CAUSES OF THE GREAT DEPRESSION
The Great Depression was a significant event in world history and was of particular importance to American history. It was a worldwide economic recession that occurred primarily during the 1930s. A recession is a term that refers to a general economic downturn resulting in high levels of unemployment and a loss in consumer spending. As a result, during the Great Depression, working-class people struggled to find work while businesses struggled to survive with an overall reduction in the sales of goods and services. Historians have identified several different causes of the events of the Great Depression, including: the stock market crash of 1929, the purchasing of stocks on margin, the wide income gap between the wealthy and the poor, the loss of consumer spending, the failure of banks to deal with the crisis, protectionism and the weather conditions of the American Midwest.
In general, most historians identify the stock market crash in October of 1929 as the start of the Great Depression in the United States. Beginning on October 24th, also known as ‘Black Thursday’, the New York Stock Exchange began to experience volatility and heavy trading which resulted in a large drop of the overall value of the market. Over the next several days, prominent American bankers attempted to slow the drop in the market, but all of their attempts only supplied temporary relief. Finally, on October 29th, also known as ‘Black Tuesday’, the market took another significant drop and the panic of the stock market crash reached its peak. In total, the market had lost over $30 billion with nearly $14 billion being lost on October 29th, alone. The crash saw the market lose over one third of its total value and led to several other major economic issues that furthered the recession, including: loss of consumer spending, increase in overall unemployment, and bank runs and closures.
The second cause of the Great Depression was the method of purchasing stocks on margin. The 1920s are often referred to as the ‘Roaring Twenties’ since it was a time of economic prosperity. In general, people were making large sums of money in the stock market by purchasing shares in companies. When you own a stock you own a part of that particular company, although usually a very small percentage. If the company is successful and grows its wealth then the value of the stock will increase, while if the company struggles, the value of the stock will fall. In the 1920s many people were buying stocks with the hope of them increasing forever, so they could sell their shares and make a profit. However, many investors did not have the necessary money to buy the stocks they wanted so financial institutions allowed them, including individuals, to buy stocks on margin. This means that people were borrowing money to buy stocks. The rules of the time allowed people to borrow as much as 90% of the value of the stock, meaning the investor was purchasing shares in a company with only about 10% of their own money. The hope was that the stock market would continue to increase and when the investor sold their shares, they could pay back the money they borrowed while still making a profit for themselves. However, this practice created the conditions for a major economic collapse when the stock market crash of 1929 finally occurred. After the crash, people were either forced to sell their stocks at a loss or continue holding on to a stock that had lost much of its value. As a result, many people went bankrupt from over-borrowing and being unable to pay back their debts. This was particularly hard on the banks as they were burdened with much of this debt, while also losing large amounts of money in the stock market crash themselves.
The failure of banks to handle the economic crisis of the 1929 is the third major cause of the Great Depression. As the economy spiralled downward into recession, banks were hit particularly hard and many did not survive the turmoil of the 1930s. As previously stated, banks suffered due to the stock market crash because they were heavily invested in the market themselves. As such, they suffered heavy losses, along with many other businesses and investors. Since businesses, at this time, were scaling back their operations in order to save money, they began to borrow less from the banks which further hurt the ability of the banks to survive the crisis. Amid all of the confusion and panic of the stock market crash of 1929, there was a series of ‘bank runs’. A bank run is when a large group of people attempt to pull their money out of the bank at the same time. It creates a crisis because the bank does not have enough actual cash on hand to provide everyone with their money, since the bank has used it to invest in other financial deals. Afraid they would lose their own savings during the stock market crash, people rushed to banks that were still open to withdraw their money. This massive withdrawal of cash caused banks to close and many were unable to reopen. Since there was no way for a bank's clients to recover any of their savings once the bank had closed, those who didn't reach the bank in time became bankrupt. Having lost much of their own capital in either the stock market crash or the bank closures, many businesses started cutting back their workers' hours or wages.
