The causes of the Great Depression 5 February 2013



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Micah McLaughlin

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The causes of the Great Depression

5 February 2013


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 was 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. The area was nicknamed "The Dust Bowl." This was the topic of John Steinbeck's The Grapes of Wrath.



Causes of the Great Depression

By:David Howarth and Megan Becker.

The Great Depression didn’t happen overnight, It was caused by a whole bunch of factors including deflation where money is not worth as much as it used to be, A decline in trade this is important because if no one is buying our goods then we cannot make money, Also not helping trade was the Smoot-Hawley Tariff Act which added a huge tariff or tax on all imported goods. These events will be the focus for this research.

 bank run

This is a picture of a bank run. All these people are lining up to get money out of their accounts

 

Debt Deflation- This happens when banks lend out more money than they have to lend. Brokerage firms on average would lend $9 for every $1 an investor had deposited.  When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits, this happened with masses of people. These events where people would rush to the bank are called Bank Runs. Back in that time there was so FIDC and the government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets. This became a problem because as people were losing their jobs and the value of the dollar was going down the debt that people had accumulated stayed the same. With the Bank Run and falling value of the dollar, the first ten months of 1930 744 US banks failed. The bank failures became worse when the banks tried collecting on the loans but the people could not pay them back in time. This caused banks not to want to give out as many loans or even have loans at all. This really slowed down the economy.

Here is a list of the chain of events that caused the Deflation:
·  Debt liquidation and distress selling
·  Contraction of the money supply as bank loans are paid off


  • A fall in the level of asset prices

·  A still greater fall in the net worth of business, precipitating bankruptcies
·  A fall in profits
·  A reduction in output, in trade and in employment.
·  Pessimism and loss of confidence
·  Hoarding of money
·  A fall in nominal interest rates and a rise in deflation adjusted interest rates.

Without jobs and loans the US economy was having a really hard time selling their own goods this made people think what could be done to help jobs and money. One thing to do would be make it so people would want to buy US products more than imported ones. This brings us to our next focus point.



Smoot-Hawley Tariff Act- This was a very controversial act that was signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels. After it was passed, many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. At first the tariff appeared to be a success. According to historian Robert Sobel, "Factory payrolls, construction contracts, and industrial production all increased sharply." However, larger economic problems emerged in the form of weak banks. U.S. Imports plunged 66% from $4.4 billion in 1929 to $1.5 billion in 1933, and exports fell 61% from $5.4 billion to $2.1 billion, both drops far more than the 50% fall in the GDP. The Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States", quadrupling previous tariff rates. This Act help to bring about my next focus point, breakdown of international trade. It seems that most every countries economy relies on other countries trading and buying their good when this slows down it has very dramatic effects on the economy.

Breakdown of international tradeAt the end of World War I in 1918 all European nations that had been allied with the United States owed large amounts of money to American banks. But with the treasuries in those nations being drained from the war the amount owed was too much for them to pay back. Those nations wanted reparation payments from Germany and Austria–Hungary because they believed that it would give them a way to pay off the debts they owed. But Germany and Austria-Hungary were themselves in deep economic trouble after the war and were in no shape economically to pay reparations. Nations that owed the US money wanted forgiveness on the debits but the American government refuses. Instead US banks were loaning money to the European Nations to pay off the debts they already owed. But after the US economy weakened in 1929 it was hard for European Nations to get loans for US banks.  At the same time, high U.S. tariffs were making it much more difficult for them to sell their goods in U.S. markets. Without any source of revenue from foreign exchange with which to repay their loans, they began to default. In the 1920’s the demand for US goods began to decline this was because European Nations were becoming more productive in industry and agriculture again, while others suffering economic hardship could not afford to buy good from overseas. The Hawley-Smoot Tariff was especially harmful to agriculture because it caused farmers to default on their loans. This event may have worsened or even caused the ensuing bank runs in the Midwest and West that caused the collapse of the banking system. During the 1920s, the former allies paid the war-debt installments to the United States chiefly with funds obtained from German reparations payments, and Germany was able to make those payments only because of large private loans from the United States and Britain. Similarly, U.S. investments abroad provided the dollars, which alone made it possible for foreign nations to buy U.S. exports. After the stock market crash of 1929 funds went from Europe to America and this caused the already weakened European economy to crumble.

