The Great Depression | ISC Class 11 History Notes

This note covers the Great Depression: the boom of the 1920s and the weaknesses beneath it, the causes of the Wall Street Crash of 1929, how the crash and depression hit the United States, Germany and Japan, and Roosevelt's New Deal, its aims and the measures taken under it.

What was the Great Depression and what background led to it?

The Great Depression was the severe worldwide economic slump of the 1930s. It began with the collapse of share prices on the New York Stock Exchange in October 1929 and lasted, in most countries, until the later 1930s.

It was the longest and deepest downturn of the industrial age, and it changed politics as much as economics.

The background lies in the boom of the 1920s. After the First World War of 1914 to 1918 the United States emerged as the world's leading creditor nation.

Between 1922 and 1929 American industry expanded rapidly, mass production spread (the moving assembly line, first used by Henry Ford in 1913), and consumer goods such as motor cars, radios and refrigerators were bought on hire purchase (instalment credit).

Ordinary people also bought shares, often with borrowed money, because prices seemed to rise without end.

Beneath the boom lay weaknesses. Farm incomes fell through the 1920s as European farms recovered after the war. Wages rose far more slowly than profits, so the mass of people could not buy all that industry produced.

Much of the prosperity rested on credit and on speculation. The United States also lent heavily to Europe: under the Dawes Plan of 1924 and the Young Plan of 1929, American loans helped Germany pay reparations, and the whole system depended on the flow of American money continuing.

Definition: A depression is a long period of falling output, falling prices and high unemployment. A recession is a shorter, milder fall. The slump after 1929 is called the Great Depression because it was deep, worldwide and lasted about a decade.

Note: The Wall Street Crash and the Great Depression are not the same thing. The Crash was the sudden collapse of share prices in October 1929; the Depression was the long economic slump that followed. The Crash was a cause and a signal, not the whole depression.

What were the causes of the Wall Street Crash of 1929?

The Wall Street Crash was the dramatic fall of share prices on the New York Stock Exchange in October 1929. Historians usually explain it by several causes acting together.

Speculation and buying on margin

In the late 1920s share prices rose far beyond the real value of companies. Many buyers used buying on margin: they paid only a fraction of the price in cash and borrowed the rest from their brokers.

When prices fell, brokers called in these loans, forcing more sales and driving prices down further.

Cheap credit fed the boom. The Federal Reserve lowered interest rates in 1927, and by the time it raised them in 1928 and 1929 the speculation was already out of control.

Overproduction and weak demand

Factories and farms produced more than people could buy. Wages lagged behind profits, so demand could not keep pace with supply. Unsold goods piled up and profits began to fall even before the Crash.

Weak and unequal banking

Thousands of small American banks held deposits that could not be repaid if many people withdrew at once. There was no deposit insurance, so a run on one bank could ruin its savers.

Lack of regulation and false confidence

Share trading was lightly regulated and rumours and tips drove prices. Many believed prosperity would never end, which made the fall more shocking when it came.

The international tangle

American loans to Europe, reparations and tariff barriers tied the world economy together. When American lending slowed in 1928 and 1929, the whole system weakened.

1. Share prices rise far above real company values through speculation.
2. Buyers borrow to buy shares on margin, so the market rests on debt.
3. Production outruns demand because wages lag behind profits.
4. Lenders begin to call in loans and cautious investors start to sell.
5. Prices fall, margin calls force more selling, and panic spreads.
6. Banks fail as depositors rush to withdraw their money.
7. Credit dries up, firms close and unemployment rises.

Note: A common confusion is to say the Crash "caused" the Depression by itself. Most historians treat the Crash as the trigger; the underlying causes were overproduction, weak demand, speculation, fragile banks and the international debt tangle.

What happened in the Wall Street Crash and the years that followed?

The New York Stock Exchange on Wall Street had risen steadily through 1929. In September prices began to slip. On 24 October 1929, remembered as Black Thursday, panic selling began and a record number of shares changed hands.

Bankers tried to steady the market by buying shares, and prices recovered briefly.

On 28 and 29 October 1929 (Black Monday and Black Tuesday) the collapse came. Share values fell by billions of dollars in days. Many investors who had bought on margin were ruined, and so were the brokers and banks that had lent to them.

