Causes of the Great Depression
|🗽 American History
|Cause and Effect Essay
|💲 The Great Depression, 💱 Macroeconomics
The Great Depression was a significant economic downturn that affected the well-being of multiple nations, businesses, industries, and families worldwide. Great Depression perpetuated unemployment due to mass layoffs of workers and a reduction in investment and consumer spending, resulting in a massive reduction in industrial output, depreciation of the agricultural market, and currency decline. Consequently, President Franklin Roosevelt developed the New Deal Legislation to facilitate reform, recovery, and relief of the American economy, ultimately spearheading the end of the Great Depression in 1939. The leading causes of the Great Depression were the stock market crash, the failures of the Federal Reserve System and the collapse of the banking sector.
The Stock Market Crash
In 1929, the economic impacts of the stock market crash kicked off the Great Depression. Numerous social, political, and social changes marked the early and mid-1920s. In particular, consumer spending rapidly increased in the United States. Besides, countless American corporations produced goods in mass to match consumer demand. Technology also drastically improved, facilitating innovations of new products such as washing machines, refrigerators, and radios which broadened the market and boosted the gross domestic product. After observing the increased revenue in businesses and new investment opportunities, individuals from diverse economic backgrounds began rapidly investing in the stock market (Robbins, 2011). Also, stockbrokers permitted individuals to purchase stocks on margin since the cost of shares was progressively rising. However, in the spring of 1929, industries encountered overproduction, resulting in surplus products in the market and reduced consumer spending. Despite the resultant slowdown in production, the stock prices rose before reaching their peak on September 3, 1929. On Black Thursday, dated October 24, 1929, the stock market began to crash, marked by investors panicking and starting to sell their shares (Robbins, 2011). The crash rendered the shares worthless, making investors who had bought shares impoverished. In this view, the stock market crash led to an economic downturn that triggered the Great Depression.
Following the stock market crash, economic turmoil increased, paving the way for the worsening of the Great Depression. In particular, companies began to lay off workers, manufacturers reduced production, and consumer spending reduced. Besides, the salaries of employed individuals were cut, rendering them incapable of sufficiently providing for their families (Benmelech et al., 2019). As a result, numerous Americans began to sell their property and lost their residences to foreclosure. Since individuals’ investments had been rendered worthless, their savings depleted or diminished, and access to credit became tight, bringing companies’ and consumers’ spending to a standstill (Benmelech et al., 2019). Consequently, individuals could not pay for properties they had bought through hire purchase, resulting in evictions and repossessions. Besides, the reduction in purchasing power drastically increased the amount of unsold inventory, resulting in the collapse of multiple businesses. Against this backdrop, the economic impacts of the stock market crash deepened the Great Depression.
Failure by the Federal Reserve System and the Banking Sector
The banking system failure also perpetuated the Great Depression. Following the stock market crash, numerous individuals panicked and swiftly withdrew their money from their bank accounts. Before the stock crash, banks had taken part in speculation purchasing by using investors’ money and lending it to third parties to purchase stocks (Texas Getaway, n.d.). After the stock market crash, individuals anticipated an urgent bank failure. Consequently, their mass withdrawals resulted in the closing of thousands of banks. As of 1933, almost half of the United States banks had failed. This led to the intensification of the Great depression.
Additionally, the Federal Reserve System (Fed) adopted monetary policies which perpetuated the Great Depression. For instance, the Fed raised interest rates to counter the rapid stock market speculation between 1928 and 1929 (Texas Getaway, n.d.). This resulted in a reduction in consumer spending. Furthermore, the Fed failed to inhibit banking panics witnessed between 1930 and 1933. Additionally, the Fed only offered aid to its constituent banks or those having sufficient collateral (Romer, 1990). As a result, numerous banks failed to access the much-needed bailout, resulting in their mass closure. Furthermore, the Federal Reserve System enacted policies that made numerous United States citizens depreciate their confidence in the banking system, resulting in mass cash withdrawals from bank accounts and intensifying the Great Depression. The policy mistakes made by the Fed in response to the global recession only intensified its impacts.
In summary, the stock market crash and the failures of the Federal Reserve System and the banking sector were the leading proponents of the Great Depression. The stock market crash in 1929 compelled numerous investors to sell their shares, resulting in the mass layoff of workers, slowed-down production, and reduced consumer spending. Furthermore, collapse of the banking sector made numerous individuals panic and swiftly withdraw their money from their bank accounts, deepening the Great Depression. Besides, the Federal Reserve System enacted unfavorable monetary policies, which made most citizens lose confidence in the banking system and rapidly withdraw their bank account balances, fueling the Great Depression.
- Benmelech, E., Frydman, C., & Papanikolaou, D. (2019). Financial frictions and employment during the Great Depression. Journal of Financial Economics, 133(3), 541-563. https://doi.org/10.1016/j.jfineco.2019.02.005
- Robbins, L. (2011). The Great Depression. Transaction Publishers.
- Romer, C. D. (1990). The great crash and the onset of the Great Depression. The Quarterly Journal of Economics, 105(3), 597-624. https://doi.org/10.2307/2937892
- Texas Getaway (n.d.). Introduction—What is the Great Depression?. https://www.texasgateway.org/resource/causes-great-depression