Problems with the Federal ReserveSome people credit the Great Depression to problems at the Federal Reserve. According to Ben Bernanke, the current Chairman of the Federal Reserve, he said that these events caused the Great Depression:
- The Federal Reserve began raising the Federal Reserve  Funds rate in the spring of 1928, and kept raising it through a recession that began in August 1929. This led to the stock market crash in October 1929.
- When the stock market crashed, investors turned to the currency markets. At that time, dollars were backed by gold held by the U.S. Government. Speculators began selling dollars for gold in September 1931, which caused a run on the dollar.
- The Fed raised interest rates again to try and preserve the value of the dollar. This further restricted the availability of money for businesses, causing more bankruptcies.
- The Federal Reserve did not increase the supply of money to combat deflation.
- As investors withdrew all their dollars from banks, the banks failed, causing more panic. The Federal Reserve ignored the banks' plight, thus destroying any remaining consumers’ confidence in banks. Most people withdrew their cash and put it under the mattress, which further decreased the money supply.
He said this “Bottom line...thanks to the Fed, there was just not enough money in circulation to get the economy going again. Instead of pumping money into the economy, and increasing the money supply, the Fed allowed the money supply to fall 30%.”

Causes of the Great Depression
By: Megan Becker

The great depression was the worst economic depression in US History. It was a huge financial decline that started in 1929 that lasted into early 1940s. Many “businesses and banks closed their doors, people lost their jobs, homes, and savings and many depended on charity to survive.”  It occurred in North America and Europe but affected countries around the world. Times became very hard in many countries where unemployed and homelessness rose tremendously. Even construction stopped in many areas. The Great Depression was the most severe and lasted the longest in the United States. Many people wondered what caused it to happen. However there was a combination of domestic and worldwide conditions that caused it. Some of the top reasons that historians and economists said why the Great Depression occurred are Stock Market Crash of 1929, Bank Failures, Reduction in Purchasing Across the board, American Economic Policy with Europe, and Drought Conditions.

The Stock market crash in 1929 was referred to as the spark that started the Great Depression.  But many question if the crash actually caused the Great Depression to occur.  But most sources say it was the leading cause of it.   “The 1929 stock market crash is conventionally said to have occurred on Thursday the 24th and Tuesday the 29th of October. These two dates have been dubbed "Black Thursday" and "Black Tuesday," respectively. On September 3, 1929, the Dow Jones Industrial Average reached a record high of 381.2. At the end of the market day on Thursday, October 24, the market was at 299.5 — a 21 percent decline from the high. On this day the market fell 33 points — a drop of 9 percent — on trading that was approximately three times the normal daily volume for the first nine months of the year. By all accounts, there was a selling panic. By November 13, 1929, the market had fallen to 199. By the time the crash was completed in 1932, following an unprecedented large economic depression, stocks had lost nearly 90 percent of their value.” When the October crash occurred two months after stockholders had lost more than $40 billion dollars. Although after this the stock market began to recover some its losses by the end of 1930. But unfortunately it was not enough for America to avoid what became the Great Depression. 

The next biggest factor was Bank Failures.  Throughout the 1930’s over 9,000 banks failed.  Many people lost their savings and bank deposits were uninsured.  So as banks failed people continued to lose their savings. The few surviving banks were very concerned with being able to continue. Since the economy was in such a bad economic situation many banks hesitated creating new loans whether it was home or personal loans.  This made the situation more severe because it led to less and less expenditures.

