The Great Depression in the US and Its Causes

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Table of Contents

Stock Speculation
Unrealistic Stock Valuations
Bad Bank Loans
Bank Loan Restrictions
Decline in Consumer Spending
External Trade Issues
Companies Being Forced to Operate in the U.S. Domestic Market
Production of Goods
Works Cited

The Great Depression is considered as being one of the worst economic periods in the history of the U.S., much greater than the 2007 financial crisis since it impacted multiple industries and sectors resulting in years of declined economic activity.

Stock Speculation

One of the causes behind the great depression was actually Americas unprecedented level of growth during the 1920s. During this period, America had just emerged victorious from World War I and was experiencing an influx of new domestic technologies in the form of home radio systems, automotive vehicles, and a subsequent boom in economic activity (Irwin 211). In fact, it was thought that this period of growth and prosperity would never end resulting in considerable levels of stock speculation on the part of corporate and small-time investors. Investment speculation is basically the act of investing in a particular form of stock-based on perceived future gains and not on the actual performance indicators of companies (Payne and Uren 358). This means that an investor is betting on the future rise of the stock due to its current rate of growth and not necessarily on current company revenues and operations.

Unrealistic Stock Valuations

The inherent problem with this practice in the 1920s was that speculation increased stock values well beyond realistic valuation. Some stocks were trending at 400 to 500 percent their actual market value which is indicative of the development of a stock price bubble.

Bad Bank Loans

Aside from this, banks were approving loans for stock price speculation based on the perception of continuous growth over the long term. It was believed at the time that even if a person failed to pay back their loan, the seizure of assets to cover the cost of the loan in the form of stocks would have more than paid for the loan in the future. It was due to this that banks continued to approve loans for stocks which further increased the amount of stock price speculation.

Bank Loan Restrictions

When the bubble finally burst banks found themselves with clients that were unable to pay back their loans and stock prices had declined by more than 300 or 400 percent of the value that they were purchased at. This caused the banks to tighten their loan practices due to liquidity shortfalls (Geschwind 598). Since many small to medium scale enterprises in the U.S. relied on short term bank loans in order to operate, this sudden absence of loan sources caused many of them to close down which further contributed to the rising levels of unemployment that the country was experiencing.

Decline in Consumer Spending

Since the health of a countrys economy is directly tied to consumer spending, the sudden spread of unemployment caused many consumers to save their assets rather than spend. This action further contributed to the decline of the U.S. economy and caused a cycle of declining spending, company closure, and unemployment.

External Trade Issues

Aside from the internal issues that were just mentioned, the U.S. also experienced a considerable decline in international demand for its various industrial goods and raw materials. This was due to the implementation of the Smoot-Hawley Tariff in the 1930s that was supposed to protect companies in America from cheaper foreign imports (Peicuti 55). This was done by adding higher taxes for imports in order to encourage people to buy locally made goods instead. The inherent problem with this strategy of protectionism is that it resulted in retaliatory practices by other foreign powers wherein additional tariffs were added on American goods entering into their country.

Companies Being Forced to Operate in the U.S. Domestic Market

Due to the high price of American goods, international demand declined significantly resulting in many companies having to contend with operating mostly in the U.S. domestic market. However, due to low consumer spending, even large corporations found themselves hard-pressed to make significant profits resulting in even more layoffs which contributed to the Great Depression.

Production of Goods

Another reason behind the Great Depression is, oddly enough, connected to local overproduction which caused systemic issues within various sectors of the U.S. economy. One of the factors that keeps a healthy economy running smoothly is the cycle of purchases and sales made by companies not only between themselves and consumers but also between businesses. Various manufacturers purchased raw goods and converted them into viable consumer items and then subsequently sold them in the open market. This creates a supply chain from raw goods all the way to the end product which can take a myriad of different forms.

However, due to industry-wide overproduction in numerous sectors, this healthy cycle was derailed with many companies having considerable levels of excess stock (Hill 169). It was due to this that purchases of raw materials and other contributing goods were often erratic resulting in some sectors experiencing boom and bust periods. With the advent of The Great Depression and the excess amount of stock that companies already possessed, demand for raw goods dropped abruptly, more so than usual, resulting in numerous sectors experiencing industry-wide closures (Ziebarth 185).

Works Cited

Geschwind, Carl-Henry. Gasoline Taxes And The Great Depression: A Comparative History. Journal Of Policy History 26.4 (2014): 595-624. Print.

Hill, Matthew J. Love In The Time Of The Depression: The Effect Of Economic Conditions On Marriage In The Great Depression. Journal Of Economic History 75.1 (2015): 163-189. Print.

Irwin, Douglas A. Who Anticipated The Great Depression? Gustav Cassel Versus Keynes And Hayek On The Interwar Gold Standard. Journal Of Money, Credit & Banking (Wiley-Blackwell) 46.1 (2014): 199-227. Print.

Payne, Jonathan, and Lawrence Uren. Economic Policy And The Great Depression In A Small Open Economy. Journal Of Money, Credit & Banking (Wiley-Blackwell) 46.2/3 (2014): 347-370. Print.

Peicuti, Cristina. The Great Depression And The Great Recession: A Comparative Analysis Of Their Analogies. European Journal Of Comparative Economics 11.1 (2014): 55. Print.

Ziebarth, Nicolas L. The Great Depression Through The Eyes Of The Census.

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