The Cause and Effects of the Great Depression Essay.
Many people speculate that the stock market crash of 1929 was the main cause of The Great Depression. In fact, The Great Depression was caused by a series of factors, and the effects of the depression were felt for many years after the stock market crash of 1929. By looking at the stock market crash of 1929, bank failures, reduction of purchasing, American economic policy with Europe, and drought conditions, it becomes apparent that The Great Depression was caused by more than just the stock market crash.
The effects were detrimental beyond the financial crisis experienced during this time period.
The first and most obvious known factor in the development of The Great Depression is the stock market crash of 1929. The Money Alert website states that, “When the stock market crashed in 1929, it didn’t happen on a single day. Instead, the stock market continued to plummet over the course of a few days setting in motion one of the most devastating periods in the history of the United States” (The Money Alert).
Many investors would buy stocks on a margin where they would purchase the stocks with borrowed money. This was a great option for buyers when the stock market was on the rise.
However, when the stocks plummeted, the financial institutions that had loaned the money for the stock purchase went to collect the capital that had been loaned out and were unable to do so. This, in effect, caused banks to lose money as a result of being unable to collect on the debt, and the investors were unable to collect their losses. In addition to private investors, banks and businesses were investing in margin loans as well. So, these poor investment strategies led the banking industry to lose the majority of their assets, including money from bank customers that had no knowledge that their money was being used for this purpose.
Since no government regulations were in place to protect investors and banks in this circumstance, this ultimately led to the effect of the stock market crash, which paved the way for America to go into The Great Depression. The banking industry’s reaction to the stock market crash, would be the next major cause of the Great Depression. The banking industry as a whole after the stock market crashed was going bankrupt due to not being able to carry the “bad debt” that was created from using customer money to buy stock.
Because the banks were out of money, they were unable to cover customer withdrawals from their bank, causing many bank customers to lose all of their savings. With the uncertainty of the future of the banking industry, many people withdrew all of their savings, which caused more than 9,000 banks to close their doors and go out of business (Kelly). Due to the effects of the Great Depression, and the collapse of the banking industry, the government created regulations to prevent similar failure in the future.
For Example, the SEC, (or Securities Exchange Commission), which regulates the sell and trade of stocks, bonds and other investments was created as a result of The Great Depression. The FDIC (or Federal Deposit Insurance Corporation), was created to insure bank accounts so that that the consumer would be protected if the bank were to go out of business (Kelly). The Great Depression’s effect on the banking industry led to many useful changes to the banking industry and helped restore confidence in banks in the American people.
The next major factor that contributed to the Great Depression was the reduction of goods being purchased during the time period. After the stock market crashed, consumers from all economic classes in America were uncertain of the stability of the economy, and stopped purchasing consumer goods. The effect of not purchasing goods caused many companies to begin to produce a surplus, or an excess of goods, which caused companies to reduce their unneeded workforce (Kelly). Since so many people were out of work, they too were unable to purchase goods, and soon a domino effect was created and many companies went out of business.
During this time period, many people purchased goods on payment plans, similar to the modern credit system we use today, and their inability to pay caused many companies to repossess the purchased goods. This caused companies to have additional inventory of products that contributed to the lack of need to manufacture additional products (Kelly). By this time, more than 25% of the workforce was now out of work, and due to the overproduction of goods and overstock of inventory, there weren’t enough consumers to purchase these goods (Kelly).
Another major contributing factor to The Great Depression was America’s economic policy with Europe. During the midst of the depression, the government decided to create the Smoot-Hawley Tariff to help protect American companies by taxing import goods from Europe. The government initially created the Smoot-Hawley Tariff to protect America by making foreign agricultural goods more expensive than domestic products so that foreign goods would cost more than local grown goods(Kelly). Due to many revisions during the initial stages of the tariff, many other American businesses were included in its protection.
The effect of the tariff on trade with Europe caused unstable relations with European countries. Also, many of the European nations began to boycott goods sold by American companies in an act of retaliation for the tariff (Kelly). Having this tariff in effect during the Great Depression caused a prolonged recovery in the American economy due to the decline in Europe purchasing consumer goods from America, in addition to the decline of domestic goods purchases. The final major contributing factor in the great depression was the massive drought that took place during the 1930’s.
Though the drought wasn’t a direct cause to the depression, it did, however, add to the turmoil that was taking place during this time period. The drought of the 1930’s had a very drastic effect on many reigns of the United States which caused both economic and ecologic problems to the country. The economic problems caused by the Great Depression were mostly concentrated in the Mississippi valley, where farmers were unable to pay the tax on the land and most were left no choice but to sell their farms for no profit. This caused a decline in agriculture goods available in America, due to the lack of farming during this time period (Kelly).
The ecological effects of the drought, combined with the effects of over-farming the land, caused the Dust Bowl. The Dust Bowl was caused by over-farming the land and not correctly rotating the crops. By not rotating the crops correctly, the top soil became damaged. Because of the damages to the top soil, the land became infertile, and many people were forced to abandon their land or sell off their property. The timing of the drought, along with the effects that it had on the economy, forced the Great Depression further into turmoil and made recovery even more out of reach for the country (Bonnifield).
The stock market crash did, however, act as the match that lit the fire that was The Great Depression. Along with the stock market, the cause of the depression was also contributed to the banking industry’s inability to cover losses sustained during the stock market crash. Also, the reduction of manufacturing and purchasing goods caused a toxic cycle of workers not being able to work, in turn not being able to consume goods, which further sank the country into financial hardship.
With the tariffs in effect with Europe, the consumption of America’s goods by foreign nations greatly decreased, which caused the country to fall further behind in recovery of the economic turn-down. In addition to these circumstances, the timing of the drought that occurred in this time period caused many of the farmers supporting our agriculture to fold, and created one of the largest man-made natural disasters in history. Careful of these factors shows that it took more than a crisis in the stock market to cause America to go into the greatest economic slump ever experienced in the history of our country.