The reduction in purchasing across the board was another cause of the Great Depression. Due to the stock market crash and peoples fears of future economic problems many people stop purchasing items.  This wasn’t only lower class either it was all classes of people.  Due to the lack of purchasing it led to the reduction in number of items being produced.  So the decreased production then led to the reduction of the workforce.   As people continued to become unemployed they were not able to keep up with paying for items they had bought and many of their items were repossessed. So inventory increased in many businesses and continued to accumulate in time.  The unemployment rate rose above 25% which in turn meant even less spending to help the economy.  “The unemployment rate rose higher and remained higher longer than in any other western country. As it expanded, the depression, for many Americans, was a hard time.”

When things began to get even more difficult and businesses begin to fail the government created an American economic policy with Europe.  They then called this 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.” We will go into more detail about the Smoot-Hawley Tariff and its affect on the cause of the Great Depression.

 

The next factor was not a direct cause of the Great Depression but occurred heavily due to it was Drought Conditions.  In Mississippi Valley a large drought occurred that destroyed many farmers’ crops.  It was such large proportions that many could not even pay their taxes on the land or even any debts.  So many had no choice but to sell their farms for no profit to help themselves get out of other debts.



drought

evac sale

As stated throughout the paper there are many reasons as mentioned as to why the great depression occurred.  It was caused by a numerous amount of serious weaknesses in the economy.  Wealthy people at the time made large profits, and many Americans spend more money then what they were earning.  Many farmers suffered and had to sell items at low prices but had to consume heavy debt and sell their land at such low cost that they wouldn’t consume any profit. The great depression destroyed confidence in the economy and ruined thousands of investors. This depression had lasting effects on the United States for more then a century after it ended. Then President Roosevelt was then elected and created programs to overcome the problems occurred by the Great Depression. 



 

two men no jobman on street


Throughout the 1920’s, new industries and new methods of production led to prosperity in America. America was able to use its great supply of raw materials to produce steel, chemicals, glass, and machinery that became the foundation of an enormous boom in consumer goods (Samuelson, 2). Many US citizens invested on the stock market, speculating to make a quick profit. This great prosperity ended in October 1929. People began to fear that the boom was going to end, the stock market crashed, the economy collapsed and the United States entered a long depression.

The Great Depression of the thirties remains the most important economic event in American history. It caused enormous hardship for tens of millions of people and the failure of a large fraction of the nation’s banks, businesses, and farms. The stock market crash in October 1929 is believed to be the immediate cause of the Great Depression, but there were many other factors and long-term causes that developed in the years prior to the depression.

The 1920’s may have been prosperous for some Americans, but the growing prosperity was actually weakening the economy. Many US citizens were never participating in the boom from the start. There were some wealthy individuals, but 60% of people were living below the poverty line. The coal mining industry had expanded greatly, creating many jobs, but with the introduction of oil and gas, the production of coal was decreased along with the amount of jobs. The United Mine Workers Union’s membership fell from 500,000 in 1920 to 75,000 in 1928 (Temin, 33). The cotton industry experienced similar unemployment problems. In the agricultural industry, an increase in production was met with a decrease in demand, so farmers also became unemployed. The American farms and factories produced large amounts of goods and products during the prosperity before the Depression.

 

 On average, people’s wages stayed the same even as prices for these goods soared. The factories and farms still continued to produce at the same rate, but demand for their products was decreasing. As a result, more and more workers became unemployed, until 25% of the population was out of work. The American Federation of Labor fell from 5.1 million in 1920 to 3.4 million in 1929 (Temin, 68). All of these groups, being poorer than the rest of the country, could not afford to participate in the boom of the 1920’s. There was a major unequal distribution of income that led to the richest 1% of Americans owning approximately 40% of the country’s wealth (Matthews, 2). The country entered the 1920’s with Warren G. Harding as president. Harding was a Republican as well as a laissez-faire capitalist who advocated policies which reduced taxes and regulation, allowed monopolies to form, and allowed the inequality of wealth and income to reach record levels (Tanner, 3). Harding died in 1923 and Calvin Coolidge continued Harding’s policies of minimal government intervention in the economy and in business. Under Coolidge, the stock market began its “artificial” five year rise, the top tax rate was lowered to 25%, and the Supreme Court made an important ruling which further limited government control over monopolies (Tanner, 8).

