The Causes of the Great Depression

Introduction 

The Great Depression that occurred between 1929 and 1939 is recorded as the most severe and longest economic downturn in global history. The economic recession lasted approximately ten years and affected most countries globally. The event was marked by a steep reduction in industrial production, sharp increases in the rate of homelessness and poverty, deflation, banking panics, and mass unemployment. The US experienced the worst effects of the Great Depression because between 1929 and 1933, industrial production reduced by approximately 50%, unemployment rose to over 20%, and the gross domestic produced (GDP) reduced by about 30% ( What Caused the Great Depression? 2018) . By comparison to the Great Recession of 2007 to 2009, the GDP only reduced by 4.3% while unemployment rose towards 10% ( Eigner and Umlauft, 2015) . Historians and economists do not have a consensus about what actually caused the Great Depression, but most of them agree that it was caused by five main issues: stock market crash, the banking panics, Hoover’s anti-adjustment policies, gold standards, and reduced international tariffs and lending. 

Stock Market Crush of 1929 

During the 1920s, the American economy had expanded rapidly, and the country's GDP had more than doubled and the period was described as the ‘Roaring Twenties’ ( Nanda and Nicholas, 2014). However, the stock market that was situated at the New York Stock Exchange was the area of reckless speculation. Every person ranging from janitors and cooks to millionaire cooks splashed their savings on stocks. Due to increased investments, the US stock market experienced rapid growth, and it reached its peak in 1929 ( Nanda and Nicholas, 2014) . Nevertheless, by 1929, unemployment was quickly rising because of reduced production. Ultimately, stock prices were excessively higher than their true value ( Nanda and Nicholas, 2014) . Furthermore, the wages were quite low, banks had excessive amounts of loans that had not been liquidated, consumer debt was ballooning, and the agricultural industry was on its knees because of falling food prices and drought. The US economy experienced a mild recession as unsold produced goods began piling up because of reduced consumer spending. Regardless of the mild recession, stock prices continued increasing to high levels that were not sustainable by the American economy. 

Investors began noticing the trend, and they began selling the overpriced shares in large numbers, and the stock market crashed. More than 12.9 million shares were traded on that day, October 24, 1929, and it became known as ‘Black Thursday’ ( What Caused the Great Depression? 2018). About five days later on October 29, another additional 16 million shares were traded due to the wave of panic that was spreading across Wall Street and the day was known as ‘Black Tuesday’ ( What Caused the Great Depression? 2018). Millions of stock ended up worthless, and all the investors who had bought shares with the hope that the prices would increase were completely wiped out. 

Consumer confidence in the stock market vanished due to the stock market crash. Furthermore, the reduction in consumer spending and production caused many companies to begin firing their employees. For the employees who were ‘lucky' to retain their jobs, their income was slashed, and the overall purchasing power reduced significantly ( Nanda and Nicholas, 2014) . Regardless of the economic downturn, most investors were still eager to liquidate their stocks. The actions pushed the American economy into increased panic and economic decline. By November 1929, stock prices had reduced by approximately 33% ( Nanda and Nicholas, 2014) . The actions had a significant psychological effect globally, and most businesses and consumers lost confidence in the American economy. Due to globalization, the depression that had hit the American economy began spreading globally. The US was not only a major manufacturing hub but also a major market for goods produced in foreign countries, especially Europe. 

Banking Panics 

Between 1930 and 1932, the US experienced continuous banking panics that caused large numbers of bank clients to be fearful of their bank’s solvency and they withdrew their deposits in cash ( Mitchell, 2017) . It is ironic that the mass withdrawal of money from banks caused the same crisis that they were panicking about. Regardless of a bank’s size, economic panics can destroy the bank. By 1933, approximately 20% of the banks that had been in existence since 1930 had failed, and it caused President Franklin Roosevelt to announce a bank holiday that extended up to seven days ( What Caused the Great Depression? 2018) . During the bank holiday, all American banks were closed, and they had to prove their solvency and stability to government inspectors. 

The natural outcome of the increased bank panic and failure was a significant decrease in business investment and consumer spending because there were few monetary institutions that were willing to lend money. Furthermore, there was little money to lend businesses and people because most of the money was held by individuals in the form of cash ( Riumallo-Herl et al., 2014) . Most historians and economists argue that the situation became worse when the Federal Reserve decided to raise interest rates. The actions caused banks to depress lending, and it reduced money supply in the American economy. The Federal Reserve had hoped that raising interest rates would retain America’s gold standards which the US and other countries had linked the value of their country with particular amounts of gold. The reduced money supply had adverse effects on the American economy. It caused deflation and discouraged investment and lending because most people were fearful that future profits and wages were insufficient to sustain loan payments. 

Hoover’s Anti-Adjustment Policies 

If the depression could have been like the previous ones, the economic hard times could have reduced within two years. However unwarranted political intervention, especially by President Herbert Hoover, caused the economic hard times to prolong to more than a decade. Unemployment in 1930 was mild, and it had increased to 8.9% from 3.2% in 1929 ( What Caused the Great Depression? 2018) . However, unemployment rates increased rapidly and reached its peak in 1933 at over 25% ( What Caused the Great Depression? 2018) . These years were part of President Hoover’s tenure. However, President Hoover's interventionist policies worsened the situation and made it difficult for the economy to readjust naturally. Signing the Smoot-Hawley Tariff was a shot in the back to America’s economy. Additionally, he encouraged businesses to increase the prices of goods artificially. Also, he significantly increased government spending and introduced different forms of government lending facilities that caused a rise in budget deficits. In addition to the Federal Reserve’s inability to carry out its duties responsibly, it caused a 30% reduction in money supply ( Riumallo-Herl et al., 2014) . Hence, Hover’s anti-adjustment policies caused a rapid move toward the Great Depression. 