The Crash spread into the wider economy. Banks failed, businesses cut output and jobs, and unemployment rose steeply.

By 1933 about a quarter of the American workforce was out of work, and industrial production had fallen by roughly half from its 1929 level.

World trade shrank as countries raised tariffs, above all the American Smoot-Hawley Tariff of 1930, which raised duties on imports and provoked retaliation.

Definition: Buying on margin means buying shares by paying only part of the price and borrowing the rest from a broker. If the share price falls, the buyer must repay the loan, which is why margin buying made the Crash so severe.

What was the impact of the Depression on the economy of the USA?

The United States was at the centre of the storm. Between 1929 and 1932 industrial production fell by about half, and thousands of banks closed. Savings were wiped out for many families.

Unemployment rose from about 3 per cent in 1929 to roughly 25 per cent by 1933, and in some industrial cities it was higher still.

Farmers suffered doubly: prices for wheat, cotton and other crops collapsed, and drought turned the southern plains into the Dust Bowl in the early 1930s, driving families off the land.

Homeless people built shanty towns called Hoovervilles, after President Herbert Hoover, who was blamed for doing too little.

The Bonus Army of 1932, war veterans demanding early payment of a promised bonus, was driven out by troops, which deepened the sense of crisis.

Hoover did act, through the Reconstruction Finance Corporation of 1932, which lent to banks and businesses, but he resisted direct relief to individuals. His reputation never recovered, and in the election of 1932 Franklin D. Roosevelt won a landslide.

What was the impact of the Depression on Germany?

Germany was hit harder than almost any other country. After the hyperinflation of 1923, its recovery under the Dawes Plan of 1924 had rested on short-term American loans, and when these were recalled after 1929 German banks and firms collapsed; the great Danatbank failed in July 1931. Unemployment rose from about 1.3 million in September 1929 to over 6 million by early 1932, and industrial production fell sharply.

The Weimar Republic's coalition governments could not agree on how to respond. Chancellor Heinrich Brüning cut spending and raised taxes, which made the slump worse.

The political consequences were grave: support for the Nazi Party rose from 12 seats in the Reichstag in 1928 to 107 in 1930 and 230 in July 1932, making it the largest party.

President Hindenburg appointed Adolf Hitler Chancellor on 30 January 1933. The Depression is therefore usually seen as a decisive cause of the collapse of the Weimar Republic and the rise of Nazism.

What was the impact of the Depression on Japan?

Japan depended heavily on exports, especially silk, and on imported raw materials. As world demand collapsed, the price of silk fell and Japanese farmers and workers suffered badly. Unemployment rose and rural distress spread.

Japan responded by turning to expansion abroad. In September 1931 the Japanese army seized Manchuria from China, and in 1932 set up the puppet state of Manchukuo.

The League of Nations condemned the action, and Japan withdrew from the League in 1933. The Depression thus strengthened the hand of the military and pushed Japan towards the aggressive expansion that led eventually to the Pacific War.

The slump also changed Japan's politics at home. Party governments lost credit as the economy failed, and the army and navy gained influence over policy. Prime Minister Inukai Tsuyoshi was assassinated by young naval officers in May 1932, and an army mutiny in Tokyo in February 1936 showed how far the military had escaped civilian control. Military spending and state direction of industry were used to create jobs and to build arms, so that Japan began to recover from the Depression earlier than some other countries, but at the cost of preparing for war.

For the ISC answer, treat Japan as a case of the Depression leading to militarism and expansion, not to democratic reform. The seizure of Manchuria in 1931 gave Japan coal, iron and land for settlement, and the puppet state of Manchukuo was presented as an independent country though it was controlled by the Japanese army.

When the League of Nations accepted the report of the Lytton Commission and refused to recognise Manchukuo, Japan left the League in 1933. This was one of the first clear failures of collective security, and it encouraged other aggressive powers in the years that followed.

Note: Do not confuse Japan's recovery with the American New Deal. Japan did not adopt a programme of relief and reform; it used rearmament and empire. Both were responses to the same world slump, but their methods and their political results were opposite.