  In the 1920’s more people invested in the stock market than ever before. Between May 1928 and September 1929, the average prices of stocks rose 40 percent. Stock prices rose so quickly that at the end of the decade, some people became rich overnight by buying and selling stocks (Matthews, 3). People could buy stocks for only a 10% down payment. Between 1920 and 1929 the number of shareowners rose from 4 million to 20 million (Temin, 45). With artificially low interest rates and a booming economy, people and companies invested in over-priced stocks. During 1928 and 1929, the prices of many stocks went up faster than the value of the companies the stocks represented. “It was like pouring gasoline onto a fire-the flames rose up, no lasting fuel was added, but the economy sure looked great” (Matthews, 3).

 

Buying on credit was huge problem in the 1920’s. Since the 20’s was a period of great economic boom, not many people took the future into consideration. Many people bought expensive luxury items using money they did not have. Installment buying allowed people to make a monthly, weekly, or yearly payment on an item that they wanted or needed. Buying on credit and installment buying left millions of people in debt. Installment buying allowed lenders to repossess an item if the borrower missed just one payment. People may have stopped making new purchases to reduce the risk of losing things they already had bought on credit. There was a big drop in consumer spending, which lowered prices, which meant that farmers, businesses, and nations could not repay their debts. 

Rising debt led to restrictions on new loans, which led to scarce credit, less borrowing, lower prices, more bankruptcies, and so on (Samuelson, 1). The spiral downward of trade, investment, people’s confidence, and the economy began. Many economists agree that the Great Depression began with the Stock Market Crash in October of 1929. Stock values plummeted, stockholders were wiped out, banks and factories shut down, and millions of Americans were left jobless and penniless. Although the Stock Market Crash in October of 1929 certainly began the Great Depression, there were many events that led to the gradual decline of the economy. During the prosperous 1920’s, bank failures, together with low incomes among farmers and factory workers, helped set the stage for the depression. Uneven distribution of income among workers also contributed to the slump.

 

The 1920’s were a prosperous period for business, but most farmers did not prosper. Prices of farm product fell about 40 % in 1920 and 1921, and they remained low through the 1920’s (Tanner, 3). Some farmers lost so much money they could not pay the mortgage on their farm and were forced to rent their land or move. Bank failures in the agricultural areas became more frequent. About 550 banks went out of business from July 1, 1928 to June 30, 1929, the period of greatest prosperity in the 1920’s (Temin, 58). Workers in the coal, railroad, and textile industry did not share in the prosperity either. Industrial production increased 50 %, but workers could not buy goods as fast as the industry produced them because their wages were low. Workers reduced their spending to hold down their debts, the amount of money in circulation decreased, and business became even worse. The Stock Market Crash was an immediate cause of the Great Depression, but there were many long-term causes that gradually weakened the economy.

Bibliography

Matthews, Layth. “What Caused the Great Depression of the 1930’s?” Internet. http://www.shambhala.org. 2002.

Samuelson, Robert. J. “Great Depression.” The Concise Encyclopedia of economics. Internet. http://www.econlib.org. 2002.

Tanner, Neal. “The Easy Life of the ‘20’s Contributed to Great Depression.” Overview: The Great Depression. Internet. http://www.marist.edu/summerscholars. 2002.

Temin, Peter. Lessons from the Great Depression. 1989http://econc10.bu.edu/genec/images/sipky/anim/up_blue_gray_anim_a.gif

No Job, No Hope”

Why was the Great Depression a disaster waiting to happen?

While we have spoken about the 20's as a time of great prosperity, it was a tad deceptive. Problems lie under the surface that would not be dealt with by the conservative administrations of Harding, Coolidge and Hoover.

