What was The Great Depression?

The Great Depression is known as one of the worst economic downturns in history. It took place between 1929 and 1941, only ending during World War II – more than a decade later. This event was characterized as one of the worst economic crises in history because of its longevity, impact, and consequences.

What Caused The Great Depression?

There were multiple causes of the Great Depression that came together to create the perfect storm. Some include the stock market crash of 1929, unfavorable government policies, the Smoot-Hawley Tariff, which led to the collapse of world trade, and bank failures. External factors such as the economic downturn in Europe were also culprits. Below is further detail about three of these causes.

Stock Market Speculation: The economic boom of the 1920s also known as the ‘Roaring Twenties’ led to risky gambling on Wall Street. This comprised investors using their savings to buy stock, high levels of margin trading, rapid expansion in the stock market, and the formation of a bubble. As a result, companies became overvalued. In 1929, that bubble burst, leading to the stock market crash. The day the bubble burst is known as Black Thursday; almost 13 million shares were traded when investors panic sold their investments.

Fed Reserve Policies: The federal reserve had the task of controlling money supply to ensure economic stability. That said, a policy passed to encourage monetary expansion after the 1920/1921 depression led to an exponential increase in the country’s money supply and a decline in interest rates. Low interest rates led to increased borrowing, overinvesting and a stock market bubble. When the Fed noticed the bubble in 1929, they responded by increasing interest rates and reducing the money supply, which resulted in the market cooling down too fast and too soon.

Smoot-Hawley Act: As mentioned, the Smoot-Hawley Act contributed to the Great Depression. It was written early on in 1929 and passed into law in 1930. The law increased U.S. tariffs by around 16 percent to protect American factories from outside countries with more competitive goods. Smoot-Hawley didn’t lead to the desired outcome since other countries retaliated and put tariffs on U.S. exports.

Bank Failures: Due to bank runs and failing investments, a huge number of banks went out of business. This led to many customers losing their savings and credit drying up across the country. These effects rippled out to other sectors of the economy and exascerbated the crisis.

Effects of The Great Depression

Some consequences of The Great Depression include a decline in industrial production, a rise in unemployment, and the fall of marriage rates. Businesses were also hit hard since factories were shut down and mills and mines were abandoned.

Almost 25% of the labor force was unemployed and during the height of the depression in 1933. In terms of the economic impact, the country’s real GDP fell 29% between 1929 and 1933. Additionally, consumer prices fell 25%, and around 7,000 banks went bust between 1930 and 1933.

The Great Depression and World War II

Without a doubt The Great Depression’s international effects contributed to growing tensions around the world, especially in Europe. Interestingly, while the depression contributed to rising hostilities, some argue that the war itself ended the Great Depression. While that is debatable, the war helped the U.S. economy by opening jobs and international trading, and encouraging government spending. 17 million new jobs emerged during the war, with millions of men and women joining the armed forces or going to work in well-paid defense jobs. Some of these factors contributed to a fall in the unemployment rate and increased GDP.