Student Question
What caused the Great Depression and how effective were the government's responses by 1932?
Quick answer:
The Great Depression was caused by the 1929 stock market crash, bank failures, poor Federal Reserve policies, high tariffs like the Hawley-Smoot Tariff, and income inequality. Initially, the government believed the economy would self-correct and took minimal action. By 1932, government responses such as the National Credit Corporation, Reconstruction Finance Corporation, and Emergency Relief and Construction Act were insufficient to reverse the economic decline, failing to effectively address the crisis.
There were several factors that led to the start of the Great Depression. One cause was the crash of the stock market. Many people had been buying stocks on credit without researching the companies that they were buying. When the prices of those stocks dropped, the brokers wanted immediate payment of the money their investors owed. When the investors could not come up with the money, they tried to sell their stocks, leading to a further decline of the market. Some stocks lost most or all of their value.
Another cause was the failure of many banks. Banks had invested money in the stock market, so the banks suffered big losses when the market crashed. People were unable to get their money from their savings accounts, because the banks did not have the funds to cover all of the deposits.
Other causes included poor banking policies by the Federal Reserve. Instead of lowering interest rates as the economy slumped, the Federal Reserve raised interest rates. This made it more difficult for people to get loans to buy products or to expand businesses. The federal government also passed a high protective tariff, the Hawley-Smoot Tariff, which made it more difficult for American companies to sell products abroad. An unequal distribution of income also contributed to the start of the Great Depression, as the wealthy saved much of their money instead of investing or spending most of the money that they had.
At first, the federal government believed the economy would correct itself, leading to little government action dealing with the crisis. By the time the government acted, the Great Depression was so severe that the government actions that did occur were not enough to reverse the decline. The National Credit Corporation, the Reconstruction Finance Corporation, and the Emergency Relief and Construction Act were examples of government programs designed to help banks and create jobs that were not successful in helping end the Great Depression.
Get Ahead with eNotes
Start your 48-hour free trial to access everything you need to rise to the top of the class. Enjoy expert answers and study guides ad-free and take your learning to the next level.
Already a member? Log in here.
References