Background and Causes of the Great Depression

The 20’s had major prosperity, both to the economy and to how Americans lived their lives. The automobile was a key factor; it changed the way Americans lived. For example, you no longer had to be in or around a city to benefit from the supermarkets and stores. Now you could live an hour away in the country, and use your car to get you around. It gave people a newfound freedom. Although they were very expensive, they became very popular. The automobile had different parts – the windshield (glass), the tires (rubber), the fuel (oil, gas) etc. The companies that made these parts centered on the car, and obviously benefited when a car was purchased. If automobile sales were affected, however, then the makers of those parts were affected as well. The more cars we have also makes way for more paved roads. Due to the automobile industry affecting society, urbanization made for more buildings, stores, etc. This dramatic increase was key to the “roaring twenties”.

Another business that thrived in the 20’s was the radio business. As with the automobile, everything centered on more than just one thing. For example, electricity and electronic stores were the fuel to the radio fire. Advertising and public announcements became reliant on radio, and it swarmed the country like the love of the automobile. By 1930, 40% of all American families owned a radio.

Factories and manufacturing plants were in demand and dominant in the making of these and other devices. Due to World War 1, the parts and equipment needed for these – along with everything else Americans loved to buy at this time – was readily available and rabidly made, and in large quantities. This was also a time for Americans to invest in such industries.

So what exactly caused the Depression? Although the topic is very widespread, we can view the primary causes: 1. Speculation in the 1920s caused many people to buy stocks with loaned money and they used these stocks as collateral for buying more stocks. 2. Short signed government economic policies (the government did not take action against unwise investing). 3. The economy was not stable. 4. Stock Market crash of 1929.

In reason, these causes began to contribute to a thriving money-pit. Having money owed on credit led to an abundance in purchases. The money issue had its involvement’s on the “bubble” the economy was centered around. Around this time was when “buy now-pay later” really came into effect. Credit was introduced in the 1920’s. Now People were allowed to "buy now, pay later." But this only put off the day when consumers accumulated so much debt that they could not keep buying up all the products coming off assembly lines.[1]

After World War 1, many European businesses were devastated. Although it occurred before and during the Depression, America placed tariffs on the incoming goods from European countries[2] Because they were still struggling to rebuild their own countries (America suffered the least from the WW1, as we were the lasts to enter), they had difficulty paying off the tariffs. The United States increased many tariffs by as much as 100% or more. The result was that Europeans couldn’t sell their own goods to the US in effective quantities. Because of the link between the nations for importing and exporting goods was so important, it affected the international economy. This weakness contributed greatly to the US economy. What should have been good for world trade ended up hurting it. Although tariff rates rose by up to 50%, imports declined so sharply that tariff revenues fell 46% from $602 million in 1929 to $328 million in 1932.[3]

Another reason for the Depression was The Gold Standard.[4] It states that all money that was in the US economy was backed by a government promise to redeem it in a specific amount of gold (one ounce of gold = $20.00). When people were doing “buy now pay later” and letting other countries borrow money, the money supply could drop. This is not necessarily a problem if money drops instantly, it must be a gradual change or an obvious rift (more supply than demand).

The unfortunate gap that existed between the rich and the poor was yet another cause. In 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%. The top 0.1% also controlled 34% of all savings.[5] Business tycoons would buy no name companies and force the stock price to rise – and then sell all of their shares to smaller investors. Because they were rich, it gave the people buying the stocks the mindset that they too would become wealthy. However, the tycoons forced the price up and then sold all of their shares – creating this enormous profit. This further widened the gap between the poor and the wealthy.[6]

The stock market crash is debated over whether or not it caused the Great Depression. At the time, many people and long since then have blamed it on the Crash as a scapegoat, without regards to other factors. By definition: “The Wall Street Crash of 1929, also called the Great Crash or the Crash of '29, is the stock-market crash that occurred in late October, 1929. It started on October 24 ("Black Thursday") and continued through October 29, 1929 ("Black Tuesday"), when share prices on the New York Stock Exchange (NYSE) collapsed.” What caused the big crash? People investing with money that had been borrowed to buy more stock then they could afford, along with the initial panic that occurred when the “bubble” burst. On October 24, 1929 12,894,650 shares were traded within one day. The days following consisted of shares being traded (30 million during this time), which resulted in ruined investors (there were even 11 suicides at this point). Banks (who had loaned excessive money to people) had failed at this time, due to debt. Businesses lost their credit lines and were forced to close. This had an extreme effect on unemployment.

Economics divided business cycles into four stages: Expansion, Panic, Recession or Contraction, and Recovery.[7] Although weather (agriculture) and other factors can contribute to this cycle – and there are many theories of what the business cycle is – The Great Depression was a slump that had everyone involved. Its effects were not only reached on this country, but in other countries as well. All countries took turns in blaming one another and never themselves.