The Great Depression, a worldwide economic downturn lasting from the late 1920s to the mid-1930s, remains the longest and most severe economic crisis in modern history. Several factors contributed to the onset and severity of the Great Depression, including the stock market crash of 1929, banking panics and monetary contraction, the gold standard, and decreased international lending and tariffs.
Key Facts
- Stock Market Crash of 1929: The stock market crash of 1929 is often seen as the trigger for the Great Depression. In the 1920s, the U.S. stock market experienced a historic expansion, with stock prices reaching unprecedented levels. However, in October 1929, stock prices began to decline, leading to panic selling and a loss of confidence in the economy.
- Banking Panics and Monetary Contraction: Between 1930 and 1932, the United States experienced four extended banking panics, during which large numbers of bank customers rushed to withdraw their deposits in cash. This led to widespread bank failures and a decrease in consumer spending and business investment. The Federal Reserve’s actions, such as raising interest rates and reducing the money supply, also contributed to the contraction of lending and investment.
- Gold Standard: The gold standard played a role in the spread of the Great Depression from the United States to other countries. As the United States experienced declining output and deflation, it ran a trade surplus with other countries, leading to significant foreign gold outflows. This threatened to devalue the currencies of countries whose gold reserves had been depleted, resulting in international economic decline.
- Decreased International Lending and Tariffs: In the late 1920s, lending by U.S. banks to foreign countries fell, partly due to high U.S. interest rates. This drop-off contributed to contractionary effects in borrower countries, such as Germany, Argentina, and Brazil. Additionally, the passage of the Smoot-Hawley Tariff Act in 1930, which imposed steep tariffs on agricultural and industrial products, provoked retaliatory measures by other countries, leading to declining output and reduced global trade.
Stock Market Crash of 1929
The stock market crash of 1929 is often seen as the trigger for the Great Depression. During the 1920s, the U.S. stock market experienced a historic expansion, with stock prices reaching unprecedented levels. Investing in the stock market was seen as an easy way to make money, and even people of ordinary means used much of their disposable income or even mortgaged their homes to buy stock. However, in October 1929, stock prices began to decline, leading to panic selling and a loss of confidence in the economy. The result was a profound psychological shock and a loss of confidence in the economy among both consumers and businesses. Accordingly, consumer spending, especially on durable goods, and business investment were drastically curtailed, leading to reduced industrial output and job losses, which further reduced spending and investment.
Banking Panics and Monetary Contraction
Between 1930 and 1932, the United States experienced four extended banking panics, during which large numbers of bank customers rushed to withdraw their deposits in cash. This led to widespread bank failures and a decrease in consumer spending and business investment. The Federal Reserve’s actions, such as raising interest rates and reducing the money supply, also contributed to the contraction of lending and investment.
Gold Standard
The gold standard played a role in the spread of the Great Depression from the United States to other countries. As the United States experienced declining output and deflation, it ran a trade surplus with other countries, leading to significant foreign gold outflows. This threatened to devalue the currencies of countries whose gold reserves had been depleted, resulting in international economic decline.
Decreased International Lending and Tariffs
In the late 1920s, lending by U.S. banks to foreign countries fell, partly due to high U.S. interest rates. This drop-off contributed to contractionary effects in borrower countries, such as Germany, Argentina, and Brazil. Additionally, the passage of the Smoot-Hawley Tariff Act in 1930, which imposed steep tariffs on agricultural and industrial products, provoked retaliatory measures by other countries, leading to declining output and reduced global trade.
Citations
- “Causes of the Great Depression | Britannica.” Encyclopedia Britannica, 2023, https://www.britannica.com/story/causes-of-the-great-depression. Accessed 23 Jan. 2024.
- “5 Causes of the Great Depression | HISTORY.” HISTORY, 2023, https://www.history.com/news/great-depression-causes. Accessed 23 Jan. 2024.
- “What Caused the Great Depression? | St. Louis Fed.” Federal Reserve Bank of St. Louis, 2023, https://www.stlouisfed.org/the-great-depression/curriculum/economic-episodes-in-american-history-part-5. Accessed 23 Jan. 2024.
FAQs
What was the stock market crash of 1929?
The stock market crash of 1929 was a sudden and dramatic decline in stock prices in the United States that began on October 24, 1929, and became known as Black Thursday. The crash signaled the beginning of a decade of high unemployment, poverty, low profits, deflation, and lost opportunities for economic growth and personal advancement.
How did the banking panics and monetary contraction contribute to the Great Depression?
Between 1930 and 1932, the United States experienced four extended banking panics, during which large numbers of bank customers rushed to withdraw their deposits in cash. This led to widespread bank failures and a decrease in consumer spending and business investment. The Federal Reserve’s actions, such as raising interest rates and reducing the money supply, also contributed to the contraction of lending and investment.
What role did the gold standard play in the Great Depression?
The gold standard played a role in the spread of the Great Depression from the United States to other countries. As the United States experienced declining output and deflation, it ran a trade surplus with other countries, leading to significant foreign gold outflows. This threatened to devalue the currencies of countries whose gold reserves had been depleted, resulting in international economic decline.
How did decreased international lending and tariffs contribute to the Great Depression?
In the late 1920s, lending by U.S. banks to foreign countries fell, partly due to high U.S. interest rates. This drop-off contributed to contractionary effects in borrower countries, such as Germany, Argentina, and Brazil. Additionally, the passage of the Smoot-Hawley Tariff Act in 1930, which imposed steep tariffs on agricultural and industrial products, provoked retaliatory measures by other countries, leading to declining output and reduced global trade.
What were some of the consequences of the Great Depression?
The Great Depression had devastating consequences for the United States and the world. It led to widespread unemployment, poverty, and homelessness. It also caused a decline in output, investment, and trade. The Great Depression also had a profound impact on the political and social landscape of the United States and other countries.
How did the Great Depression end?
The Great Depression ended with the onset of World War II. The war effort led to a massive increase in government spending, which stimulated the economy and created jobs. Additionally, the war disrupted international trade, which benefited the United States, as it was the only major industrialized country that was not directly involved in the war.
What lessons can be learned from the Great Depression?
The Great Depression taught economists and policymakers many lessons about how to manage the economy. These lessons include the importance of government intervention to stimulate the economy during downturns, the need for regulation of the financial system to prevent crises, and the importance of international cooperation to promote economic stability.