A Student's Guide to the Great Depression
Why Did the Great Depression Occur?
Economists still cannot agree on what caused the Great Depression. Most however have agreed that it was a combination of events and decisions that came into play that caused the Great Depression.
Stock Market Crash of 1929
The Wall Street Crash of 1929, is cited as the case of the Great Depression. However, while it does share some of the blame the crash ruined people’s fortunes and destroyed confidence in the economy. However, most believe that the crash alone would not have caused the Depression.
World War One
After World War One (1914-1918) many countries struggled to pay their war debts and reparations as Europe began to rebuild. This caused economic problems in many countries, as Europe struggled to pay war debts and reparations.
Production versus Consumption
This is another well known cause of the depression. The basis of this is that worldwide there was too much investment in industry capacity and not enough investment in wages and earnings. Thus, factories produced more than people could afford to buy.
Banking
There were a large number of bank failures during the depression. Additionally banks that did not fail did suffer. The banking system was not prepared to absorb the shock of a major recession. Furthermore, many academics believe that the government failed to take the appropriate actions to restore stability to the banking system and to calm people's fears about the possibility of bank failures.
Postwar Deflationary Pressures
The huge cost of World War One caused many European countries to abandon the gold standard. This resulted in inflation. Following the war most of these countries returned to the gold standard to try and counter the inflation. However, this resulted in deflation1 which lowered prices but increased the real value of debt.
International Debt
After World War One most of the European countries owned a lot of money to American banks. These loans were so high the countries could not pay them. The American government refused to lower or forgive the debts so the countries began to borrow more money to pay off their debts. However, as the American economy began to slow down the European countries began to find it difficult to borrow money. However, at the same time the United States had high tariffs so that the Europeans could not make money selling their products in the United States markets. The countries began to default on their loans. After the 1929 stock market crash banks tried to stay afloat. One of the ways they did this was to recall their loans. As money flowed out of Europe and back to the United States the economies of Europe began to fall apart.
International Trade
In 1930 the United States raised tariffs by up to 50% on imported goods to increase demand for domestic goods. However, instead of increasing demand for domestically produced goods it created unemployment abroad as the factories shut down. This not only caused other counties to raise tariffs themselves. This combined with a lack of demand for U.S goods because of unemployment abroad resulted in increasing unemployment in the US. "The World in Depression 1929-1939" Charles Kinderberger shows that by March 1933 international trade plummeted to 33% of its 1929 level.
Top 5 Causes of the Great Depression
What caused the Great Depression, the worst economic depression in US history? It was not just one factor, but instead a combination of domestic and worldwide conditions that led to the Great Depression. As such, there is no agreed upon list of all its causes. Here instead is a list of the top reasons that historians and economists have cited as causing the Great Depression.
The effects of the Great Depression were huge across the world. Not only did it lead to the New Deal in America but more significantly, it was a direct cause of the rise of extremism in Germany leading to World War II.
1. Stock Market Crash of 1929
Many believe erroneously that the stock market crash that occurred on Black Tuesday, October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars. Even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough and America truly entered what is called the Great Depression.
2. Bank Failures
Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival, stopped being as willing to create new loans. This exacerbated the situation leading to less and less expenditures.
3. Reduction in Purchasing Across the Board
With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed. More and more inventory began to accumulate. The unemployment rate rose above 25%, which meant, of course, even less spending to help alleviate the economic situation.
4. American Economic Policy with Europe
As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help protect American companies. This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation.
5. Drought Conditions
While not a direct cause of the Great Depression, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves. This was the topic of John Steinbeck's The Grapes of Wrath.