What Were The Causes Of The Great

Depression? Essay, Research Paper

`In America, through the 1920’s,

new industries and new methods of production developed. America was able to use

its great supply of raw materials to produce steel, chemicals, glass and

machinery that became the foundation of an enormous boom in consumer goods,

making America more prosperous. Many US citizens invested on the stock market,

speculating to make a quick profit. This great prosperity ended in October

1929. People lost confidence as rumours spread that the boom may be over, the

stock market crashed, the economy collapsed and the USA entered a long depression.

Poverty, unemployment and homelessness became big problems. The Wall Street Crash happened on

24th October 1929 and led to the Great Depression. Was the Wall

Street Crash actually the cause of the Depression?In the great boom of the 1920’s

many companies were doing well. Many people bought shares in these companies

‘on the margin’. Between 1920 and 1929 the number of shareowners rose rapidly

from 4 million to 20 million. There were thousands of inexperienced

speculators, all buying shares in companies that they knew nothing about. They

didn’t understand how well the company may do, they just followed others’

advice and stories in the newspapers and invested to make a profit and pay back

the money which they had borrowed to buy the shares in the first place. The banks were also involved in

this share speculation. Many banks lent money to anyone, regardless of whether

they had any money to pay them back. This turned out to be a big mistake,

especially as many banks were small banks as laws stopped large chains from

forming. The banking system was very unstable, so was the stock market boom of

the late 1920’s which people thought would continue forever. By the late 1920’s there was a

falling demand for products, due to people having either all they wanted or all

they could afford, but just as many goods were being produced as before. This

led to overproduction which led to a drop in profits, which led to industrial

cutbacks because all the products were not selling, so less needed to be made.

Because fewer products were being made than at the beginning of the boom, fewer

people were needed to produce products. This led to many workers being laid

off. Unemployment levels started to rise. By 1928 speculation had really taken hold. In the 6 months

between March and September 1928 the shares in Union Carbide rose from $145 to

$413. During the boom of the 1920’s there was a great confidence that

prosperity would continue indefinitely. This confidence lasted well into 1929

but then the sales of goods began to slow down, which prompted investors who

had some knowledge of the companies they were investing in to sell their shares

while prices were still high. This information that people were selling their

shares got out to other shareholders who decided that they would follow

knowledgeable people’s tips and also start selling their shares, even in

reputable ‘blue-chip’ companies. There was a chain reaction as the prices of

shares were forced down along with the enormous confidence there had once been.

The banks then started re-calling

loans, but because there were so many small banks who had lent out money

unwisely this led to over 5000 banks collapsing in the space of 6 months. This

then led to many more businesses collapsing, as the majority of the country had

no money to pay for new goods or products like many had done previously. ‘Black

Thursday’ was the name given to October 24th 1929?the stock market

was doing terribly. 6 banks spent $40,000,000 buying shares in companies to try

and gain back the confidence, but it didn’t work. Four days later on ‘Black

Tuesday’ was the day that the depression really started and 16 million shares

changed hands. By this day over $8,000,000 had been lost by stockbrokers. Even

J D Rockafeller could not sway the public’s opinion and could not convince them

to buy any stocks and shares. Many had foolishly withdrawn all their savings to

gamble on the stock market and were left with nothing. Many more were left in

poverty, as there was much more unemployment and many wage cuts. The demand for

goods fell away and the industrial production was cut by even more. This led to

the unemployment level rising greatly to 12 million by 1932. By this time the

majority of people could afford no luxuries and many couldn’t afford to pay

their mortgages which led to many evictions. By October 1929 people started to

sell shares for whatever they could get for them, which resulted in share

prices tumbling drastically. The suicide rate also went right up as thousands

of people found their lives ruined. The Wall Street Crash was the

start of the Great Depression, but there were many weaknesses in the US economy

before the Wall Street Crash.One reason why the boom did not

continue and the Depression began was the fact that the economy was actually

fairly weak to begin with. A lot of US citizens were never participating in the

boom from the start. The US economy did look strong during most of the 1920’s

with new gadgets and new hobbies ? but not for the majority of people. There

were some wealthy individuals but 60% of people wer living below the poverty

line. Some individuals were influenced

by the advertising campaigns that went on, telling them to buy more and more

new products. An easy solution for these people seemed to be to buy on credit.

