Causes of the Great Depression and the Lasting Impacts

Abstract

This paper discusses the causes of the Great Depression and the lasting impacts it had on the U.S. Many people attribute the sole cause of the Great of Depression to the stock market crash of 1929 but there are actually multiple contributing factor. The stock market crash propelled the Great Depression forward but many other causes contributed to the length and depth.

Keywords: Great Depression, Stock Market

The 1920’s were a time of low unemployment, mass production of goods, and high consumer purchases (Parker 2002, Page 2).

The stock market was booming, and the economy was healthy. The times were positive and prosperous until the Great Depression hit from 1929-1939, and the world was severely impacted (History.com.) The cause of the Great Depression is still debated today (Britanica.com). Many speculate that there was one single cause, the stock market crash of 1929. The reality is that there were many events that contributed to the Great Depression and had lasting impacts on the U.S. economy. Reduction in purchasing, bank failures, drought conditions, the uneven distribution of income and of course the stock market crash all contributed to the Great Depression and forever changed the lives of Americans.

The Great Depression had drastic effects on those during the time and left long-term impacts on our future. Herbert Hoover was the president at the onset of the Great Depression and Franklin D. Roosevelt was elected as president in 1932. President Roosevelt brought with him a “New Deal”. President Roosevelt’s “New Deal” would not only have an impact on the Great Depression but would impact our future. The New Deal put programs and policies in place that would help reduce the chance of another Great Depression and stabilize the U.S. financial system (History.com).

Prior to the Spring of 1929 consumer purchases were high and partly due to technological advancements. Household products that made life easier and saved time were being mass produced (Parker 2002, Page 2). In the Spring of 1929 there was a reduction in spending.

This reduction caused mass produced goods to go unsold (Texasgateway.org). Many businesses had to terminate employees and, in some cases, reduce the pay rate of employees. Despite the reduction in spending the stock market continued to grow and people continued to invest (Texasgateway.org).

Some speculate that the uneven distribution of income also contributed to the cause of the Great Depression. Luxury goods were in high demand in the early 1920’s. One of the big luxury items was the automobile which sold at a rapid pace between 1922 and 1926 (Dietmar, 1996, page 50). By 1928 the sale of the automobile had slowed considerably. Many believe that the uneven distribution of income is the cause and that those that could afford automobiles already owned them (Dietmar, 1996, Page 50). The wealthy were more likely to save money as opposed to putting money back into the economy which left the wealth concentrated in the hands of a few (History.org).

During the 1920’s the stock market had grown by record numbers. Investors were buying stock “on margin”, meaning they would put 10-20% of their own money down to purchase the stock and borrow the rest (History.com). The economy was good, and credit was readily available for those who wanted to purchase stock (businessinsider.com). Many banks were also buying stock “on margin” using their customers money since there were no laws that prohibited them from doing so (Texasgateway.org). This was a risky method of investment because if the stock dropped below the loan amount some lenders would demand immediate repayment, leaving the investor broke (businessinsider.com). The stock market was overbought, and destruction was near.

In October of 1929 the stock market began to drop and show signs of trouble. This would be the beginning of the stock market crash which took place over 4 days. Many investors attempted to stop the loss, so they made bids on stock for more than market value. This proved to be a temporary fix that was very short lived. By Tuesday, October 29th the stock market significantly dropped causing investors to panic. Panicked investors began to sell millions of shares of stocks in a short period of time ultimately causing the crash of the stock market (businessinsider.com).

The stock market crash caused people to panic and question the stability of the economy and they feared that banks would fail. They rushed to banks to withdraw their savings which further caused destruction of the US economy (Texasgateway.org). Banks had used their customers money to invest in the stock market and were unable to recoup money they had loaned. They were in debt and unable to provide customers the money they had deposited (Hanes 2002, Page 42). They too, had lost money in the stock market crash. Many banks failed during this time due to debt and not being able to give their customers the money they rightfully earned. There were very few regulations during the 1920’s that protected money that was placed in a bank. The banking system in the U.S. was not well regulated by the Federal Reserve System and many banks did not have adequate reserves to back up the deposits (Brinkley 2009).

The collapse of the stock market and bank failures obviously contributed to the Great Depression. Both of which were not very strictly regulated contributing to their downfall. The Securities Act of 1933 was enacted to regulate the stock exchange. This legislation took the power to regulate the stock exchange from the states and gave it to the federal government to get rid of the fraud. The stock market is still regulated today. The Federal Deposit Insurance Corporation (FDIC) was created under the Banking Act of 1933. One of the reason the Banking Act of 1933 was created was to separate commercial banking from investment banking (Banking Act of 1933). The FDIC was created to insure money that is deposited into a bank and to restore the trust in the banking system (Brinkley 2009). There have been many changes, but the FDIC is still intact today, helping prevent bank failures and maintaining confidence in the banking system (History.com).

During the war the farmers increased production of crops to assist with war efforts (History.com). During this time farming equipment technology was advancing and enabling farmers to produce more. The new technology allowed farmers to replace their work animals with machinery and that in turn gave them more land to work (Dust and Drought). Famers took out loans to buy more land and new machinery to enable them to produce more. After the war ended farmers found themselves with excess product and no buyers. The price on crops had significantly dropped and they were making less on the crops they did sell. The over production of the ground had taken a destructive toll on the grassland. The lack of rain prevented the crops from keeping the topsoil intact and that coupled with high winds created deadly consequences and caused crops to fail (loc.gov.) Many farm animals suffocated due to the dust storms and children became ill (History.org). The land was so destroyed that farmers could not make a living. Many families had to abandon their homes and land to move West to look for work (Dust and Drought). Farmers were in debt and unable to make mortgage payments causing some to go into foreclosure (Hanes 2002, Page 172).

The farmers that borrowed money from banks when times were good borrowed at high interest rates and then were unable to make their mortgage payments when the Great Depression struck. President Roosevelt created that Farm Credit Act in 1933 to give famers access to better interest rates and more flexible payment options. The Farm Credit Act is still in operation today and provides loans to agricultural borrowers. The Farm Credit Act offers reliable credit and promotes competition by offering many other services to those in agriculture.

We may never know all the causes of the Great Depression, but it seems unlikely that there was simply one cause. The time was grim and there was destruction in more than one area of the U.S. economy. Who is to say that without a drought the Great Depression wouldn’t have lasted as long or have been as devastating? What we can take away is that without the Great Depression we may be without much of the legislation that helps prevent another devasting depression in today’s world.

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