The Great Depression did not begin in 1929 with the fall of the over inflated stock market. In fact the Depression began ten years earlier in Europe. As the depression raged on in Europe American's believed they would be immune to its effects. Isolationist sentiments and conservative doctrine held that the less we had to do with Europe the better. As a result American polices never addressed the possibility of the United States entering a depression as well. Actually American policies actually contributed to our entry into the depression.

The early warning signs first came in the agricultural sector. Farmers continued to produce more and more food due to technological advances like the tractor. As production grew farm prices dropped. It was simply a matter of supply and demand. Framers reacted in the traditional manner and boosted production even further. Prices plummeted. Farmers began to default on their loans and the banks foreclosed. To make matters worse the central part of the nation was hit with a terrible drought. Farmers were devastated. The drought turned that portion of America into what was called "The Dustbowl."

In the 1920's American economic policy was laissez faire. Businesses were left alone and for sometime things appeared to fine. American businesses reported record profits, production was at an all time high. The problem was that while earnings rose and the rich got richer, the working class received a disproportionally lower percentage of the wealth. This uneven distribution of wealth got so bad that 5% of America earned 33% of the income. What this meant was that there was less and less real spending. Despite the fact that the working class had less money to spend businesses continued to increase production levels.

Purchasing dropped internationally as well. Since Europe was in a depression people there weren't buying as much as businesses had estimated. Then the Fordney McCumber Tariff and the Hawley Smoot Tariff raised tariff levels to as much as 40%. Europe which was already angered at US foreign actions responded with high tariffs of their own. International trade was at a standstill.

At this point you should be asking the question "If no one buying and companies were increasing production levels, wasn't there going to be a problem?" BINGO!!! The problem is known as overproduction. American businesses were producing far more than could be consumed. The result was lost profits and eventually debts. After a while many companies went out of business. Why would these companies continue to overproduce? There are several reasons. Some were managed poorly. Others were part of holding companies that placed layers and layers of companies, each relying on the others production levels like a pyramid. If one company in the pyramid reported lower production levels the others fell off and it looked bad. In many cases however crooked company owners reported earnings that were higher than they were actually were in order to drive up the stock price.

As a result of World War I America had emerged as the worlds leading creditor nation. Foreign powers owed the United States and its companies about a billion dollars annually. With declining trade in America, a demand for reparation from the United States and the continuing European depression this debt went unpaid.

Throughout this period of time Americans (and it seems this included Harding, Coolidge and Hoover.) Truly felt they would be prosperous forever. They didn't see or were unwilling to see the warning signs. With this confidence Americans began to increasingly invest in the stock market. The market began an unprecedented rise in 1928. By September 3rd 1929 the market reached a record high of 381. Then the decline began. Many didn't think it would last but on October 24th panic selling began as 12.8 million shares changed hands. Then came Black Tuesday, October 29th 1929. The market plummeted. By July the Dow reached a low of 41.22. Millions upon millions of dollars had been lost. Many who had bought on margin (credit) had to pay back debts with money they didn't have. Some opened up the windows and jumped to their deaths. The depression had arrived.

Banks that had invested heavily in the stock market and real estate lost their depositors money. A panic ensued as people lined up at the banks to get their money. unfortunately for many the money just wasn't there. As the amount of money in circulation dropped deflation hit. Money was worth more but there was little money to be had. The fed which had the power to put more money into circulation did nothing (laissez faire). Workers were fired as thousands of businesses closed down. Unemployment rose to 25-35%. In Toledo Ohio fully 80% of the workers were unemployed! Real estate investments flopped because with deflation a building that was once worth ten million was now worth five. The mortgage and debt stayed the same but the income was gone. Banks foreclosed on loans and took possession of worthless properties that nobody could afford to buy. Between 1930 and 1932 over 9000 banks failed.



With all of this there Hoover announced to Americans that they should "stay the course" that the ship would right itself. After all, Hoover was a self made man, a rugged individualist. By the time Hoover recognized he had to do something it was too little and much too late.


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