Politics in the 1920s Long-term causes of the Great Depression (1. …
Politics in the 1920s
Long-term causes of the Great Depression
While the Great Crash of 1929 marked the beginning of the Great Depression (GD), the underlying reasons for this crash can be seen building up for many years before this.
1. Speculative investment on the stock marker (especially towards the late 1920s)
Speculative investments is a high-rise investment made in order to earn a large profits in a short time
Republican economic policies: Buying shares at their lowest and then selling immediately once they go up
From early 1928 - Sept 1929, the Dow Jones Index (the measure of investment in stocks and shares) rose from 191 to 381 pints, a rise of 99%.
There's no way that the US could have doubled its production and wealth in this time, so this speculation meant that people were buying shares in companies where the value was only an illusion. Once investors saw this they became disillusioned and panicked, selling shares and driving the stocks down.
This could have been avoided if there was more regulations on the market.
2. Over-production and under-consumptions of goods
The amount of good manufactured was not being bought at the same rate leading to an excess of it → supply outstripped demand
Low wages did not permit the purchase of such lavish, inflated-priced goods. Eg. Henry Ford's automobile company "Ford"
By 1925, Ford was constructing a complete car every 10sec. However, as they were quite dear, the average middle-class (whom made up the majority) wouldn't be able to afford it unless they used credit. This led to a surplus of it.
↳ Damaging as it leaves the economy unstimulated
↳ Raw material industries are also affected if production of goods halted.
3. Reliance on credit and insufficient regulation of the banking sector
• By 1929, 60% of all car purchase and 80% of all radio purchases were on credit. Due to the low wages, many working class to lower class consumers could not afford to buy goods outright.
↳ This would cause a large problem as people began to find themselves unemployed as the years edged closer to the crash and they cannot pay back their debts and credits
from 1925 - 1929, the amount of money owed on instalment payments doubled
↳ As a result of insufficient regulations of the banking sector, banks were over-extending their credit and when the Great Crash of 1929 occurred, this prompted the collapse of the banking sector as this elicited a loss of capital flow from speculators unable to repay loans and elicited a decline in consumer confidence causing a mass rush to the banks, whereby consumers would w/draw their savings
• The bank was also investing their customer's money into the stock markets which they lost when the market crashed
↳ This further exasperated the bank and caused many companies to declare bankruptcy due to the consumers rapidly w/drawing money → leading to the collapse the banking sector
4. Agriculture Recession
The prices for agricultural goods fell dramatically
New technology emerged after WWI, enabling farmers to produce greater amounts of farm goods
however, people were not purchasing the excess = over-production and under-consumption
But after WWI, the govt removed protection policies for the farmers → could not sell their excess produce
↳ Prices for agricultural goods fell dramatically
reducing the incomes of farmers (dropped from 30% between 1918 - 1929) increasing their debt and sending many into poverty and bankruptcy
By 1929, the farming industry was failing and contributed nothing to the ailing economy
5. High Tariffs and Protection Policies
As a Protectionism practice, high tariffs imposed by the US govt was done so to protect US industries from foreign competition, but this proved not only to be ineffective, but also harmful to the economy.
Tariff acts like the Emergency Tariff Act (1921) and the Smoot-Hawley Tariff (1930), enacted extremely high taxes on international imports into America
This however backfires as it induced other countries to raise their own tariffs against the US
added more stress to the already problems w/ the over-production, yet under-consumption of their goods. Their resorting measure was to sell their surpluses overseas but the high taxes made it hard to do so.