The Great Depression, which lasted for approximately ten years, affected the financial affairs of such great powers as the United States, Germany, Canada, France, and the United Kingdom. The economic crisis that happened in these countries has significantly impacted the politics and economy of the US. The causes of the Great Depression are discussed extensively, focusing on the activity of private business as well as the role of government. The major reason for the crisis was that capitalism could not regulate itself, which was expressed in the overproduction of goods, stock market crash, protectionism, and other contributing factors.
Stock Market Crash of 1929 and Bank Failures
One of the key reasons that led to the Great Depression was financial speculation. It was the period when the stock market developed rapidly, and financial trading grew substantially. However, this process took place outside of any control, as a result of which a lot of financial bubbles were created, financial speculations were made, and shares were issued (Postel-Vinay 7). Fascinated by the schemes of rapid enrichment, Americans actively invested in corporate stocks, trying to make money by selling them. Due to such artificial demand, the value of shares grew exponentially, and they were bought at substantially inflated prices. This formed an economic bubble, which could only have burst with time. As a result, a sudden collapse in share prices, which acted as one more serious impetus for the economic crisis, occurred.
On the so-called “Black Tuesday”, the stock market finally collapsed, and thousands of shareholders went bankrupt almost instantly. Some investors could not accept the fact that they had lost all their money and decided to commit suicide. In the 1920s, the shares of enterprises were acquired for ten percent of the nominal value, but brokers could demand payment of the debt at any time (Koch 539). In order to avoid payments, companies marketed their shares, while following the stock market collapse, the banking system also crashed.
Since many banks issued loans to investors for the purchase of shares, they lost considerable amounts of money. Banks tried to stop the issuance of deposits even though many of them went bankrupt. The banks also lacked the means to pay and sold their securities, while people desperately withdrew their money. As a result, 16,000 banks waited for a complete collapse, of which 5,760 ceased to exist (Postel-Vinay 9). In addition, representatives of international banks bought up both competitor banks and many American companies. The final step on the path to the Great Depression was the decision that resulted in the abolition of the US gold standard and the confiscation of the gold savings of the population.
Decreased International Lending and Tariffs
The policy of protectionism based on the Smoot-Hawley Tariff Act was introduced by President Hoover as a decree that seemed to protect the economy of the state. The essence of the law was that customs taxes increased on more than twenty thousand imported goods (Carabelli and Cedrini 108). This situation should have contributed to the protection of the domestic market from imported products and an increase in national trade. However, other countries such as Canada, Germany, and France were deeply offended by the rising prices of their exports and increased the tariffs on the importation of American products into their territory. It is clear that the products of the United States have ceased to be in demand by foreign buyers. It, in turn, adversely affected the economy of the US as exports fell sharply at almost sixty percent compared with previous years. The situation was aggravated by the fact that overproduction was already observed in the country.
Gold Standard System
From the perspective of the economic theory, the Great Depression of 1929 happened because of the overproduction of goods and insufficient money supply for the purchase of these goods. It is evident that money tied to the limited amount of gold caused a shortage of strong demand for services and goods. Then, the snowball situation may be observed: a sudden drop in prices (deflation) for goods, unemployment, bankruptcies of companies, protectionism on imported goods, and a fall in consumer demand.
The issue of overproduction also should be discussed as the contributing factor. Production can only expand to a certain limit, after which demand no longer grows. In a competitive environment, profit disappears, while wages reduce, negatively affecting the demand for goods (O’Rourke 424). Prior to the Great Depression, US gold reserves did not increase as rapidly as the economy developed. Such a situation led to the appearance of hidden inflation since the government issued new money driven by the quick development of the economy. According to O’Rourke, “between 1929 and 1932, world manufacturing output fell by 30 percent, while agricultural primary production remained constant” (424). Thus, the Federal Reserve Board decreased the discount rate and gold supply was destabilized, which promoted the budget deficit raise.
Unlike the era of the classical gold standard, maintaining exchange rate parity with gold yet without international cooperation had a destabilizing effect on the American financial system in the 1930s. It led to the spread of the crisis and greatly aggravated the fall of economies supporting the gold standard. The fact that money supply in the US directly depended on the gold and foreign exchange reserves of central banks significantly limited the credit expansion (Irwin 79). In an effort to attract gold flows to their country, the central bank raised interest rates, and the government pursued protectionist policies and sought to balance the budget, reducing government spending. It caused a reduction in business activity, both within the country and worldwide.
Environmental Destruction (Drought)
The continuous drought can also be mentioned among aggravating factors that made the Great Depression more devastating. In crises that happened before, farmers were usually far from their serious effects as they could, at least, feed themselves. During the Great Depression, drought with storms of dust continued for several years and aggravated the plight of the farmers. Dust storms and tornadoes destroyed everything in their path, leaving farmers without a crop. In addition, the recent introduction of mechanized feed supply devices has drastically reduced the need for labor resources. Banks stopped lending to small farms, and farmers became homeless and unemployed.
In conclusion, there were several factors that led to the occurrence of the Great Depression and its serious consequences. From the economic perspective, a focus on the gold standard and stock market crash promoted bank failures. In terms of the political aspect, the government’s protectionism strategy led to the decrease in international lending and tense relationships between the US and other large countries. Overproduction occurred as a result of the low purchasing power of the population and the increase in factory-based production. Also, the continuous drought ruined farms, leaving many people without livelihood.
Carabelli, Anna M., and Mario A. Cedrini. “Keynes, the Great Depression, and International Economic Relations.” History of Economic Ideas, vol. 22, no. 3, 2014, pp. 105-135.
Irwin, Douglas A. Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton University Press, 2017.
Koch, Christoffer, et al. “Bank Leverage and Regulatory Regimes: Evidence from the Great Depression and Great Recession.” American Economic Review, vol. 106, no. 5, 2016, pp. 538-542.
O’Rourke, Kevin Hjortshoj. “Two Great Trade Collapses: The Interwar Period and Great Recession Compared.” IMF Economic Review, vol. 66, no. 3, 2017, pp. 418-439.
Postel-Vinay, Natacha. “What Caused Chicago Bank Failures in the Great Depression? A look at the 1920s.” The Journal of Economic History, vol. 76, no. 2, 2016, pp. 478-519.