How did the Depression affect different groups and countries?

Industrial workers

Factory workers in the United States, Germany and Britain faced mass unemployment, short time and wage cuts. In the United States the jobless often depended on charity or on relief from state and city governments, which were quickly overwhelmed.

Farmers and rural people

Farm prices fell further and faster than industrial prices, so farmers in the United States, Germany and Japan were squeezed between falling incomes and fixed debts. In Japan the silk-growing countryside was especially hard hit.

Bankers and investors

Banks that had lent to speculators or held shares failed in large numbers, and shareholders lost much of their wealth. Confidence in banks and markets took years to return.

Governments and political parties

Governments everywhere faced pressure to protect jobs and trade. In the United States the crisis brought the New Deal; in Germany it destroyed the Weimar Republic; in Japan it strengthened the military. Democracies that seemed secure in 1929 were under strain by 1933.

How did the New Deal differ from earlier policies, and how did countries compare?

The New Deal differed from Hoover's approach in its willingness to use federal power directly: to lend, to regulate, to create jobs and to provide a safety net. Hoover had relied mainly on voluntary cooperation and loans to business, while Roosevelt's administration regulated banks and the stock market, set minimum wages and hours, and gave direct relief.

Comparing countries, the United States under Roosevelt chose reform within democracy; Germany under Hitler chose dictatorship and rearmament; Japan chose territorial expansion. Britain left the gold standard in 1931 and recovered earlier than some others, while France stayed on gold longer and suffered a delayed slump.

What were the aims of Roosevelt's New Deal?

Franklin D. Roosevelt took office on 4 March 1933 and promised "action, and action now". The New Deal had three broad aims, often called the three Rs.

1. Relief for the millions of unemployed and destitute, through direct help and work schemes.
2. Recovery of the economy, by restoring confidence in banks, raising prices and restarting production.
3. Reform of the financial system and of industry and agriculture, so that a similar collapse could not happen again.

Roosevelt also aimed to restore public confidence. His fireside chats on the radio, beginning in March 1933, explained his policies directly to ordinary people. The New Deal was not a single plan but a series of laws and agencies, often called the alphabet agencies from their initials.

Note: The New Deal did not end the Depression by itself. Unemployment was still high in 1939, and full recovery came only with the rearmament and spending of the Second World War. Its lasting achievement was reform and relief rather than complete recovery.

Roosevelt was re-elected by a landslide in 1936, winning every state except Maine and Vermont, but a sharp recession in 1937 to 1938 showed that recovery was still fragile. American unemployment fell below 10 per cent only in 1941, as war orders grew.

What measures were taken under the New Deal?

Banking and finance

The Emergency Banking Act of March 1933 closed the banks for a short holiday and reopened only those found sound.

The Glass-Steagall Act of 1933 separated commercial from investment banking and created the Federal Deposit Insurance Corporation (FDIC) to insure small deposits. The Securities and Exchange Commission (SEC) was set up in 1934 to regulate the stock market.

Industry and agriculture

The National Industrial Recovery Act of 1933 set up the National Recovery Administration, which drew up codes on prices, wages and hours. The Agricultural Adjustment Act of 1933 paid farmers to reduce acreage and output in order to raise prices.

The Tennessee Valley Authority (TVA) of 1933 built dams and power stations to develop a poor region.

Relief and public works

The Federal Emergency Relief Administration gave grants to states for relief. The Civilian Conservation Corps employed young men on conservation work. The Public Works Administration and later the Works Progress Administration (1935) built roads, bridges, schools and public buildings.

Labour and social security

The Wagner Act of 1935 protected the right of workers to organise and bargain collectively. The Social Security Act of 1935 set up old-age pensions and unemployment insurance, the foundation of the American welfare state.

The Second New Deal

After the Supreme Court struck down several early measures, a Second New Deal from 1935 pushed through the Wagner Act, the Social Security Act and the Works Progress Administration. The Fair Labor Standards Act of 1938 set a minimum wage and a maximum working week.

Note: Some New Deal measures were declared unconstitutional by the Supreme Court, including the National Industrial Recovery Act in 1935 and the first Agricultural Adjustment Act. Roosevelt's attempt in 1937 to enlarge the Court, the "court-packing plan", failed and damaged him politically.