It seemed a good solution, but eventually they had to pay back instalments on

what they had bought. Credit gave people the impression that they could afford

more than they really could, but eventually they had to stop buying, as their

wages weren’t high enough. Sooner or later the people would have to pay back

what they owed and stop buying new goods. Many people were also conned into

buying products or land with their money. The gullibility of some Americans

drove them into debt. One of the most famous financial tricksters was Charles

Ponzi who fooled many Americans into paying money to supposedly make profit by

doing nothing at all and into buying land that they didn’t know where it was,

especially in Florida, which at that time was just swamp land! These people

stopped participating in the boom when they realised they were being tricked

and couldn’t really afford it. There were many groups of people who could not

afford to take part in the consumer boom. Coal miners were one such group. In the 19th century

the coal mining industry had expanded greatly, creating many jobs, but with the

introduction of oil and gas the production of coal was decreased along with the

amount of jobs at the pits. Many American miners lived in poverty in the

1920’s. Similarly the cotton industry was in a state of change. The cotton industry was one

industry that suffered particularly badly; this was partly due to the

introduction of synthetic fibres such as nylon and rayon and partly due to the

change in fashions. In 1914, 19 yards of fabric were needed to create an

average ladies outfit, but by 1928, the fashions had changed and the average

amount decreased dramatically to just 7 yards. This obviously decreased the

profits made by the textile industry. Some towns that relied heavily on the textile

industry had already entered the depression whilst the boom was still going on

in many parts of the USA. This decline in some industries was very damaging, as

many people became unemployed. This is damaging because it means that these

people could not contribute to the consumer boom and many could not afford

necessities. Unemployment was a major feature of the depression.Overproduction was also common in

the agricultural industry, which proved to be a large problem. Wheat prices

fell by 75% and the total income of farmers by about 70%. The farmers were

another of the groups of people that were never rich enough to participate in

the boom to start off with. New machinery and farming

techniques helped the farmers, farming wheat, maize and corn on the prairies.

During the boom in the USA, Americans discovered many different types of foods

and began to eat more expensive foods such as meat; they ate less bread so less

grain was needed. Also, the grain used to be exported to Europe, but as they

were still recovering slowly from the effects of WW1, they also needed less

grain, as many people in European countries were living in poverty and were

unemployed. Farmers had discovered new techniques that allowed them to be more

productive, along with a series of good summers. This would have been a good

thing if the demand had have been high, but this rise in production

unfortunately coincided with the decrease in demand. Farmers were

overproducing, and this was during the boom. Farmers borrowed money, like many

other Americans, from banks. They used this to buy new machinery, but many

farmers were making too little to pay their debts. Over one million farmers

were evicted from their farms during the 1920’s and many more lived in poverty.

Farmers made up a fairly large

part of the population and another group (although many were also farmers) who

also made up a large part of the population, were the black Americans who made

up between 10 and 15% of the population. Millions of black people lived in

the southern states such as Alabama. Nearly all blacks were too poor to buy

consumer goods, as most were very poor farmers who were in debt. Most whites in

America were very racist and did not think that equal rights for blacks should

be allowed. The Ku Klux Klan was a very racist group who made sure that any

blacks that tried to live a normal life, without living in poverty couldn’t

make any economic progress. The KKK and the racist Jim Crow laws put many

restrictions on black people’s freedom. Even after 1900 when black people moved

into the north of the country they were still discriminated against and lived

in ghetto areas such as Harlem in New York. Black people did not have equality

and there was much truth in the saying that Negroes were "the last to be

hired and the first to be fired." Even when they were doing the same jobs

as whites they were getting worse wages, so the blacks and the farmers, the

textile workers and the miners (who made up a large proportion of the country)

could not even afford the consumer goods in the boom. America’s foreign policies also

helped to restrict the market for its goods by the immigration controls. Prior

to 1922 America had welcomed immigrants who had been young, strong and

ambitious people. After the policy, introduced in 1922, the population growth

was slowed therefore the market for goods restricted. If the majority of the

USA had originally participated in the boom then it would probably have

continued for longer because there would have been a wider target market, but

there were millions of Americans who could never afford the goods in the first

place. All of these groups being poorer

than the rest of the country meant that there was a major maldistribution of

income. Some studies suggested that up to 60% of the population were living on

or below the poverty line. There were some very wealthy individuals such as

John D Rockafeller, but not in comparison to the amount of Americans

altogether. Many Americans did have good jobs and did improve their standard of

living in the 1920’s. In the late 1920’s it was estimated that the richest 1%

of Americans owned approximately 40% of the country’s wealth. A major reason for the depression

was that whilst company profits rose by 72% during the 1920’s wages for workers

rose by just 7%. This meant that only a very small minority of people could

genuinely afford as many consumer goods as they wanted, but this minority could

not possibly keep company profits rising. The workers made up a fairly large

proportion of the country and because they (and the groups previously

identified) could not afford the products themselves. With hindsight, the

general public could not sustain the boom and the knock on effects would be

that the companies’ profits would drop because of the greediness of some rich

individuals who would not increase wages. I think that this unequal

distribution of wealth, along with the industrial problems mentioned, is a very

significant reason why the depression happened. Maybe if the employers hadn’t

have let the difference between the increase in company profit and the increase

in wages be so vast, then the boom would have carried on, as the surplus goods,

which many workers couldn’t afford to buy, would have been sold and profit

would have continued to be made.As well as many people not being

able to afford goods in the first place, there was another factor which helped

stop the market from expanding ? the demand had been met. Cars, vacuum cleaners, radios,

telephones, cookers, washing machines and typewriters were popular items bought

by US citizens during the great boom, but by the late 1920’s, most Americans

who could afford these new goods had purchased them and the need was satisfied.

