The Economics Of The Causes Of The

Great Depression Essay, Research Paper

Looking back on the past century of American History, there are many ups and downs, triumphs and tragedies, booms

and busts. However, each one of these periods lasted for relatively short periods of time. There is one notable exception. The

Great Depression was truly that, the greatest low point this country has ever experienced. At its nadir, in 1932 and 1933, 14

million people were unemployed, over 25% of the nation’s workforce. All this occurred after a decade remembered as the

“Golden Twenties” in which prosperity was everywhere. Those who didn’t put their money in the stock market were judged

insane or incompetent.

There were, however, “Two Sides to Paradise,” during the Twenties. Forty percent of the nation’s wealth was

concentrated in only 5% of the population. Even though workers in the 1920’s increased their output by 40%, wages only rose

by 7%. This meant that the now greatly increased profits weren’t being passed on, simply making the very rich still richer.

Because antitrust laws weren’t enforced, there were also price-skimming scams, that allowed companies to make even larger

profits. Overall this meant that producers were slowly constricting their market. Without money to spend in workers’ pockets,

there could be no demand for goods.

The consequence of the rich having so much of the nation’s money was that they speculated with their money in the stock

market. They also spent much of the nation’s gross national product. This meant that if the stock market crashed, as it would,

much of the nation’s money would instantly disappear. As the rich disappeared, demand for luxuries and like products would

disappear with them.

Another false side to paradise was the farmers. During World War I much of Europe’s prime farmland went out of

production due to the war. The demand for food was increased by the needs of the vast armies. American farmers filled the

gap by stepping up production, thereby reaping huge profits. However, between 1919-1921 farm income went from $17.7

billion to $10.5 billion as European farmland came back into production. Farmers continued to take losses all through the 20’s.

Another unstable part of the 20’s economy was that most of the fantastic growth of the decade had been based upon

two industries, radio and the automobile. Any industry that was remotely connected to these had banner years. Take

construction for example. During the 20’s there was an incredible demand for new paved roads. On average America spent

$1.4 billion dollars annually on new roads. In addition, the automobile was responsible for much of the urbanization of the

country during the 20’s. Because so many new people were moving to the cities, there was demand for many new apartments,

factories and office buildings. Steel, lead, glass, leather, fuel and probably most of all, the tire industry benefited from cars.

The problem with so much of the nation’s growth being essentially centered on two industries was that the whole

economy was dependent on them. If the radio and automobile industries slowed down, the entire economy would slow down

with them. This might have been all right had it been a different industry, such as agriculture. However, these two industries

could not expand forever. You could only own so many radios and so many cars before you didn’t want any more; this is law

of diminishing marginal utility in action. Because agriculture had been dismissed as unprofitable, there was nothing left in the

economy after radio and construction went down.

As more and more people speculated in the stock market prices, were driven way up, beyond the actual worth of a

company. Instead of reflecting a company’s assets, dividends, or outlook, prices reflected what someone else might pay in a

week, or a minute, for their chance to make a profit in the same way. Another problem with the speculative boom was that

when people bought stock they usually bought it on margin. This meant that you only paid 40% of the value of the stock. The

broker got the rest of the money on credit, which you paid back when you sold the stock. If your stock’s value fell below the

breakeven point for the broker, he would either sell the stock, and take a loss, or ask you for more money. What all this meant

was that banks were indirectly, and sometimes directly, investing their depositors’ money in the stock market.

Generally the largest cause for the crash of 1929, and therefore the depression, was the fact that the stock market boom

was based on confidence, not actual reality. If investors lost confidence in the market’s ability to turn a profit the whole system

would come crashing down. Instead of being based on confidence, a crash would be based on fear.

During the summer of 1929 many warning signs of the impending crash were noticed. However, these signs were

generally ignored because most investors believed there was no way the market could crash. The one strong response to the

warning signs was when the Federal Reserve raised interest rates t

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