The Cause Of The Great Depression The economic expansion of the 1920s, with its increased production of goods and high profits, culminated in immense consumer speculation that collapsed with disastrous results in 1929 causing Americas Great Depression. There were a number or contributing factors to the depression, with the largest and most important one being a general loss of confidence in the American economy. The reason it escalated was a general misunderstanding of recessions by American policymakers of the time. The U.S. economy was booming in the 1920s. Stocks prices soared, as they were bought on margin for as little as 10% down.
Market speculation is cyclical-that is, if one stock appears profitable, you buy it, which causes the price to rise and others to buy as well. However, the economy was not stable. National wealth was not distributed evenly. Instead, most money was in the hands of a few families who saved or invested rather than spent their money on American goods. Thus, supply was greater than demand, and some people profited, but others did not. As such, the bubble had to inevitably burst, since the stock market boom was very unsteady and people borrowed money on false optimism.
Black Tuesday in 1929 was that bubble burster. In the summer of 1929, a few stock market investors began selling their stock. They predicted that the bull market might end soon, leaving them in debt. Seeing these few investors begin to sell, others soon followed to minimize their losses, creating a domino effect, which exacerbated the situation. Regardless of the governments attempt to place the modern equivalent of tens of billions of dollars into certain banks, the liquidation continued, as folks wanted out quickly at whatever cost. Many people lost as much as ten times their initial investment, which shook consumer confidence.
In an effort to cover their margins, people rushed the banks in masses, demanding their money. Soon, banks began to run out of cash and went bust. With the economy falling in shambles and companies defaulting on loans, nearly all private and corporate investment ceased. Companies couldnt afford to expand, and in fact, many had to consolidate in order to cover the margins on their loans. This meant postponing hiring and laying workers off, which caused unemployment to skyrocket.
With people now willing to work for less money, wages lessened too. At the same time prices rose in an attempt by companies to make some amount of profit off the goods. Because the governments prevailing economic theory was based on laissez-faire economics, the government believed that recessions were self-correcting. Eventually unemployment and inflation stopped declining, but not before the U.S. lost 1/3 of its output and 25% of the workforce was unemployed. In the end, it was World War II that brought us out of the Great Depression.
With war at hand, the government began pumping massive amounts of money into the economy. Production and inflation increased. More jobs were available and wages rose. At the wars end there was a brief recession while the economy reacted to a loss of the money the government had been pumping in, but the big picture demonstrated American optimism for victory was high, and as such the faith of Americans in their country followed their increased patriotism. The market had finally corrected. Economics.