Causes Of The Great Depression In The United States (1929-1939)

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The Roaring Twenties

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Time: 1920-1929

The Roaring Twenties was a time of large economic prosperity in the United States (and in Canada and Britain).
During this time the real wages of workers increase by approximately 14 present, workers worked fewer hours from 47 hours a week to 44. GNP rose approximately 50 present as well as significantly low unemployment (at maximum of around 3.7 present).
There were a variety of reasons for that including tax reductions on many people, lowered economic regulation. Additionally technological advances in the motor vehicle industry, creations of washing machines, vacuums and other electronic consumer goods etc. As well as new business models and activities, including an expansion of credit, mass advertising, creation of huge corporations and advantageous markets in Europe and South America.

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The Wall Street Stock Market Crash

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October 24 1929

As stock prices started to fall, brokers started to sell their stocks in mass. This caused a decrease in the price of stocks causing more frenzied selling. However at near the end of the day (October 24th). Some large bankers including J.P. Morgan decided to purchase up to $40 million worth of stock to calm the market. However, the next day brokers continued to sell stocks, they sold at such a rate that the stock ticker couldn't keep up causing mass panic and hysterical selling. This continued for 3 more business days until the 29th of October. Where a total of 16,410,030 million stocks had been sold.

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Tariffs

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Fordney-McCumber Act: 1922
Smoot–Hawley Tariff Act: 1930

At the onset of the roaring twenties, the government implemented the Fordney-Mcumber Act. This increased the rate at which currently existing tariffs taxed foreign goods. This was meant to promote U.S. business, primarily in agriculture and industry especially after the war. However this caused the price of consumer goods to increase drastically, it also hurt European economies hard as they could no longer export goods to the U.S. and as a result raised their own tariffs on goods. This caused a slow and painful decline in global trade with trade all but completely ending with the Smoot-Hawley Tariff.

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Buying on the Margin

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Buying on the Margin was the practice of borrowing money for the purpose of investing it in the stock market with the belief that you would be able to turn a profit from said stocks. This was a rampant practice during the roaring twenties due to interest rates being near zero for many lenders, this allows people to borrow money and play little interest on their loans which allowed this practice to become more wide spread.
Buying on the margin is considered very dangerous by many people since it is akin to gambling with an empty hand. If you win, then you win, but if you loose and the company or investment goes bankrupt then you will loose money since you will not have the money to pay back your loan causing a host of problems.

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Overproduction

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Overproduction was another core reason for the great depression. After World War 1, industry and farmers had over invested in themselves causing them to produce food and products at extremely low prices, These prices were so low that it became extremely hard for said producers to turn a profit from their product. This caused many farm owners and factory owners to start to lay off workers as it was easier to fire workers than to lower pay or downscale production due to federal wage fixing laws.

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Get Rich Quick Schemes

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Due to more Americans than at any previous point in history investing the stock market, Most were poorly educated in fiance, the lead many people to offer scams and get rich quick schemes to many people. The most well known was created by Charles Ponzi, known as the Ponzi scheme (or pyramid scheme). The scheme involved asking other people to join the pyramid, they would then bring in other people into the pyramid, who would then bring more people in, with every time someone is recruited, each member on top gains a percentage of the money the recruit pays. While these schemes were prevalent during the roaring twenties and to an extent during the great depression aswell, they didn't have as large an effect on causing the great depression as other things did.

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International Debt

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After the first world war, Germany was hit with huge reparations from the allies, Germany initially needed to pay 132 billion Golden Marks to the allies for war related damages. Additionally Britain and France had taken out huge loans from the United States in order to fund the war, however they were only paying the money back with money they received from Germany. This made the us initiate the Dawns and Young Plans which involved giving Germany ultra low interest loans so that they could pay off their reparations so that in turn they could pay the allies so that they could pay the U.S. This meant that if one link in the debt chain breaks then the entire thing would collapse. However other problems compounded this one, including high tariffs from the U.S. and massive over-investment in Germany by U.S. investors.

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Banking Failures

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There were also a number of problems with banking that probably influenced the great depression. One was that investment banks and savings banks often acted as one bank, this meant that money put into the bank by average people we often invested heavily by banks, this meant that if their investments went toxic that that average people would loose money.