The Causes of the Great Depression

The Causes of the Great Depression

The cause of the Great Depression has been debated for many years. The actual cause of the Great Depression is a multitude of factors, there was no single cause. Several reasons for the Great Depression were supply and demand, the banking system, wages of workers, success and failure of business, government policy, excessive speculation in the stock market and the unequal distribution of wealth between the rich and the middle class. While there are many theories to what caused the Great Depression; all of these factors played a role in the Great Depression.

The European nations industry had been devastated during the war and they relied on the United States for most goods. The American industry increased production during the war to meet the demand but over production after the war hurt the American industry and agriculture. The United States industry was producing more than the people were buying. The American farmers were faced with the same fundamental problems of over production (McElvaine 35). During the war in Europe the government encouraged a vast increase in agricultural production. During the war the government subsidized many of the farmers. The farmers borrowed heavily during the war to enlarge their farms to meet the demand. After the war the farmers did not slow production and they over produced (McElvaine 36). The United States imposed high tariffs on goods coming into the country but wanted to sell their good freely in Europe (James 103). Congress passed the Fordney-McCumber tariff of 1922 were they placed tariffs on certain agricultural products which were seldom imported in large quantity to the United States. The tariff should have slowed the agricultural production to meet the domestic demands, but it only hurt the nation’s farmers. The nation’s farm families represented 22 % of the American People in the 1920s.

There was still a major gap in income of the rich and middle class. The top 0.1% of Americans in 1929 had a combined income equal to the bottom 42% of Americans, while 80% of the people had no savings at all (McElvaine 38). The average income for the farmer was only $273 compared to the average national income of $750 (McElvaine 21). By 1929 the productivity of the American industry had risen 43 percent while the wages only increase 8 percent (McElvaine 39). The American worker had enjoyed the 1920s as an era that was filled with new inventions, the radio, automobile, electric irons, and refrigerators were in every home. The average American worker could not afford to buy these items, but they could if they made small weekly or monthly payments. Convincing Americans to go against traditional values was difficult, but the advertising industry convinced them they could (McElvaine 41). The average worker in America was living in poverty, making about $24.76 a week. Most Americans did not have much money to loose when the stock market crashed; they had no savings and no investments. The people who lost the most were the wealthy investors (McElvaine 17).

Speculation in the 1920’s caused many to invest money they did not have. The stock market was a “Bull Market in the 1920s, it seemed that it would never end. Hoping to get rich, people from all walks of life were buying up stocks. The boom was built on the foundation of new technology, such as the radio and automobile (McElvaine 43). The market would rise and fall, like a rollercoaster (Freedman 6).

The banking system in the United States was not regulated; the banks were lending money to anyone with no collateral in the 1920s. The Federal Reserve set the interest rate at which banks loaned money. In 1929 the Federal Reserve raised the short term interest rate to 6 % in order to slow the boom in the stock market (Temin 1). During the war American banks loaned large sums of money to foreign countries. The Versailles Treaty following the war required Germany to pay France, and Britain; Germany began borrowing money from the United States to pay back reparations; this was called the Dawes Plan (Brinkley 670). Many Nations could not continue this cycle of borrowing money to pay for loans and defaulted in there debts. American business set up companies in Europe to take advantage in the open market following World War I. Europe was going through a recession, these companies failed (Brinkley 673). Other industries such as oil, rubber and construction were tied together; when one failed they all followed. As the need for these items at home and abroad declined, factories shut down production and laid off workers. The businesses had borrowed money during the early years of the 1920s and now could not pay their loans. As business failed, banks followed behind them. Investors in the stock market saw their profits falling as they lost confidence,