What Caused the Great Depression?
First, American farmers. As technology developed and things like tractors became available, farms could be bigger. In order to afford all of these things, farmers took loans to pay for this. Unfortunately as the price for crops plummeted, the farmers were unable to make payments and they had to foreclose, or give their property over the banks as payment.
Second, the Roaring 20s were so named because, well, it seemed to be an incredible time of economic growth, and all around good times. The problem was that much of this had to do with a credit expansion made by the Federal reserve to keep the good times rolling. The reckless spending and speculation continued, but much of it was on credit and loans, and as a result, when the economic ceiling started caving in, people were going to lose almost everything they had obtained on loans they could no longer pay.
Lastly, the world was still recovering from the costs of WWI, particularly Germany and Great Britain. Germany had been forced to pay reparations for the war, and had borrowed billions of dollars from the US to do so. All of the European economies were now tied together by similar loans, and when the American and world economies began to falter, so did German payments.
Eventually, the German and Austrian governments froze payments altogether, making problems ever more dire. These and other causes created the perfect storm when the stock market crashed in 1929. In reality, the stock market wasn’t the worst thing that had happened to the American economy.
In fact, markets were already adjusting the following year, and unemployment was only at about 8%, but, people panicked, and went to their banks and took out all of their savings. Local banks could not stay open when their reserves were depleted, and thousands closed. People stopped buying things, which meant prices only rose, making it more impossible to buy things, etc.
You know, that whole supply demand thing. Businesses couldn’t stay in business with low demand and they laid off workers, furthering the average American’s plight and inability to purchase even the basic necessities of life. America had other depressions throughout the years prior to the one in 1929, but they were never quite as severe, so what was the difference? It all comes down to how American leaders responded.
President Hoover urged businesses not to make adjustments to the market. Instead, he told them to keep their employees and prices at the same levels as they were prior the crash. He encouraged large amounts of government borrowing and artificially upheld vital markets, like wheat, cotton and others. President FDR won a landslide election in 1932 and when he took office, created even more price controls, government programs, and changes within international financial policy in an attempt to resolve the issue.
Taxes were raised in order to pay for programs that would hopefully employ thousands. Unfortunately, this did not resolve the problem either, and the American and now European economies continued to struggle throughout the 30s. By end of the decade, the market had finally begun to adjust, restrictions on businesses and banks began to ease, making growth more rapid. I hope that helps. Thanks for watching and until next time, happy studying.