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 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
“No Job, No Hope”