Timeline of the Great Depression

What sources tell us about the Great Depression?

Historians build their accounts from several kinds of evidence. Official statistics are central: figures for industrial production, unemployment, bank failures and farm prices, collected by governments and by bodies such as the League of Nations, allow historians to measure the depth and length of the slump.

The American census and labour statistics of 1930 and later years show the rise in unemployment.

Contemporary newspapers and magazines, such as reports of the panic selling of October 1929, capture the mood of the Crash.

Photographs of the 1930s, including those taken for the American government's Farm Security Administration from 1935, record Dust Bowl families and relief queues.

Roosevelt's fireside chats and speeches, and the texts of New Deal laws such as the Social Security Act of 1935, show the aims and measures of the government.

Personal accounts, letters and oral histories give the experience of ordinary people, while the records of the Nazi Party and of the Japanese army show how the crisis was used politically.

Each type of source has limits: statistics may be incomplete, photographs may be staged, and memoirs may be selective. Historians therefore compare several kinds of evidence before drawing conclusions.

Glossary

• Wall Street Crash: the collapse of share prices on the New York Stock Exchange in October 1929.
• Buying on margin: buying shares with borrowed money, paying only part of the price in cash.
• Speculation: buying shares or goods in the hope of selling at a profit from price changes rather than from their real value.
• Overproduction: producing more goods than can be sold at a profit.
• Tariff: a tax on imports, used to protect home industry but which can reduce trade.
• Gold standard: a system in which a currency's value is fixed to a quantity of gold.
• New Deal: Roosevelt's programme of relief, recovery and reform from 1933.
• Alphabet agencies: New Deal bodies known by their initials, such as the TVA and the WPA.
• Fireside chats: Roosevelt's radio broadcasts explaining his policies to the public.
• Dust Bowl: the drought-stricken southern plains of the United States in the early 1930s.
• Hooverville: a shanty town of the homeless, named after President Hoover.
• Reparations: payments required from Germany after the First World War under the Treaty of Versailles.
• Weimar Republic: the German democratic republic of 1919 to 1933.
• Deflation: a fall in prices and demand, which makes debts harder to repay.

Common errors and misconceptions

• Misconception: The Wall Street Crash and the Great Depression are the same. Correct: The Crash was the sudden fall of share prices in October 1929; the Depression was the long slump that followed.
• Misconception: The New Deal ended the Depression. Correct: It gave relief and reform, but unemployment was still high in 1939 and full recovery came with wartime spending.
• Misconception: Only the United States was affected. Correct: The slump spread worldwide, hitting Germany and Japan severely and shaping their politics.
• Misconception: Hoover did nothing at all. Correct: He set up the Reconstruction Finance Corporation in 1932, but he resisted direct relief to individuals.
• Misconception: All New Deal measures survived. Correct: The Supreme Court struck down several, including the National Industrial Recovery Act in 1935.
• Misconception: The Depression caused the Second World War directly. Correct: It created conditions, such as the rise of Hitler and Japanese expansion, that contributed to war, but the link is complex.

Exam-style questions with model answers

Q1. State any two causes of the Wall Street Crash of 1929. [2 marks]

1. Speculation and buying on margin: share prices rose far above real values and many buyers borrowed to buy, so a fall in prices forced more selling.
2. Overproduction and weak demand: factories and farms produced more than people could buy because wages lagged behind profits.

Q2. What were the three aims of the New Deal? [3 marks]

1. Relief: to help the millions of unemployed and destitute Americans at once, through direct federal grants and work schemes such as the Civilian Conservation Corps.
2. Recovery: to revive the economy by restoring confidence in the banks, raising farm prices and restarting industrial production.
3. Reform: to change banking, the stock market, industry and agriculture so that a similar collapse could not happen again.

Q3. Explain how the Depression affected Germany between 1929 and 1933. [4 marks]

1. American loans were recalled after 1929, so German banks and firms collapsed.
2. Unemployment rose from about 1.3 million in September 1929 to over 6 million by early 1932.
3. Coalition governments failed to agree, and Brüning's cuts made the slump worse.
4. Nazi support grew from 12 seats in 1928 to 230 in July 1932, and Hitler became Chancellor on 30 January 1933.

