Causes of the Great Depression (Banking (There was a lack of banking…
Causes of the Great Depression
The Stock Market
Many shares bought by ordinary people were bought 'on the margin.' This involved buying shares on credit
14 billion was wiped off share values; there was a 14% drop in the market and confidence was lost
There seemed to be an almost religious belief in the market amongst shareholders
The Stock Market was alleged by some to be corrupt - there were example of insider dealing
The value of the US stock market nearly doubled in a frenzy of speculative buying in the eighteen months before the crash began on "Black Thursday" October 24 1929.
The stock market crash singled the beginning of the Great Depression, but it was only one factor among many root causes of the Depression.
There was a feeling the Bull Market would go on forever. But only a tiny percentage owned shares
Black Tuesday - 16 million shares were traded after another wave of panic swept Wall Street. Millions of shares ended up worthless, and those investors who had bought stocks "on margin" (with borrowed money) were wiped out completely.
Consumer confidence vanished in the wake of the Stock Market Crash
It is far too simplistic to view the stock market crash as the single cause of the Great Depression. A healthy economy can recover from such a contraction.
The growing unemployment added to the problem - new consuming and thereby threw themselves and others out of work
Traditional industries like coal mining and textiles began to decline
American firms earned record profits during the 1920s and reinvested much of these funds into expansion. Workers could no longer continue to fuel further expansion, so a slowdown was becoming inevitable. While corporate profits, skyrocketed, wages increased incrementally, which widened the distribution of wealth.
Ford employed 120,000 workers in 1929, by 1931 this had shrunk to 37,000
General Electric's income fell from $60.5m in 1930 to $14.17m in 1932. Its workforce fell from 88,000 to 41,000
The success and dynamism of the new industries was part of the problem - the new technologies and production techniques were saturating the market
With the Stock Market Crash and fears of further economic woes, individuals from all classes stopped purchasing items. Then this led to a reduction in the number of items produced and thus a reduction in the workforce.
The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation
As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed. More and more inventory began to accumulate.
Price levels for farming goods fell - a bushel of wheat cost $2.19 in 1919 but had gone down to 90c in 1922
As incomes fell, farmers fell behind with mortgage repayments and tax debts increased
Farmers suffered from debt after investment in new equipment and technology
Sharecroppers also became destitute and the smaller farmer had no opportunity as markets shrank
By 1929, farmer annual income stood at an average of $273, well below the national average of $750
The agricultural sector of the economy was struggling due to drought and falling food prices.
The drought occured in the Mississippi Valley in 1930 was of such proportion that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves. The area was nicknamed "The Dust Bowl." This was the topic of John Steinbeck's The Grapes of Wrath
There was insufficient purchasing power in the economy, especially in consumer durables like cars and radios. By 1927, the majority who could afford to buy had done so
Banks operated without guarantees which meant that there was heightened panic when 'times got tough'. There was little regulation and banks were lending money to people who were spending recklessly amid the economic boom
Difficulties in the banking system became enmeshed with the international financial crisis in 1931
The banking system in the US was fragile in the extreme
The Federal Reserve was crucial in controlling the amounts of money in circulation - but it was inherently weak
There was a lack of banking regulation: no federal deposit insurance system existed to provide security and the majority of state banks operated independently
The majority of rural banks were small and lacked reserves to cope with pressure when it came.
The Federal Reserve was based in Washington not New York this led to communication problems
The Federal Reserve Board was made up of private bankers who were believers in the old system
Consumer debt was proliferating
Throughout the 1930s, over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival, stopped being as willing to create new loans. This exacerbated the situation leading to less and less expenditure