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Political and Economic Causes of the Great Depression

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Published: Fri, 29 Sep 2017

The Great Depression: Political and Economic Causes in the Americas

The Great Depression was a big economic slump in the 1930’s. Many Americans lost their jobs, their savings, and their homes. However, the United States was not the only affected country. The business slump affected the entire world. Many attribute Black Tuesday, when the New York Stock Exchange crashed in 1929, as the major cause, but one can not overlook the fact that there was not just one single factor causing this economic downfall. Most historians and economists agree that the stock market crash was just one of many contributors to the slump. In reality, it was more of a sign that things had already gone wrong. To understand the Depression’s causes, one must go further back. The Great Depression resulted from a combination of economical and political causes that had been building up since months prior to the crash.

After World War I ended, American farmers had a difficult time making profits. The farm depression of the 1920’s was a contributing economic factor to the Great Depression. Farmers were producing a surplus and well over what American consumers were purchasing. Prices of agricultural products fell about forty percent by 1921 and remained low for the rest of the decade (Causes of the Great Depression). Some farmers were in so much deficit they couldn’t even pay off the mortgage on their farm and had to rent the land or even leave. Hard times had hit other major parts of the economy, as well, including energy, coal mining, railroads, shipbuilding, and textiles. Businesses had too much inventory and too few buyers.

In addition, high tariffs and war debts were political causes of the Great Depression. America had lent money to the United Kingdom and other European nations in World War I reparations. This caused many other economies to become reliant on the U.S. economy. As the United States experienced this economic downturn, many other nations were affected as America insisted on repayment. European countries couldn’t afford to repay their debts. Tensions were further exacerbated when the Hawley-Smoot Tariff Act was passed in 1930. Based on the ideals of protectionism, this act raised import duties to protect American farmers and businessmen, resulting in world trade decline by 66% from 1929 to 1934 and international economic strain (5 Possible Causes of the Great Depression).

The 1920’s were a time of great economic and technological growth in America. World War I had just ended, and Americans were ready to take a break from the anxiety of world politics. During this time, known as the Roaring Twenties, Americans were focused on making money and having fun. Factories built to make weapons and ammunition for the war were reestablished to churn out consumer products. But, overproduction in industry resulted in an economic cause of the Great Depression. America was actually more productive than ever, but the gap between the rich and the poor kept growing. Many manufacturers were turning huge profits, but most of that was going to the management, not the workers. Too few workers could afford to buy what the factories were producing. Also, the surplus products could not be sold to foreign countries because of the high tariffs. Still, people rushed to spend their money on cars, radios, telephones and other new technologies.This uneven distribution of income was one of the many economic causes of the Great Depression. “The top one percent of the wealthy Americans owned over a third of all American assets” (The Great Depression). “Ninety-nine percent of the population received a nine percent increase in their income, while the top one percent saw their income rise by seventy-five percent” (5 Main Causes of the Great Depression).

One of the major infamous events that led to the Great Depression was the Stock Market Crash of 1929. Without the cash to buy of those neat new gadgets like cars and radios, consumers relied on another new invention: credit. Americans were saving less and spending money they didn’t have. They were even borrowing money to invest in the stock market. Stock brokers readily agreed to sell shares on margin, where they would lend citizens money to buy stock. The savings were not insured. Through speculation, these investors figured that the stock prices were bound to go up, allowing them to pay back the stock’s original price ten-fold. This helped inflate stock prices well above what they were actually worth. On October 29, 1929, reality finally caught up to the stock market. Panic spread as the prices dropped. Investors began to sell stock, causing prices to drop. In response, brokers called back their loans. However, investors did not have enough money to payoff the loans. Then, brokers demanded the sale of stocks to payoff the loans. This unending cycle caused alarm and money to vanish.

