The Great Depression

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What were the causes of the Great Depression?

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One of the main factors in the Great Depression was the almost complete collapse in the US banking system. The stability of a capitalist economy, such as America's, relies on a strong banking system which can provide regular supplies of credit and investment to individuals and businesses.

But, in the wake of the Wall Street Crash, American banks were unable to do this. Like most other businesses, their confidence had taken a huge hit when the stock market collapsed. And it wasn't only the banks who lost confidence; individual savers and investors did too. In the ensuing panic, tens of thousands of people literally queued around the block to withdraw their money from banks, which meant that the banks had less capital available to finance business investment. This had a damaging domino effect on businesses, many of whom relied on bank loans to keep themselves going. To make matters worse, banks started calling in their debts, which placed an additional strain on businesses, forcing many of them to the wall and creating a downward spiral of mass unemployment.

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The Great Depression was caused primarily by a belief that the economy had entered a period of permanent growth, and there could be no negative consequences. As a result, caution was thrown to the winds, the economy spun out of control, and ultimately collapsed.

Several particular occurrences are indicative:

  • The most obvious factor (although not the "cause" of the Depression) was wild speculation in the Stock Market, leading to unsustainable growth in the market which eventually (and suddenly) collapsed.
  • Speculation in Real Estate, primarily in the Miami, Florida area. So called "binder boys" signed contracts to purchase real estate with a small binder fee, then sold the contract itself at a higher price. The new holder repeated the process such that the contract to purchase the property was sold many times over, each time at a higher price, until the price was unrealistically high. The price collapsed and the last buyer lost everything.
  • Overproduction of manufactured goods which far exceeded demand. Even though there were signs that unsold inventory was increasing rapidly, factories continued to produce. Again, when inventory amounts became unrealistically high, factories stopped production and laid off workers.
  • Poor lending practices by banks. The belief in permanent growth in the economy caused banks to loan money with abandon, quite often to those with poor prospects of paying them back. When the loans failed, banks were forced to call in loans on other borrowers, and the lending market collapsed. When banks could not recover their loans, they failed.
  • Government monetary policy at the time encouraged saving rather than spending. As a result, purchasing declined and prices entered a downward spiral.
  • The dollar was still tied to the gold standard, which limited growth. Stabilization could only occur when the economy deflated and prices fell. The end result was disaster.

Together, all these factors send the economy into a deflationary tailspin. As prices fell, consumers postponed purchases waiting on prices to fall further, which exacerbated the spiral. The end result was disaster for the economy.


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The political and economic destruction in Europe caused by the First World War set the stage for the economic ruin of the Great Depression. This was a world-wide phenomena, exacerbated by poor tariff policies of the United States.

The US had become the major lender to Europe during the War, and the repayment by the former combatants was slow, as the industrial base of Europe was wiped out.  Even so, France continued to hold Germany to its agreed upon reparations, which caused hyperinflation and once again destroyed the German economy in the 1920's.

The United States, being the only intact industrial power, expanded greatly during the 1920's particularly with the introduction of mass-produced automobiles and other consumer goods, many of which were exported.

But as Europe's governments failed to pay their debts, and Europe's people failed to purchase US consumer goods, the global market began to contract.

What finally brought down the US economy was widespread stock market manipulation, causing erratic high and low swings, until it crashed in October 1929. One of the more prominent businessmen who had clearly manipulated millions of dollars worth of stocks was Joseph P. Kennedy (1888 - 1969), father of the US president, who later as the first chairman of the SEC, forbade the "insider trading" and stock pooling that had made him a fortune, but triggered the Depression.

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