The poor could not afford them and the rich had already got them.The amount of products being

produced exceeded the amount being sold in the USA. These items could have then

been exported and sold abroad but by this time, most foreign countries did not

sell goods made in the USA because of the tariffs that had been introduced, so

when the demand in the US was satisfied there was no growth of exports to

compensate. One of these tariffs was the 1922 Fordney-McCumber Tariff, on

imports. This seemed like a good idea because it prevented foreign competition,

but backfired. Europe needed the profit made from exporting their goods to the

USA in order to help them re-build from WW1. They didn’t sell America’s

products but also couldn’t pay back their war loans. The Smoot-Hawley Tariff

was passed in 1930 for extra protection to American industries, but ended up

spreading the effects of the depression all over the world.So, the excess products could not

be sold in the USA and could not be sold abroad. As soon as the demand was

satisfied, overproduction began. This led to industrial cutbacks and because

there weren’t as many products being made, not as many people were needed to

make them. Workers were laid off as a result of overproduction. The ex-workers

could not afford new products which meant that more workers were laid off, who

in turn bought less, and so the vicious circle continued. There were industrial

cutbacks in many fields, not just consumer goods. When the demand for cars went

down, so did the demand for glass, oil, rubber, service stations and motels,

therefore there was much unemployment. Unemployment was a major feature of the

depression, so overproduction did, in ways, lead to the depression.? So, there appears to be much

evidence suggesting that the US economy wasn’t too healthy even before 1929.

The Wall Street Crash occurred just before the depression began but that does

not mean that it was the main cause of the depression, but what exactly did

cause the economy to collapse?Overall, I feel that the US

economy was not as strong as it seemed and there were lots of problems

weakening the economy at the time of the depression, the economic boom was

somewhat false and it was obvious that it could not possibly continue forever.

Many Americans thought that they could become rich because the country was

doing so well and knew little about the state the country was in. They gullibly

believed that they could make money by doing nothing and millions invested in

shares in companies they knew nothing about. Many people made profit, as the

whole country appeared to be doing well, everybody was confident that the boom

would continue. Therefore, when the first signs appeared that the sales of

goods were beginning to slow down, better informed investors began to sell

their shares. Suspicion spread and soon everybody began to sell. I think that a

main cause of the Wall Street Crash was that people were ill informed and

believed whatever they were told, but I don’t feel that this is a major cause

of the depression, just the incident which triggered it. I think that the Wall Street

Crash is just one symptom of the many problems with the US economy and even if

it hadn’t have occurred in 1929, the boom couldn’t have lasted much longer, as

too many goods were being produced, workers were continually being laid off,

therefore companies weren’t doing as well, and the unemployment rate was

rising. This would have happened with or without the Wall Street Crash, so I

don’t think that the depression was caused by the Wall Street Crash.Many of the other causes are

inter-related, therefore it is hard to decide which is the most significant. I

think that the protectionist policies were a key cause as it was obvious that

the boom could not last forever on the sale of consumer goods in the USA, as

people would no longer have a desire to buy more and more of the same items.

Exporting the goods would have been a sensible suggestion. If the protectionist

tariffs had not have been introduced, then Europe could have been better off

and so could the USA. Then overproduction would not have been such a problem, as

the goods the Americans didn’t want could have been exported, the economy

wouldn’t have got worse so quickly and the boom could have lasted.Although the protectionist

policies were problematic I think that the unequal distribution of wealth was a

long term cause which played a very significant part in leading to the

depression. If the Americans had have bought the goods to start with then there

would have been no need to export them anyway. The boom was bound to come to an

end some time, as a large proportion of the country (farmers, blacks, coal

miners etc) could never afford the great new goods anyway. Only a small

minority of the country could honestly afford the goods ? the rest could not

afford them or bought on credit and fooled themselves. This meant that when the

minority had bought what they wanted, the surplus goods could not be sold to

the blacks, farmers, miners, textile workers and the 60% of the country living

below the poverty line, before exports were even thought about. If a larger

percentage could have afforded these goods then the boom could have continued

for longer.Overall, I would say that the depression was a result of

many linked reasons, leading from a reason which had been present for years ?

the fact that there were far too many poor people and far too few rich people

to keep the economic boom going.