Economies naturally go through periods where there is more supply of products than demand. When that happens on a widespread level, there is a recession, a period where the economy shrinks. There are lots of possible reasons for why the 1929 slowdown turned into a full-fledged depression, which is a longer, more severe recession. When borrowers were unable to repay their loans, banks failed. “In 1929, there were 25,568 banks in the United States; by 1933, there were only 14,771. Personal and corporate savings dropped from $15.3 billion in 1929 to $2.3 billion in 1933.” (5 Possible Causes of the Great Depression). People everywhere started losing it. They rushed to local banks to withdraw their money while they still could. When that happened, banks across the country went under and had to close– causing thousands of people to lose their life savings. “As banks went bankrupt, both consumer spending and investment fell into a downward spiral. Output fell while unemployment rose resulting in the negative multiplier effect” (Economics Essays: Causes of Great Depression).

Many historians also fault Herbert Hoover, the President in 1929, for making things even worse. He thought the key to ending the panic was balancing the government’s budget, so he raised taxes. That made consumers even less likely to spend, and businesses less likely to risk money on expansion. Finally, a 10-year drought hit the Great Plains in 1930, putting even more pressure on farmers. The Dust Bowl further exacerbated problems caused by the Great Depression. Millions of acres of farmland were rendered useless and infertile. The drought added thousands of farmers to the already growing number of unemployed workers. Reaching its zenith in 1933, unemployment was twenty-five percent (Causes Of The Great Depression | What Happened And How It Compares With Today?).

Although some facts are clear-cut, the exact causes of the Great Depression are still being debated. Some of the mainstream theories include the Monetarists view, Austrian view, Keynesian view, and Marxist view. Monetarists believe that the Great Depression was an ordinary recession, but that it degenerated into the Great Depression as a result of the policies implemented by monetary authorities, especially the Federal Reserve. One of the major mistakes was that the Fed did not increase the supply of money to combat deflation. (What Happened During The Great Depression of 1929?). The Austrian view states that the unsustainable credit boom in the 1920’s was the major cause. Particularly, the decision in inflate the U.S. economy to try and help the United Kingdom remain on the Gold standard rate was an indelible mistake (Economics Essays: Causes of Great Depression). They argue that the loss of trust in the banking system was the major harm. The Keynesian theory claims that the problem was the lack of aggregate demand. Based on classical economics, this theory believed that real output would naturally return to equilibrium. However, the Great Depression showed that this was not the case. Keynes argued that governments should intervene in the economy to stimulate demand and fix the problem (Economics Essays: Causes of Great Depression). Lastly, the Marxist View saw the Great Depression as a symbol of the failure of capitalism. Contrary, economies with state-sponsored economic planning, such as the Soviet Union, were more successful as they overcame the Great Depression (Economics Essays: Causes of Great Depression).

To this day, economists are still debating the exact causes of the Great Depression. Contrary to popular belief, the Great Depression did not result directly from Stock Market Crash of 1929, but instead from political and economical causes that were building up months prior to the crash. Most historians agree that the Great Depression had devastating effects on the international economy. In order to prevent another catastrophic event from reoccurring, the government generally spends whenever the economy slows. It gives money back to Americans through tax cuts and financial support. Additionally, the Federal Reserve lowers interest rates, making it cheaper for people to borrow money. When people and businesses can borrow money easily, they’re more likely to spend it and keep the economy humming along. This policy has kept recessions from turning into depressions ever since.

Works Cited

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“5 Possible Causes of the Great Depression.” About. N.p., n.d. Web. 6 Sept. 2014. <http://uspolitics.about.com/od/economy/tp/what_caused_great_depression.htm>.

“Causes Of The Great Depression | What Happened And How It Compares With Today?.” The Great Depression. N.p., n.d. Web. 5 Sept. 2014. <http://www.thegreatdepressioncauses.com/causes/>.

“Causes of the Great Depression.” Causes of the Great Depression. N.p., n.d. Web. 6 Sept. 2014. <http://econc10.bu.edu/Ec341_money/Papers/Carroll_paper.htm>.

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