What Caused the Great Depression? | U.S. History Review
3 Causes of the Great Depression
The Great Depression
The Great Depression is usually represented as a simple, but awful, result of the stock market crash of the 1920s, but that’s oversimplifying a bit.
In reality there were many causes, but I want to address 3 of the causes and then how American leaders responded to the situation.
The three causes I want to address today are 1. Farmers’ foreclosing, 2. The Federal Reserve slowing credit expansion, and 3. International Loan instability. So, let’s get started.
First, American farmers. As technology developed and things like tractors became available, farms could be bigger and in order to afford all 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 a time of incredible economic growth, cultural development, and good times. The problem was that much of this had to do with a credit expansion by the Federal reserve took 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 tied together by similar loans, and when the American and world economy began to falter, so did German payments. Eventually, the German and Austrian governments froze payments, making problems ever more dire.
So these and other causes created a 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, went to their banks and took out all 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, the 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 the simple necessities of life.
In reality, 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 keep their employees and prices at the same level 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.
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Last updated: 04/13/2018
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