Causative Factors Of The Great Depression
One fact about the Great Depression which can be agreed upon without question is that there was no single factor that caused this major economic crisis. In fact, many different causes contributed to it. Across America and throughout the world, the Depression grew due to each different cause.
The end of World War I was a new chapter in United States history. Confidence was inspired in the hearts of Americans that gave them hope for the future. Indeed, things like inventions and popular culture heroes seemed to prove that nothing was impossible. The belief in infinite funds pervaded Americans' minds, though it was false.
The Stock Market Crash of 1929 was one of the more prominent and recognized reasons the Great Depression occurred. The stock market was so successful in attracting consumers because it was a place where not only successful rich people, but common people could make money. However, the common person often could not afford the full price of stocks, and so had to buy on margin. This type of buying was similar to the installment plan, in that the buyer put down part of the debt as a down payment and borrowed the rest of the money from a broker. Since this relied on the ability of the buyer to actually pay off his loan in the future, it wasn't as successful as it was designed to be. It put consumers in even more debt. If the value of the stock fell lower than the amount owed, it's called negative net worth. This means the buyer owes more than he owns. Companies put money into the stock market also. Banks also invested customers' money in the stock market without telling the customers. They thought that an increase in money was a sure thing since stocks were looking so good. When the stock market crashed, however, all this money was lost, even the money the banks invested, meaning people's life savings disappeared seemingly overnight.
In the 1920s, companies and industries had had an economic "boom". This means that consumers were convinced that their money was sufficient to pay for multiple things at once and so demand went up for many products. To keep up with this demand, there was a need for a larger supply of products, which meant more money spent to produce them. It also meant that the price of these overproduced products went down - following the principles of supply and demand. This "boom" was based on fictional money due to the installment plan. Money was lost in the over-production of goods that consumers could not afford. This over-extension of economic growth was a result of the belief that nothing was impossible.
In the late 1920s, the nation's wealth was distributed very unevenly. The richest 1% of Americans owned the majority of America's money. Middle class citizens used their savings -which wasn't much- to invest in stocks. Wealthy Americans owned almost all the nation's stocks before and during the Great Depression. Middle class citizens therefore lost most of their money and wealthy citizens lost exponential amounts of money in the crash.
The end of World War I was a new chapter in United States history. Confidence was inspired in the hearts of Americans that gave them hope for the future. Indeed, things like inventions and popular culture heroes seemed to prove that nothing was impossible. The belief in infinite funds pervaded Americans' minds, though it was false.
The Stock Market Crash of 1929 was one of the more prominent and recognized reasons the Great Depression occurred. The stock market was so successful in attracting consumers because it was a place where not only successful rich people, but common people could make money. However, the common person often could not afford the full price of stocks, and so had to buy on margin. This type of buying was similar to the installment plan, in that the buyer put down part of the debt as a down payment and borrowed the rest of the money from a broker. Since this relied on the ability of the buyer to actually pay off his loan in the future, it wasn't as successful as it was designed to be. It put consumers in even more debt. If the value of the stock fell lower than the amount owed, it's called negative net worth. This means the buyer owes more than he owns. Companies put money into the stock market also. Banks also invested customers' money in the stock market without telling the customers. They thought that an increase in money was a sure thing since stocks were looking so good. When the stock market crashed, however, all this money was lost, even the money the banks invested, meaning people's life savings disappeared seemingly overnight.
In the 1920s, companies and industries had had an economic "boom". This means that consumers were convinced that their money was sufficient to pay for multiple things at once and so demand went up for many products. To keep up with this demand, there was a need for a larger supply of products, which meant more money spent to produce them. It also meant that the price of these overproduced products went down - following the principles of supply and demand. This "boom" was based on fictional money due to the installment plan. Money was lost in the over-production of goods that consumers could not afford. This over-extension of economic growth was a result of the belief that nothing was impossible.
In the late 1920s, the nation's wealth was distributed very unevenly. The richest 1% of Americans owned the majority of America's money. Middle class citizens used their savings -which wasn't much- to invest in stocks. Wealthy Americans owned almost all the nation's stocks before and during the Great Depression. Middle class citizens therefore lost most of their money and wealthy citizens lost exponential amounts of money in the crash.
"The nation that destroys its soil destroys itself."
