Great Depression: Causes and Definition

Ninety years ago, in late October 1929, the American Stock Exchange collapsed. The rapid decline following the dizzying success of the U.S. stock market triggered the global financial crisis known as the Great Depression years.

The most famous and dramatic stock market crash has forced America to rebuild its financial system. However, this was not the first world crisis, the first of such catastrophic proportions and long-term. The acute phase of the Great Depression dates from 1929 to 1933, and it was the total period. It is calculated in decades.

Despite the efforts of investment companies and banks to stabilize the situation by buying shares, the collapse on October 29 became irreversible – in two days, the market lost $ 30 billion. For Europe, the crisis has become even more severe due to the freezing of all American loans, which has led to financial and political instability in some countries. This period is studied by every student in every university and college. Because it’s essential to even an education process. So let’s figure out the causes of the Great Depression.

The stock market crash of 1929

As a precondition for the crisis of 1929, researchers name several main reasons. First, the problem was associated with a shortage of cash, as production in the United States grew in the 1920s, and the money provided by gold was not enough to buy products of this production. Second, the collapse of the Wall Street stock market was caused by the desire of many Americans to make money on an investment, which led to the so-called speculative bubble – many securities transactions at an inflated value. Investors, seeing rising quotes, begin to buy even more shares, seeking to make a profit. 

Regarding the crisis in the United States, the situation was exacerbated by the fact that many players bought stocks on credit. It’s a significant theme, so to research it more deeply, you can find many essays on the great depression and read them. Every essay will help you to understand the importance of this period. Also, such essay examples will be the perfect material for your home assignments about Depression.

Banking panics and monetary contraction

Banking panic, it’s the simultaneous and unexpected withdrawal of money

from the bank, caused by a sudden decreased trust or fear of depositors that the bank will be closed. Because the cash reserve in the bank covers only a tiny part of his deposits, the mass withdrawal of money in a short period can lead to the depletion of unrestricted cash and the closure of the bank. The first wave of banking panic from October 1930 to January 1931 was the most pronounced. There was an increase in the number of deposits from bankrupt banks. The Federal Reserve was too passive during the banking panic of the Great Depression and failed to fulfill its primary purpose of “lender of last resort” to prevent panic. The main reason for the Fed’s inaction was that its leadership was unaware of the adverse effects that bank failures had on the money supply and economic activity. In addition, the bankruptcy of banks in the early stages of the banking panic was concentrated among smaller banks, and since the most influential figures in the banking system were bankers of large cities, who considered the existence of smaller banks dishonest, the disappearance of the latter could be regarded as complacent.

The gold standard

On September 21, 1931, Britain abandoned the gold standard, pegging the currency to a certain amount of gold. It was the first major industrial country to take this step. Others followed it in the Old World and Canada, New Zealand, and Japan. On June 5, 1933, the United States followed suit. In 1929, the gold standard was supported by 50 countries, and many of them during the Depression rushed to defend its preservation. But pegging currencies to gold made economies vulnerable, closely linked. They could not change freely, devalue the national currency, and expose external risks. Finally, the club of gold-standard countries collapsed in 1936. Adherence to the gold standard forced many countries to resort to tariffs when instead they should have devalued their currencies.

Decreased international lending and tariffs

The quick drop in international trade after 1930 deepened the Depression. Many people accuse the American Smoot-Hawley Tariff Act of deepening the Depression by remarkably facilitating international trade and causing retaliatory tariffs. Foreign trade was a small piece of general financial activity focused on businesses like farming. It was a much more significant factor in many other countries. 

Conclusion

As a result, many businesses have lost funding, leading to an economic crisis that has hit the world. Modern people should know about this time and take consequences. So knowing history allows us not to make the same mistakes and build a successful future without any crises and Depression.

Leave a Reply

Your email address will not be published. Required fields are marked *