Great Depression Causes

The Causes of the Great Depression

Introduction The young man shivered as the wind ripped through the large wooden crate, his temporary home as he searched for work in Toledo. Three months ago he defaulted on his mortgage loan and the bank seized his farm in Indiana. As his wife and kids lived with his in-laws, he ventured to the city in hopes of a job. He wondered how his fortune and that of his country could change so drastically. The Great Depression was a worldwide tragedy that affected millions of people. The event is well chronicled by historians and economists alike. We know what occurred, and it is staggering. GNP fell from $104 billion in 1929 to $56 billion in 1933; one out of every four
A new term entered the lexicon of the middle class: buying on margin. Margin is the percent of the purchase price of a stock that the buyer has to pay in cash; he can borrow the rest. A typical margin during the late 1920s was 10%; a buyer could put up $100 and buy $1000 worth of stock. Of course, the buyer had to leave his shares with the broker as security. But as long as stock prices were rising, as long as market prices covered the borrowed 90%, the buyer was in no jeopardy. But let prices fall, and the situation could turn mean. The broker would call the buyer and demand more margin. If the buyer could not produce more margin, the broker would sell the shares to cover the loan on the
A fall in exports as a result of the Smoot-Hawley trade wars hurt the US. All these depressing factors caused consumption to fall further as more workers became unemployed. To make things worse, adverse expectations of the future pushed consumption even lower. Expectations of profit play a crucial role in the rate of capital formation. The stock market crash, the bank failures, the weakness of the agricultural sector and the falling consumer expenditures all led to low profit expectations. These grim expectations dampened investment spending. Real investment in the US fell from healthy numbers in the late 1920s to a negative number in 1932, as American business did not invest enough to replace depreciating machines. So the fall in aggregate spending began on the farm, then spread to housing, then to investment, then to consumption and finally to exports. Together they produced a tremendous decrease in real income. We were to learn later from Keynes that any fall in spending causes production and income to fall by a greater amount - what he called the multiplier