Gold Standard 

Gold standards had a significant effect on the money supply within the American economy. It is essential to note that gold standards affected not only the US but also other countries that conducted business with the US. As the country was experiencing deflation and reduced economic output, the US began experiencing a trade surplus because American exports became relatively cheap while imported goods appeared quite expensive ( Riumallo-Herl et al., 2014) . However, the US had to trade with other countries, and there was significant gold to the American economy. Additionally, the gold inflows to the US threatened to reduce the value of currencies of most states whose gold standards or reserves were depleted because of the depression ( Riumallo-Herl et al., 2014) . Moreover, in a bid to counteract the trade imbalance caused by the US, central banks of foreign countries raised their interest rates, and it had the effect of increasing unemployment in their local economies and reducing output. As mentioned earlier, globalization had made most economies to be interconnected, and the effects of the Great Depression in the US were almost as worse as its impact on Europe. 

Decreased International Tariffs and Lending 

As the US economy was expanding rapidly in the 1920s, foreign countries reduced borrowing from US banks due to the high interest rates ( Kelly, 2019) . The reduction in lending caused a contractionary effect in major borrower countries, such as Brazil, Germany, and Argentina, whose economies began experiencing a major downturn even before the Great Depression began affecting the US. Notably, American agricultural investments experienced downturns because of overproduction and reduced demand due to increased competition from major agricultural nations in Europe. Therefore, investors lobbied the Congress to introduce tariffs affecting agricultural imports. The Congress passed the Smoot-Hawley Tariff Act in 1930, and it imposed heavy tariffs up to 20% on a wide variety of industrial and agricultural imports ( Kelly, 2019) . Unfortunately, the action had a ripple effect and provoked retaliatory actions by many countries. Ultimately, the cumulative effect of the retaliatory measures and Smoot-Hawley Tariff Act caused a significant decline in international business. 

Notably, American agriculture was hardly hit by retaliatory measures by other countries. Immediately President Hoover signed the law, American farmers lost more than 33% of their foreign markets. The prices of farm produce reduced significantly and tens of thousands if not over a hundred thousand farmers went bankrupt ( Mitchell, 2017) . Due to the collapse of the agricultural industry, most rural banks also collapsed and dragged all their clients into the economic downturn. Agricultural commodity prices that had been significantly above the average standards before the Great Depression plummeted significantly by over 47% in 1932 ( What Caused the Great Depression? 2018) . The crashing agricultural prices caused hundreds of thousands of farmers to plummet into bankruptcy. Additionally, it caused farm mortgages to be foreclosed until different states were forced to pass moratoria laws that shifted farmer’s bankruptcy to many creditors. 

It is essential to note that the total American exposed reduced to $1.7 billion in 1932 from $5.5 billion in 1929. America’s agricultural industry had traditionally exported over 40% of lard and tobacco, 20% of its wheat, approximately 55% of its cotton and many other agricultural produce ( Riumallo-Herl et al., 2014) . Due to the disruption of international commerce and trade, America's agricultural industry collapsed. Rather than protecting America's farmers, the Smoot Hawley Act had devastating effects not only on American farmers but also farmers in foreign countries. Many federal agencies attempted to stabilize prices, but their actions only caused an oversupply of crops that in turn caused even greater depression of commodity prices. It caused the economic conditions to get even worse, and unemployment increased to over 12.4 million by 1933 ( What Caused the Great Depression? 2018) . When the Federal government introduced the 1932 Revenue Act, it was a decisive blow on the American economy because it caused the sharpest increase in Americans’ tax burden ever recorded in history ( Mitchell, 2017) . Moreover, due to reduced revenues, local governments began imposing new levies on liquor, business income, tobacco, property, sales, and other products. 

Conclusion 

The term paper has explained how the stock market crash, the banking panics, Hoover’s anti-adjustment policies, gold standards, and reduced international tariffs and lending caused the Great Depression. Additionally, it explained how the government's anti-adjustment policies, such as the Smoot-Hawley Act, had a negative impact on America's farmers. American farmers' played a crucial role in America's economy and the retaliatory measures by foreign countries had ripple effects on the entire American economy. The term paper has also highlighted how bank panic can cause the same crisis that customers are afraid of if they withdrew their deposits in mass. Due to globalization, the adverse effects of the Great Depression spread to other countries, especially Europe. Ultimately, the economy began readjusting after the New Deal that was proposed by President Franklin Roosevelt. 

References 

Eigner, P., & Umlauft, T. S. (2015). The Great Depression (s) of 1929-1933 and 2007-2009? Parallels, Differences and Policy Lessons Parallels, Differences and Policy Lessons (July 1, 2015): Hungarian Academy of Science MTA-ELTE Crisis History Working Paper , (2). 

Kelly, M. (2019). The Great Depression and Its Causes. Retrieved from https://www.thoughtco.com/causes-of-the-great-depression-104686 

Mitchell, B. (2017). The Depression Decade: From New Era through New Deal, 1929-41: From New Era Through New Deal, 1929-41 . Routledge. 

Nanda, R., & Nicholas, T. (2014). Did bank distress stifle innovation during the Great Depression? Journal of Financial Economics , 114 (2), 273-292. 

Riumallo-Herl, C., Basu, S., Stuckler, D., Courtin, E., & Avendano, M. (2014). Job loss, wealth and depression during the Great Recession in the USA and Europe: International journal of epidemiology , 43 (5), 1508-1517. 

What Caused the Great Depression? (2018). Retrieved from https://fee.org/articles/what-caused-the-great-depression/