Causes of Great Depression

Topics: Great Depression, Wall Street Crash of 1929, Federal Reserve System Pages: 5 (1620 words) Published: August 19, 2013
ssionMajor causes of the Great Depression- 1929-1939
There is no single cause or obvious set of factors that can explain why the great depression of 1929-1939 occurred. Historians, economists and political scientists have come up with various explanations that place different emphasis on different factors and events. One thing seems clear, however, that the depression was the result of the interaction of a complex set of factors, some economical, some political and some social. This report will concentrate on the economic factors and government policies that led to the great depression. Following are the major causes of the Great Depression: 1. Overproduction (responding to high demand for goods)

2. Banking and Money Policies (low interest rates, buying on credit, raise in interest rates, low reserve rates for banks) 3. Stock Market Practices (buying on margin, bank loans for stock purchases) 4. Political decisions (Smoot-Hawley Tariff, Increase Income Tax)

1. Over Production
Great depression was not due to a single event but due to a series of events that took place prior to 1929. End of World War I is one such event, which left much of Europe destroyed. Americans felt they deserved to reward themselves after the sacrifices of World War I. The “roaring twenties” was an era when America prospered tremendously. Average output per worker increased 32% in manufacturing and corporate profits rose to 62%.The availability of so many consumer goods, such as electric appliances and automobiles, offered to make life easier. This led to a high demand for such goods, so companies began to produce more and more, in order to meet that demand. But in reality there was under consumption of these goods in U.S. and abroad due to people not having enough cash to buy everything they wanted. American farms were also overproducing. During the period of World War I, with European farms in ruin, the American farm was a prosperous business. Increased food production during World War I was an economic “boon” for many farmers, who borrowed money to enlarge and modernize their farms. The government had also subsidized farms during the war, paying high prices for wheat and grains. When the subsidies were cut after the War, it became difficult for many farmers to pay their debts when commodity prices dropped to normal levels. So, HIGH DEMAND for consumer goods and agricultural products led to OVERPRODUCTION.

2. Banking and Money Policies
There existed an uneven distribution of wealth and income in America at that time. This, however, did not dither the poor and middle class from wanting to possess luxury items, such as cars and radios. But that created economic disturbance because wages were not keeping up with the prices of these goods that created problems. As a solution to this, purchasing of products on credit started. The concept of “buying now and paying later” caught on rapidly. There had been credit before for businesses, but this was the first time personal consumer credit was available. Banks were offering credits on lucrative terms. By the end of the 1920s, 60% of the cars and 80% of the radios were bought on installment credit. The Federal Reserve was formed to serve as a protective “watchdog” of the nation’s economy. It had the power to set the interest rate for loans issued by banks. In the 1920s, the Federal Reserve set very low interest rates which encouraged people to buy on the “installment” plan (on credit). More buyers meant more sale and profit for companies, so they produced in huge quantities; so much that a surplus of goods build up. In 1929, the Federal Reserve realized that growth was too rapid, so it decided to raise the interest rates in order to tighten the supply of money. This turned out to be a bad miscalculation. Facing higher interest rates and accumulating debt, people began to slow down their buying of consumer goods. So, banking policies which offered “buying on credit” first with...
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