Causes & Courses of the Great Depression

The Great Depression was one of the most long- lasting, severe, economic crises in the history of the nation. Many historians pinpoint the stock market crash of 1929 as the cause of the depression, yet there were several accumulating causes that lead to massive economic failure. Throughout the course of the depression, consumer spending as well as investment would drop, causing industrial output and employment to drop. At the lowest point of the depression, nearly a quarter of Americans were unemployed and nearly half of the banks had failed. And though New deal reforms aided several Americans, the depression would not subside until World War II.

One of the main issues, was that as consumer spending increased the decade before, appliances and stocks were bought on credit. Stock prices steadily increased, beyond their realistic value and had little benefit to companies because they had been overinflated in price. Debt was increasing because there was no way to pay back borrowed money when the prices of stocks decreased. A 1928 credit inventory shows that there was a population of 200 million when the outstanding debts were 8 billion.

Another key issue was the maldistribution of wealth. Consumer spending was made up by a relatively small group because worker wages were low and companies refused to spend use their profits to raise wages. In 1929, over half of the population lived at or below subsistence level. It was already difficult for most Americans to support themselves and their families on a daily basis. Consumer spending had also dropped as a result of the overproduction of goods, slowing down production. When the stock market crashed, only around 2% of Americans owned stock. So why did it have such a huge impact on the economy? As the wealthy withdrew money from the stocks, downturn in spending and investment caused factories and other businesses to slow production and begin firing workers to compensate for low profit. Workers who kept their jobs say their wages fall and therefore their spending power decreased. Because the middle class saw job loss or lower wages and the wealthy took money out of the system, there was little economic stimulation.

In addition, the only two industries were the backbone of the American economy. Construction and industrial manufacturing (especially automobiles) were the largest industries and were heavily involved with many of the smaller industries. And when production went down, which is rather inevitable for businesses such as construction with low land supply, other industries saw downturn as well. The agricultural sector also failed to uphold the economy when the other industries failed because it had already been in a depression. The prices of farm products between the years of 1919 to 1929 fell 67%. Because no other industry in the economy could compensate for losses in the automobile and construction businesses, economical downturn was bound to occur.

Another cause was the relatively weak banking system. When investors lost confidence in the solvency of banks, they wanted to take their money out of the bank. This forced the banks to liquidate loans in order to compensate for the lack of cash reserves. By the early 1933, thousands of banks had closed because of these bank runs. The Hoover administration tried to support the banks by issuing government loans so that banks could loan to businesses. But much of the damage had already been done. Hoover had previously stood firmly on the belief that it was not the responsibility of the government to create jobs or provide economic relief to citizens.

When Roosevelt took office, however, he announced a four day "bank holiday" to close banks until Congress could pass reform legislation. Three fourths of the banks had later reopened that same month. The road to recovery would be a difficult one, and even New Deal reforms could not entirely ameliorate the extensive damage that had already been done to the economy and the people in it. We can see that the Great Depression was not severe because of a single incident, but because of the accumulation of the weak banking system,  artificial inflation of stocks, lack of diversification in the economy, and a massive wealth gap.

Sources:

http://www.history.com/topics/great-depression
http://www.pbs.org/wgbh/americanexperience/features/general-article/dustbowl-great-depression/