History and Causes of the Great Depression

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The Great Depression was history’s worst economic crisis ever experienced by the industrial world, lasting from 1929 through 1939. The Great Depression initially started after the Stock Market Crash of 1929. Over the next several years, consumer spending and investment rates had dropped, causing massive declines in industrial output and employment as struggling businesses were forced to fire their workers. By 1933, when the Great Depression reached its lowest point, 25% of the American population were unemployed and over one third of the country’s banks had failed. The Depression was the result of economic lifestyle choices made during the 1920’s, the effects caused by crashed stock market, bank panics, and government policies.

The 1920’s were mostly known for America’s prosperity and optimism, however the very things driving the prosperity and optimism in the U.S. helped lead to the downfall of the economy. During the 1920s, the popularity of the stock market and the amount of consumer spending in the United States had grown. American companies were mass-producing goods that consumers were buying. Technology was constantly improving, providing the opportunity for people to purchase things to better their lives.

The increase in the production of consumer goods led to an increased demand for factory workers, who then benefited from the job opportunities and higher wages. As a result, consumer spending and buying power also increased, and in turn gave business to companies. However even with increased wages, the disposable income of the average American during the 1920’s only rose by 9%, meaning that people would not be able to buy everything they wanted at once. The way people got around this was when more businesses began to offer credit, or installment buying, as an alternative payment option.

This worked similar to a house mortgage, where a “down payment” will first be made, with the rest of the cost being paid slowly over time. However even with the ability to buy more items, there were only so many things a person needed. By spring of 1929 consumer spending had slowed, and the mass overproduction had left stores with a huge surplus of unsold items. This led to stores to stop ordering from factories, causing the factories to cut down on production and fire the now unneeded workers.

This left a large amount people unemployed, even before the stock crash. Another problem relating to this is the mass concentration of wealth, where despite everyone seeming to have money at the time, most of the wealth was maldistributed. In America at the time the top 0.1% of the population had a combined income equal to the total income of the bottom 42% of the population. When comparing to wealth, the top 2.3% of Americans held 66% of all savings.

The reason for this was mainly because of wage differences, where even with an increased production rates in factories, factory workers wages only rose 8% during the 1920’s. However at the same time, mass production lowered production costs for the products being sold, causing an increase in corporate profits by 62%. Most of those profits would go directly to the factory owners, leaving low wage workers with little ability to purchase the many products being manufactured. Until manufacturing started to expand, only 2% of Americans were purchasing stock by the mid 1920’s.

As stock prices kept increasing and investors made profits, the popularity of the stock market increased, leaving 1 million people from all economic backgrounds with shares in the stock market by 1929. With the ever-increasing popularity of the stock market during the 1920’s, speculation in stock was a common thing. Speculation is where you buy stock with the assumption that it can always be sold for a profit. The lack of government regulations around the stock market during the 1920’s allowed for wild speculation to artificially raise stock prices, soon to cause future problems. The flaws behind the causes for the prosperity and optimism in America during the 1920’s helped lead up to the Great Depression.

The Stock Crash of 1929 played an important role in leading to poor economic decision making during the time of the Great Depression. With the number of increased sales in business during the 1920’s, people saw a chance to make a small fortune off of the ever-increasing popularity in the stock market. The stock market allows for people to publicly buy and sell shares of a company. The value of these “shares” change according to how well a company is doing. In order to invest in a company, some people borrowed money from banks to invest on stocks with. Investors had expected to make large profits because of the increasing stock prices.

By spring of 1929 consumer spending had dropped and manufacturers were passing through a period of overproduction and surplus, decreasing production rates and business income. Despite the slowdowns, stock prices kept increasing past the “real value” of the companies that were open for investment. On October 5th 1929, only two days after the market had reached its peak of $105 billion, prices of stocks had started to decline in value. On the 24th of October, known as “Black Thursday”, the market began to show trouble.

This caused panicked investors to sell 12.9 million stock shares that day, most of which were overpriced stock shares that would end up being worthless. Five days later, another panic swept across Wall Street. This time, 16 million shares were traded that day, wiping out the stock market and leaving its investors penniless. With the markets downfall, consumer spending had plummeted, causing a massive slowdown in factory production and the firing of most of its workers.

Those who still had jobs had their wages cut, decreasing their buying power and making it hard to support themselves. The losses on the stock market and the panic caused by it had also contributed to the bank runs that would continue throughout 1933. The Stock Market Crash of 1929 led to a mass economic panic caused peoples reaction to it to lead the U.S. into a deeper depression.

In addition to the stock crash causing mass panic, it helped lead to the bank runs and protectionist acts that came soon after. Before the Stock Market Crash of 1929, banks would use account funds for the purpose of loaning to stock investors. After the crash, stock investors who bought stocks on margin could not repay the loan to the banks, and the banks who were not receiving the money for the loans could not repay the account owners who they had borrowed the money from in the first place.

This caused widespread panic among other account owners, causing people in masse to rapidly withdraw money from their bank accounts in fear that the banks would fail. These “bank runs” began to spread and by 1933, nearly 4,000 banks had failed. During this time as well, there was a global economic crisis affecting other countries after the devastating economic effects of WWI. During the 1920’s, American farmers faced intense competition with their European counterparts, causing crop prices to decline because of competitive overproduction.

This caused people to lobby for the federal government to protect them against foreign agricultural imports. In Herbert Hoover’s 1928 campaign for the presidency, he promised to increase tariff rates on foreign agricultural goods. At first Hoover’s administrations failed in their efforts in raising import taxes in 1929. However after the effects of stock crash took effect, Herbert Hoover passed the Smoot-Hawley Tariff Act on June 17, 1930. In response to this, European nations reacted by adopting similar taxation strategies.

According to the U.S. Department of State, “U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934.” Due to the price increase of consumer goods that resulted from this tariff, consumer spending drastically decreased, causing businesses to fail. These failures and profit losses contributed to people losing jobs or having their wages cut further. With how the bank runs and tariff acts have affected the economy during the depression, it is easy to see how these things dove the world further into the Great Depression.

The Great Depression resulted from these four main causes: false economic lifestyle choices and prosperity during 1920’s, economic effects of the stock crash, massive bank panics, and failed government policies. The Great Depression was an economic crisis that initially began after the stock crash of 1929. During the time of the depression high unemployment rates, bank failures and bank runs, as well as cut wages were common to see during the depression. The Great Depression initially ended in 1939 once the WPA decided to strengthen military defenses during German aggression in Europe. However it wasn’t until the U.S. joined WWII after Japan attacked Pearl Harbor that America’s factories were put back into full production.

Cite this paper

History and Causes of the Great Depression. (2021, Mar 11). Retrieved from https://samploon.com/history-and-causes-of-the-great-depression/

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