Major Causes Of The Great Depression
There are many events that took place leading up to and into the first years of the Great Depression that could be cited as cause. However, the decline in spending across all aspects of the economy, the policies of the Federal Reserve at the time, and the decline in agriculture appear to be some of the largest reasons for the Great Depression. The roaring 1920’s was a time of after war elation.
People were free of war time responsibilities, new technologies were on the market, and hours in the workplace allowed for more free time than many had ever seen. Urban families were purchasing items for their homes like washers, toasters and cars making every day responsibilities go quicker. These items freed up time for leisurely activities which people were happy to spend their hard-earned money on. They weren’t just spending their money; they were being allowed to use credit for their purchases as well. People were buying and manufacturers were making at very fast paces, boosting the economy. This boost in spending allowed stock prices to rise steadily throughout the 1920’s.
In the late 1920’s however, spending started to slow down and companies started to see a surplus in inventory. Factories were laying off workers and slowing production. As more and more individuals faced unemployment, spending slowed even further. Consumers in Europe also had stopped buying as many goods from the United States, because they weren’t importing their products at the same pace due to higher tariffs. Even though production was down and the economy had slowed, stock prices continued to rise for some time. There was a false sense of security as people were still buying stocks, but the purchases were made with loaned monies.
In 1929 when the stock market crashed, people that were already struggling financially were worried and went to their banks to pull out money. People had quickly lost all trust in the banking system as a whole. The problem with everyone going to pull out cash is that banks generally do not keep that amount of money available without having to request repayment from investors. At this time investors, could not replay what they had borrowed either, so consequently many banks (commercial banks or state chartered bank not associated with the Federal Reserve) closed their doors leaving many people financially stranded. The Federal Reserve should have been able to step in and help at this time, but they could do nothing to stop the panic and would only provide help to banks that were member banks. In addition, rural banks were failing due to the lag in agriculture that had happened over the past 10 years. As farmers were trying to compete in the international arena they had invested in big and new machinery like harvesters and tractors. As more large scale farming took over, crop prices plummeted, and the farmers defaulted on loans.
Farmlands were auctioned off to meet debts and, to add insult to injury, a drought later named the Dust Bowl, would occur next causing thousands of farmers that still had their farms to leave as well. In addition to the decline in spending and the financial losses in agriculture, the United States, and private U. S. creditors, were also not seeing millions of dollars in debts owed by foreign countries from war reparations and loans. There was a cycle of how these debts were paid after the war. “The Allied nations depended on German war reparations to pay their debts to the United States, and the German government depended on American bank loans to pay those reparations. ” When the stock market crashed, the loans were stopped to Germany.
The cycle was broken and it also caused the economy to halt. When looking at these difficulties by themselves the crisis would not seem to be so bad, but recognizing that all of these things were happening in very short timeframes or at the same time it is easy to see how it could put quite a strain on the U. S. financial market.
