Today we talked about the causes of the Great Depression. Although there are hundreds of different causes that people claim are responsible, today we went over 5 main causes that were the foundation for the Great Depression.
- Few industries controlled the US economy
There were two main industries that controlled the American economy: Industrial manufactures and construction. During the 1920s, these industries had a huge role and had ties to almost all other smaller industries. Since there was a great deal of connection between the two main industries and all other industries, if the main industries failed, so did everyone else. Therefore, once the industrial manufactures and construction slowed down, the economy was slowed down as well.
- Maldistribution of Wealth
Although the roaring twenties seemed like a great time for all, only a small portion of people were thriving. During this time the top 2% of Americans controlled 26% of the wealth, where 1/2 of Americans were on or below the poverty line. Due to the fact that such a small population controlled such a huge amount of money, the economy was relying on this small population to stay successful. So eventually when the rich started to fall, they brought down everyone else.
- Credit Structure of the Economy
Due to lack of regulation, banks during this era did not have to follow many laws and were unable to absorb a recession . Many banks loaned from each other and recklessly invested in the stock market. Also, many large banks made poor loan choices. This caused them to have a very small reserve. In the late 1920’s there was a credit inventory of $200 million and loans were at a staggering $8 billion. So when the recession occurred, the bank was unable to handle it.
- International Trade
After World War I, Europe need American products to recover. Though once they did recover the demand for American products declined sharply. Countries that did not recover by the 1920's, however, were in no condition to buy American products anyway. Therefore there was a lack of demand everywhere. America tried to compensate for this by creating tariffs like the Fordney-Mccumber tariff. However, the tariffs were so high that neither the Europeans nor Americans would buy products.
5 International Debt Structure
At the end of the war there was massive debt from many nations that slowed the economy. America tried to keep it flowing by issuing the Dawes and Young plans. In these plans America would give money to Germany to pay the Allies. The Allies would then give that money back to America to pay of their debt. Although American would not gain back the money they lost in the war by doing this, it would help run the economy. However this completely relied on America continuing the flow of money. Unfortunately once the other problems causing the depression started to come together, America had little choice but to stop the flow. This was final nail in the coffin that helped cause ruin to the American economy and caused damage to the European economy as well.
This is great, Kim! Adding on to your point about the banks recklessly loaning out money and investing in stock when the value of stock started to decrease, the people who bought the stocks had to use real money to back up the credit used. However, there was no money available for everyone to use since the banks loan out more than it actually had and the fact that the money were in the hands of a few people. The accounts were then liquified and the turned over to be sold off. The selling of stocks caused a panic among the rich which soon effected the rest of the classes. The main problem was that there were more sellers than buyers. The more people tried to sell the stocks, the more value it decrease.
ReplyDeleteAwesome post! Just adding onto some causes, another not very well known cause of the great depression was a drought that occurred in the Mississippi valley in 1930. Although it was not a direct cause, it certainly had an effect on the economy as it destroyed the lives of farmers who had to sell their farms as no crops could grow because of the high temperatures and deficient rainfall. Many migrated from these drought areas to the cities, only increasing the number of unemployed and impoverished.
ReplyDeleteThanks for the post, Kim! This is a great and detailed summary that will be a great resource to study for the test! I was interested in the success of the Fordney-Mccumber tariff so I did a little bit more research. I found that (similar to what you mentioned) the tariff made more of an impact internationally rather than domestically in the US- it prevented Europe from trading with the US, making it harder to pay off war debts. An interesting statistic: "if a set amount of a foreign-produced chemical had a value in its home market of $60 and the U.S. tariff rate for that item was 50 percent, then the total price on the American market would be $90 ($60 + $30)."
ReplyDeleteSource: http://www.u-s-history.com/pages/h1370.html