The fourth cause the Great Depression was the large income gap that existed between the wealthiest people and the poorest people in the late 1920s. For example, in the years before the stock market crash of 1929, the top one percent of earners in the United States grew to have nearly twenty four percent of the share of the total national income. The top one percent had seen their share of the national income rise by about five to ten percent in the decade before the market finally collapsed. Some economists and historians have argued that this income gap led to the Great Depression because it lowered the consumption rates of the working-class. The theory holds that, since working-class people had a smaller share of the total national income, it lessened their ability to consume goods and services at a high rate without taking on large levels of debt. As such, since working-class people could not consume at heightened levels, it put a strain on businesses and their ability to create wealth.
The fifth main cause of the Great Depression was the overall drop in consumer spending during the 1930s. As stated in the previous paragraph, consumer spending is an important aspect of any country’s economy. It allows consumers to purchase goods and services from producers while also providing jobs and wealth for companies and their workers. Without consumer spending, companies would struggle to generate profit and would in turn need to lay off workers. This is exactly what occurred the years of the Great Depression. When the market crashed in October of 1929, it caused a wave of panic across the American economy, as well as many other countries. Banks and other businesses had lost immense amounts of wealth in the market crash and sought to solve their economic issues by decreasing their number of employees. This caused a high level of unemployment, which furthered working-class families to cut back on their monthly expenditures, especially luxury items. This lack of consumer spending caused additional businesses to cut back wages or, to lay off some of their workers. Some businesses couldn't stay open even with these cuts and had to close their doors, leaving all their workers unemployed. What resulted was a downward cycle in which reduced consumer spending resulted in higher unemployment and high unemployment resulted in reduced consumer spending.
The policies of protectionism that became popular during the time period are often considered to be a major cause of the Great Depression. Simply put, protectionism is when a country enacts laws or policies that attempt to promote their own industries against those of other countries. To do this, a country usually places tariffs (a form of taxes) on goods that are imported from a foreign country. For example, if the United States wanted to protect its lumber industry it might place tariffs on lumber from Canada that is being sold in the United States. The hope of the government is to make imported goods more expensive and therefore less appealing to consumers. For example, in the United States, many economists and historians consider the Smoot-Hawley Tariff Act of 1930 as an example of protectionism that led to the Great Depression. The act imposed or increased tariffs on over 20,000 goods imported into the United States from foreign countries. At the same time, other countries imposed their own tariffs in retaliation and because it was a popular political view in many countries. Some economists have argued that these policies caused trade between countries to slow to extremely low levels which furthered the downward spiral into a recession. Companies, which had earlier sold their goods around the world, were forced to sell primarily to their own country, which lessened their ability to generate profits.
The last cause of the Great Depression was the drought conditions that affected the American Midwest during the timeframe of the Great Depression. While not technically a direct cause of the economic conditions of the Great Depression, the drought had a profound effect on farming communities in the United States at the time and worsened life for many people. Often referred to as the Dust Bowl or the Dirty Thirties, the drought conditions impacted large areas of the Great Plains in Canada and the United States but was generally centered on Colorado, Kansas, Oklahoma and Texas. In general, extensive farming was carried out in these areas in the decades before the Great Depression. As a result, historians now understand that aggressive farming practices led to a deterioration in the soil quality and caused the top level to erode into a dust. When strong winds hit the region, it quite literally caused entire fields to be swept away across the country. The dust was lifted high into the air and caused a blackening of the sky. Because of the Dust Bowl, many families were forced from their farms. Famously, many of them relocated to the west coast in hopes of finding employment, but were often met with the harsh unemployment caused by the Great Depression.
In general, the Great Depression was a major event of the 20th century. Historians have identified several different causes of the recession, including: the stock market crash of 1929, the purchasing of stocks on margin, the wide income gap between the wealthy and the poor, the loss of consumer spending, the failure of banks to deal with the crisis, protectionism and the weather conditions of the American Midwest.
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