A Student's Guide to the Great Depression

Economists still cannot agree on what caused the Great Depression. Most however have agreed that it was a combination of events and decisions that came into play that caused the Great Depression.

Stock Market Crash of 1929

The Wall Street Crash of 1929, is cited as the case of the Great Depression. However, while it does share some of the blame the crash ruined people’s fortunes and destroyed confidence in the economy. However, most believe that the crash alone would not have caused the Depression.

World War One

After World War One (1914-1918) many countries struggled to pay their war debts and reparations as Europe began to rebuild. This caused economic problems in many countries, as Europe struggled to pay war debts and reparations.

Production versus Consumption

This is another well known cause of the depression. The basis of this is that worldwide there was too much investment in industry capacity and not enough investment in wages and earnings. Thus, factories produced more than people could afford to buy.

Banking

There were a large number of bank failures during the depression. Additionally banks that did not fail did suffer. The banking system was not prepared to absorb the shock of a major recession. Furthermore, many academics believe that the government failed to take the appropriate actions to restore stability to the banking system and to calm people's fears about the possibility of bank failures.

Postwar Deflationary Pressures

The huge cost of World War One caused many European countries to abandon the gold standard. This resulted in inflation. Following the war most of these countries returned to the gold standard to try and counter the inflation. However, this resulted in deflation which lowered prices but increased the real value of debt.

International Debt

After World War One most of the European countries owned a lot of money to American banks. These loans were so high the countries could not pay them. The American government refused to lower or forgive the debts so the countries began to borrow more money to pay off their debts. However, as the American economy began to slow down the European countries began to find it difficult to borrow money. However, at the same time the United States had high tariffs so that the Europeans could not make money selling their products in the United States markets. The countries began to default on their loans. After the 1929 stock market crash banks tried to stay afloat. One of the ways they did this was to recall their loans. As money flowed out of Europe and back to the United States the economies of Europe began to fall apart.

International Trade

In 1930 the United States raised tariffs by up to 50% on imported goods to increase demand for domestic goods. However, instead of increasing demand for domestically produced goods it created unemployment abroad as the factories shut down. This not only caused other counties to raise tariffs themselves. This combined with a lack of demand for U.S goods because of unemployment abroad resulted in increasing unemployment in the US. "The World in Depression 1929-1939" Charles Kinderberger shows that by March 1933 international trade plummeted to 33% of its 1929 level.

Additional Sources of Information on the Great Depression

Shambhala.org
Government of Canada
UIUC.edu
Canadian Encyclopedia
PBS