Causes of the Great Depression

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The Roaring Twenties for many was a great time of prosperity and economic growth. Unfortunately, the stock market crash in 1929 and the Great Depression brought financial havoc to many people.

Stock Market Crash of 1929

Many experts argue that one of the main causes of the Great Depression was the stock market crash in 1929. Before the Great Depression, many people were speculating in the stock market, particularly the buying of stocks on margin (on credit). Prior to the stock market crash of 1929, people would put down as little as three percent of a stock’s price and borrow the remainder through a broker. The booming demand for stocks led to a general rise in the prices of securities. Soon individuals invested billions of dollars in the stock market, many of them buying on margin, borrowing from banks and mortgaging homes.

By August 1929, stockbrokers had been carrying on margin approximately 300 million shares of stock. By October 1929 the feverish wave of buying stock had exhausted itself and gave away to a frenzy of selling. Respectively, stock prices started dropping. Thousands of people lost everything they had invested, which led many into financial ruin and bankruptcy. On October 29, 1929 the largest stock exchange, the New York Stock Exchange, had its worst day of selling. By the end of 1929, declines in stocks reached $15 billion.

The stock market crash of 1929 had a ripple effect on the economy. According to John B. Kirkwood in “The Great Depression”, the “gross national product in real terms declined almost 30 percent, and money GNP fell over 45 percent. Private investment sank below the level needed for replacement.” Bank failures from 1931 to 1933 caused a panicky public. And the effect on employment was just as severe. In 1929 the unemployment rate was 3.2 percent, and by 1933 one out of four people who wanted jobs could not find any.

Major Causes of the Great Depression

Some experts argue that banks failures after the stock market crash of 1929 were the main cause of the Great Depression. In “Their Great Depression and Ours” James Livingston cites Milton Friedman and Anna Jacobson Schwartz’s seminal book A Monetary History of the United States 1867-1960 published in 1963 as stating the underlying cause of Great Depression “was not the stock market crash but a ‘great contraction’ of credit due to an epidemic of bank failures.” Others argued that banks got out of control and needed more government regulations to prevent them from becoming so greedy and speculative through extending too much credit.

There are other different arguments about the causes of the Great Depression. A monetarist, Milton Friedman argued the federal government or the Fed “unknowingly raised real interest rates between 1930 and 1932 (nominal interest rates remained more or less stable, but as price deflation accelerated across the board, real rates went up), thus freezing the credit markets and destroying investor confidence” Still others argued that the Great Depression was caused by random events that amplified other conditions happening elsewhere in the economy (Livingston).

Livingston goes on to argue that the stock market crash in 1929, in his opinion, was caused by non-financial companies abruptly pulling $6.6 billion out of the call loan market. Since they had experienced the relative decline in demand for consumer durables, especially automobiles, since 1926, they knew better than the banks that the outer limit of consumer demand had been reached. After they pulled their money out, demands for stocks dropped accordingly.

Effects of the Great Depression

The stock market crash preceding the Great Depression had not only spread over the United States, in the early 1930s it also affected worldwide economies. Credit froze, many factories closed, unemployment increased, several banks failed, mortgages on farms and houses were being foreclosed in large numbers and commodities steadily fell in prices.

In 1932 Franklin D. Roosevelt promised in his Democratic nomination speech a “New Deal” in economic and social reform to bring about recovery from the Great Depression. The New Deal was also to effect a change that would prevent severe economic crises in the future. After Roosevelt was elected president, he began enacting his New Deal programs to improve the struggling economy; however, many of the effects of the Great Depression continued to be felt until the beginning years of World War II.