What Caused the Great Depression?
The Great Depression of the 1930s was the economic crisis that had the longest lasting impact on the entire world. Even today, its effects are still felt in many parts of the world. This period of history spans from 1929 to 1939, a decade of financial turmoil. While the United States was the epicenter of the Depression, it quickly spread to other countries, most notably Canada and Europe.
The Great Depression forced millions of people around the world out of work and into poverty. So, what caused this epic economic crisis? In this article, we take a deep dive into the causes of the Great Depression and look at how it impacted economies around the world, and continue to do so today.
Misdirected Credit and Investments
One of the main causes of the Depression was the misdirected credit and investments that were made at the time. Banks, corporations, and individuals were taking on too much debt in the late 1920s and investing in the stock market and speculation, leading to financial losses when the stock markets crashed in October 1929.
The heavy debt loads assumed by businesses during this time crippled their ability to remain afloat during the economic crisis. This also created additional problems, as businesses had to reduce their workforce in order to remain profitable. As a result, unemployment skyrocketed during the Great Depression and lasted up to the start of World War II.
Rapid Devaluation of the US Dollar
The United States went off the gold standard in 1933, resulting in a rapid devaluation of the US dollar. This meant that individuals and businesses needed to pay more for goods and services as the value of the dollar was reduced and inflation rates surged. This made life difficult for people, as the cost of living increased drastically.
This also had a major impact on the foreign exchange markets, as a devaluated US dollar meant that foreign currencies had greater buying power. As a result, American exports became much less attractive and demand for them plummeted. This resulted in a decrease in sales for American companies, leading to a downward spiral in the economy.
Declining Agricultural Prices
Many rural areas in the United States saw a sharp decline in agricultural prices during the Great Depression. This was due to overproduction and the fact that the demand for agricultural products and commodities declined. In fact, the prices of agricultural products decreased by over 50% and this had a huge impact on rural livelihoods, leading to widespread hardship.
The sudden decrease in agricultural prices put farmers into a difficult situation, as their savings and investments decreased dramatically. This, combined with a lack of liquidity and investment options, led to many farmers going bankrupt and losing their land.
Stock Market Crash of 1929
The biggest cause of the Depression was undoubtedly the stock market crash of 1929. The crash itself was unexpected, as the market had been booming until October 24th, when the value of stocks had fallen drastically. This was due to people panicking and selling off their stocks in fear of further losses.
The effects of the crash were widespread, as many people lost their savings and retirement funds. This led to a lack of confidence in the stock markets and investors losing faith in the investment options that had been so popular just a few weeks before.
Political Unrest and Protectionism
Political unrest and protectionist policies were also major contributors to the causes of the Great Depression. Countries around the world implemented protectionist policies in an attempt to shield their economies from the effects of the Depression. These policies included increasing tariffs on imported goods, creating quotas on imported products, and devaluing their own currencies.
These policies caused a decrease in international trade, which led to a decrease in global demand for goods and services. In turn, this caused more businesses to downsize and thousands of more people to become unemployed. The closing of world markets also had a severe impact on global economic conditions.
The Great Depression was a devastating time in the world’s history and it left many countries and people in economic turmoil. The exact causes of the Depression remain debatable and a variety of factors appear to have contributed to the events that occurred. These include misdirected credit and investments, a devaluation of the US dollar, declining agricultural prices, the stock market crash of 1929, and political unrest and protectionism.
While the Great Depression is a difficult time to remember, it is still important to understand the causes of the Depression and how its effects still resonate today. Only by understanding its causes can we better prepare for future economic crises and ensure that we are adequately protected to prevent them from occurring again.