- Franklin D. Roosevelt
- Franklin D. Roosevelt
While urban areas experienced their version of the Depression, farmers in the Great Plains experienced something not quite the same. A drought began in 1930 which made it impossible for farmers to plant crops. Without crops, the farmers had nothing to sell and therefore made no profits. Additionally, winds blew across the dry land, forcing dust and sand up off the ground and causing massive dust storms. With no money and sand forcing itself into their homes and lungs, farmers and their families gathered their possessions and left to try their luck in the cities.
A balanced budget is one in which revenues are equal to or greater than expenditures. Herbert Hoover advocated a balanced budget, and so money that was needed to help struggling Americans and to improve the economy never was spent. The country carried on paying and gaining in the same way they had before the depression started. Since Hoover felt that the economy would heal itself, the money the country acquired was not spent on American citizens and banks.
A factor which is beginning to be widely accepted as the major cause for the depression is a bad monetary policy, and the fact that the Federal Reserve allowed a reduction in the country's money supply. The Federal Reserve was set up to prevent bank failure. However, the Reserve seemed to believe that "weeding out 'weak' banks was a harsh but necessary prerequisite to the recovery of the banking system" (Kupelian). So small banks were left to overcome their crises on their own, usually failing, leaving Americans without their savings. The Reserve also allowed interest rates to fall very low in the 1920s, but then allowed them to increase drastically in 1929, meaning that people had to pay their brokers more money all of a sudden. The Federal Reserve also had the power to put more money into circulation after the Stock Market Crash of 1929, but chose not to.
While the US's Depression began in 1929, Europe's began ten years earlier, after World War One. World War One had resulted in economic instability in all countries involved. This instability eventually led to a collapse. Each country had spent a huge amount of money to pay for their war effort. Before 1917, both the Allies and the Central Powers had payed the United States to provide war supplies to them, which left them in debt. Germany's debt was made even worse after the inclusion of the war guilt clause in the Treaty of Versailles, which demanded that Germany pay reparations -compensation (given or received) for an insult or injury- as punishment for initiating the Great War. America eventually joined the war, and was inevitably thrown into some debt as well. Economic weakness pervaded countries internationally.
America was desperately in need of money during the Great Depression. This need led to the passage of the Hawley-Smoot Tariff Act, which raised taxes on exported goods. This act reduced American imports and exports, because it provoked retaliation from the US's international trade partners, who were in need of money also and so began to raise taxes on their own products. The Hawley-Smoot Tariff Act reduced international trade by half, which cost the US money and was a cause of the Great Depression.
A balanced budget is one in which revenues are equal to or greater than expenditures. Herbert Hoover advocated a balanced budget, and so money that was needed to help struggling Americans and to improve the economy never was spent. The country carried on paying and gaining in the same way they had before the depression started. Since Hoover felt that the economy would heal itself, the money the country acquired was not spent on American citizens and banks.
A factor which is beginning to be widely accepted as the major cause for the depression is a bad monetary policy, and the fact that the Federal Reserve allowed a reduction in the country's money supply. The Federal Reserve was set up to prevent bank failure. However, the Reserve seemed to believe that "weeding out 'weak' banks was a harsh but necessary prerequisite to the recovery of the banking system" (Kupelian). So small banks were left to overcome their crises on their own, usually failing, leaving Americans without their savings. The Reserve also allowed interest rates to fall very low in the 1920s, but then allowed them to increase drastically in 1929, meaning that people had to pay their brokers more money all of a sudden. The Federal Reserve also had the power to put more money into circulation after the Stock Market Crash of 1929, but chose not to.
While the US's Depression began in 1929, Europe's began ten years earlier, after World War One. World War One had resulted in economic instability in all countries involved. This instability eventually led to a collapse. Each country had spent a huge amount of money to pay for their war effort. Before 1917, both the Allies and the Central Powers had payed the United States to provide war supplies to them, which left them in debt. Germany's debt was made even worse after the inclusion of the war guilt clause in the Treaty of Versailles, which demanded that Germany pay reparations -compensation (given or received) for an insult or injury- as punishment for initiating the Great War. America eventually joined the war, and was inevitably thrown into some debt as well. Economic weakness pervaded countries internationally.
America was desperately in need of money during the Great Depression. This need led to the passage of the Hawley-Smoot Tariff Act, which raised taxes on exported goods. This act reduced American imports and exports, because it provoked retaliation from the US's international trade partners, who were in need of money also and so began to raise taxes on their own products. The Hawley-Smoot Tariff Act reduced international trade by half, which cost the US money and was a cause of the Great Depression.