Q4. Distinguish between Hoover's response to the Depression and Roosevelt's New Deal. [4 marks]

1. Hoover relied mainly on loans to banks and firms through the Reconstruction Finance Corporation; Roosevelt used direct federal action.
2. Hoover resisted direct relief to individuals; Roosevelt set up federal relief and work programmes.
3. Hoover left banking uninsured; Roosevelt created the Federal Deposit Insurance Corporation in 1933.
4. Hoover preferred voluntary cooperation in industry; Roosevelt drew up codes under the National Industrial Recovery Act.

Q5. Explain the measures taken under the New Deal in banking and social security. [5 marks]

1. The Emergency Banking Act of March 1933 closed all banks for a short bank holiday and reopened only those found sound, which stopped the runs on banks.
2. The Glass-Steagall Act of 1933 separated commercial banking from investment banking, so that depositors' money could not be used for speculation.
3. The same Act created the Federal Deposit Insurance Corporation, which insured small deposits and restored public confidence in the banks.
4. The Securities and Exchange Commission, set up in 1934, regulated the stock market to prevent the abuses that had led to the Crash.
5. The Social Security Act of 1935 set up old-age pensions and unemployment insurance, the foundation of the American welfare state.

Q6. Evaluate the view that the New Deal was a turning point in the role of the American government. [6 marks]

1. Before 1933 the federal government played a small part in relief and regulation; the New Deal made it central.
2. It regulated banks and the stock market through the FDIC and the SEC, and industry through the National Industrial Recovery Act.
3. It gave direct relief and created jobs through the Civilian Conservation Corps and the Works Progress Administration.
4. It created a welfare system through the Social Security Act of 1935.
5. It protected workers through the Wagner Act of 1935 and the Fair Labor Standards Act of 1938.
6. Limits: the Supreme Court struck down several measures, and recovery was incomplete until wartime spending.

Q7. How did the Depression affect Japan, and why did it turn to expansion? [4 marks]

1. Japan depended on exports, especially silk, and on imported raw materials, so falling world demand hurt farmers and workers.
2. Unemployment rose and rural distress spread.
3. The military gained influence and argued for expansion abroad.
4. Japan seized Manchuria in September 1931, set up Manchukuo in 1932 and left the League of Nations in 1933.

Key takeaways

• The Great Depression began with the Wall Street Crash of October 1929 and lasted through the 1930s.
• Its causes included speculation, buying on margin, overproduction, weak demand and fragile banks.
• The United States suffered mass unemployment and bank failures, and Hoover's response was seen as inadequate.
• Germany was hit hard, and the slump helped bring Hitler to power in January 1933.
• Japan turned to expansion in Manchuria in 1931 and left the League of Nations in 1933.
• Roosevelt's New Deal, begun in March 1933, had three aims: relief, recovery and reform, the three Rs.
• Its measures included the FDIC, the SEC, the TVA, the Wagner Act and the Social Security Act.
• The New Deal gave relief and lasting reform but did not fully end the Depression.

Test yourself

On which dates did the worst selling of the Wall Street Crash take place?

On 28 and 29 October 1929, known as Black Monday and Black Tuesday, after the panic of Black Thursday on 24 October.

What was buying on margin?

Buying shares by paying only part of the price in cash and borrowing the rest from a broker, which made the market rest on debt.

Which American tariff of 1930 raised duties on imports?

The Smoot-Hawley Tariff, which provoked retaliation and reduced world trade.

When did Hitler become Chancellor of Germany?

On 30 January 1933, after the Nazi Party had become the largest party in the Reichstag.

What did the Tennessee Valley Authority do?

It built dams and power stations from 1933 to develop a poor region of the United States.

Which Act of 1935 set up old-age pensions and unemployment insurance?

The Social Security Act, which became the foundation of the American welfare state.

Why did Japan leave the League of Nations in 1933?

The League condemned Japan's seizure of Manchuria in 1931, and Japan withdrew rather than accept the criticism.