When thinking about the world’s greatest economic downfalls in history, the Great Depression of 1929 comes to mind to most. However, in a world where economics can often get confusing and complicated, it may be hard to understand the enigma that is the Great Depression. This article seeks to break down this event into a digestible read so that you can understand one of the world’s greatest economic events.
If you were an American citizen during the 1920s, you would be living through one of the world’s greatest economic expansions in history. With the nation’s wealth nearly doubling within this decade, this period in time was famously known as the “Roaring Twenties.” However, this all came to a halt when the country was hit by the longest and most severe economic downturns in history, where they faced drastic deflation, mass unemployment, rising rates of poverty and an ever-decreasing GDP.
But what caused this? There doesn’t seem to be any one answer and most of the answers tend to get complicated. However, the causes of the Great Depression can be broken down into three fundamental causes.
The crash of the stock market in the late 1920s: Before delving into the crash of the stock market, we must first understand what the stock market is. Simply put, it refers to the market wherein the buying and selling of shares (a portion of a company) of publicly traded companies. Many consumers saw that investing in stocks was a quick way to make money and started investing their disposable income and even took loans/mortgages to buy and share stocks. By the summer of the 1929s, 300 million shares of stocks were being carried on margin. However, prices began to decline shortly after, and the market slowly went into free fall. Millions of indebted shareholders tried to liquidate their holdings — causing further losses and panic.
Banking panics: This leads us to banking panics. After the crash of the stock market, many bank customers were in a state of panic in fear of being insolvent and simultaneously, they tried to withdraw deposits in cash. However, one important thing to note is that oftentimes in a state of banking panic, the thing customers fear is what ends up happening. By 1933, almost one-fifth of all American banks had failed. This resulted in consumers having to decrease their expenditure and investment as fewer banks could lend money.
The gold standard: This then led to the problem that arose due to the gold standard. The gold standard was a measure that many nations used to value their currencies. Essentially, their currencies would be valued by measuring them against a fixed amount of gold. Due to fewer banks, the demand for money lending went on a rise. However, to maintain the gold standard, the Federal Reserve raised interest rates and reduced the money supply. This thus reduced prices, which discouraged investment as people feared future wages would not be sufficient and hence became protective.
It is important to note that many other factors contributed to the Great Depression such as a decrease in international lending and tariffs, overproduction, the 1928 Presidential election, monetary policies, war debts, etc. However, the three aforementioned provide an initial crucial understanding of how the Great Depression unfolded.