national problems of mal distribution of income, overproduction, speculation, Republican policies and weaknesses in the banking system were extremely relevant for the Crash to take place. Therefore, the Crash was the first visible sign of crisis but it resulted from a series of underlying weaknesses that could be observed in the US economy throughout the 1920s. In this way, the Wall Street Crash was an important cause of the Great Depression but it was only the short-term cause; there were other significant causes that help explain the crisis. Word count: 152 9 F. List of Sources Books: • Brinkley, Alan. 2007. A Survey American History. Twelfth edition. New York. McGraw-Hill Company. • Himmelberg, Robert F. 2001. The Great Depression and the New Deal. Westport. Greenwood Press. • Leopold, Richard W. and Link, Arthur S. 1957. Problems in American History. New Jersey. Prentice-Hall. • Lowe, Norman. 2005. Fourth Edition. Mastering Modern World History. London. Palgrave Macmillan. • Murphy, Derrick and Cooper, Kathryn. 2008. United States 1917-2008 and Civil Rights 1865-1992. London. Collins • Patterson, James T. 1976. America in the Twentieth Century a History. New York. Harcourt Brace Jovanovich. • Robbins, Lionel. 1934. The Great Depression. London. Macmillan and Co. • Soule, George. 1947. Prosperity Decade.From War to Depression:19171929.Volume VIII. New York. Holt, Rineheart and Winston • Traynor, John. 2001. Mastering Modern United States History. New York. Palgrave. • Underwood Faulkner, Harold. 1965. American Political and Social History. 7th Edition. New York. Appleton-Century-Crofts. • Walsh, Ben. 2005. GCSE Modern World History. Second edition. London. Hodder Murray. Internet Resources: • Hausman, Daniel M. “Economics, Philosophy”. (Online). Available http://philosophy.wisc.edu/hausman/papers/67.htm, Accessed on July 7, 2009 Word count: 1985
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