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What were the underlying causes of the Great Depression? 

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tourlay99 | (Level 2) Honors

Posted July 27, 2013 at 1:16 AM via web

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What were the underlying causes of the Great Depression? 

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tjbrewer | Elementary School Teacher | (Level 2) Associate Educator

Posted July 27, 2013 at 2:02 AM (Answer #1)

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The underlying causes of the Great Depression were a perfect storm of bad news. 

#1.  Agricultural overproduction.  During the 1920s technological innovations enabled farms to produce more and more crop for less time and labor.  However, this began to outpace the consumption of these crops, and as a result the price of these products began to drop.  In the past, farmers had compensated for lower unit prices with sheer volume, but by 1929 prices were so low, that producing enough volume to make up for the price was impossible.  In addition, if no one was buying the price didn't matter. 

#2.  Wealth concentration.  Although the 1920s had been a time of great urban prosperity, this prosperity was not spread evenly.  Although wages had been rising, they had not kept pace with inflation.  As a result, the power of people to buy goods was not keeping pace with the volume of goods produced.  When this happened either prices had to fall or wages had to rise.  Businesses did neither, as that would reduce their proficts.  As a result, consumers began to resort to credit, but that just created a bubble in the economy, as credit eventually has to be repaid, and the wages to pay it back didn't materialize. 

#3. Securities fraud came to light in the late 1920s.  Due to the rising profits of businesses caused by inflation outpacing wages, everyone wanted a piece of the action.  This attracted many unscrupulous characters who capitalized on everyones desire to own stock in the most successful companies.  Many of these schemers also offered options to buy stock on margin, where a loan was taken out to buy even more stock, and then the profit from the rising stock value paid back that loan, or was used to buy even more shares.  But in September, the fact that fewer people were buying goods caused a chain reaction. 

#4. Chain reaction: Farmers stopped buying, this caused the credit and margin purchases to default when expected gains were not realized.  With money no longer available spending dropped.  Declining spending reduced business revenues.  Businesses cut jobs to compensate for dwindling revenues, reducing incomes.  Reduced incomes led to even lower spending, and a vicious cycle erupted.  By 1932, unemployment was a staggering 25% (or more by some estimates), the stock markets were at only 10% of their August 1929 high, banks were closing in droves under threat of "runs," and the Great Depression had begun. 

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