What are the five main causes of the Great Depression?

Answer 1

Causes
Main article: Causes of the Great Depression
Business cycles are a normal part of living in a world of inexact balances between supply and demand. What turns a usually mild and short recession or "ordinary" business cycle into a great depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part of governments to prevent widespread bank failures and the resulting panics and reduction in the money supply. Those who believe in a large role for governments in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that exacerbated the problem. Current theories may be broadly classified into two or more main points of view. First, there is orthodox classical economics: monetarist, Keynesian, Austrian Economics and neoclassical economic theory, all which focus on the macroeconomic effects of money supply and the supply of gold which backed many currencies before the Great Depression, including production and consumption. Second, there are structural theories, including those of institutional economics, that point to underconsumption and overinvestment (economic bubble), malfeasance by bankers and industrialists or incompetence by government officials. Another theory revolves around the surplus of products and the fact that many Americans were not purchasing but saving. The only consensus viewpoint is that there was a large scale lack of confidence. Unfortunately, once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices got lower and lower and a given amount of money bought ever more goods.

There are multiple reasons on what set off the first downturn in 1929, concerning the structural weaknesses and specific events that turned it into a major depression, and the way in which the downturn spread from country to country. In terms of the 1929 small downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists (such as Peter Temin and Barry Eichengreen) point to Britain's decision to return to the Gold Standard at pre-World War I parities ($4.86 Pound).


Debt
Macroeconomists, including the current chairman of the U.S. Federal Reserve Bank System Ben Bernanke, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher. In the 1920s, in the U.S. the widespread use of purchases of businesses and factories on credit and the use of home mortgages and credit purchases of automobiles, furniture and even some stocks boosted spending but created consumer and commercial debt. People and businesses who were deeply in debt when a price deflation occurred or demand for their product decreased were often in serious trouble—even if they kept their jobs, they risked default. Many drastically cut current spending to keep up time payments thus, lowering demand for new products. Businesses began to fail as construction work and factory orders plunged. Massive layoffs occurred, resulting in unemployment rates of over 25%. Banks which had financed a lot of this debt began to fail as debtors began defaulting on debt and bank depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to destruction of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.

Furthermore, the debt became heavier, because prices and incomes fell 20–50%, but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 banks failed. In all, 9,000 banks failed during the decade of the 30s. By 1933, depositors saw $140 billion of their deposits disappear due to uninsured bank failures. [1] Unfortunately, bank failures snowballed as desperate bankers tried calling in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment, construction etc. slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.[2] They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.


Trade decline and the U.S. Smoot-Hawley tariff act
Many economists have argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign trade. Most historians and economists assign the American Smoot-Hawley Tariff Act of 1930 part of the blame for worsening the depression by seriously reducing international trade and causing retaliatory regulations in other countries. Foreign trade was a small part of overall economic activity in the United States and was concentrated in a few business like farming; it was a much larger factor in many other countries. [3] The average ad valorem rate of duties on dutiable imports for 1921–1925 was 25.9% but under the new tariff it jumped to 50% in 1931–1935.

In dollar terms, American exports declined from about $5.2 billion in 1929 to $1.7 billion in 1933; but prices also fell, so the physical volume of exports only fell in half. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this theory, the collapse of farm exports caused many American farmers to default on their loans leading to the bank runs on small rural banks that characterized the early years of the Great Depression.


U.S. Federal Reserve and money supply
Monetarists, including Milton Friedman and Benjamin Bernanke, stress the passive role taken by the American Federal Reserve System in failing to reverse the cascading bank failures. They do not argue the Federal Reserve caused the recession, but rather that different policies might have stopped the downward slide into recession. By not acting, the Federal Reserve allowed the money supply to shrink by one-third from 1930 to 1931. In A Monetary History of the United States, Friedman argued that the downward turn in the economy starting with the stock market crash would have been just another recession. The problem was that some large, public bank failures, particularly the Bank of the United States, produced panic and widespread runs on local banks, and that the Federal Reserve sat idly by while banks fell. He claimed that if it had provided emergency lending to these key banks or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, the money supply would not have fallen to the extent and at the speed that it did. [2] With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve, especially the New York branch, which was owned and controlled by Wall Street bankers for inaction. The Federal Reserve, by design, was not controlled by the President or the U.S. Treasury; it was primarily controlled by member banks and the chairman of the Federal Reserve. [3]


Sharecropper Bud Fields and his family at home. Hale County, Alabama.1935 or 1936
Texas panhandle, 1938

Business
Franklin D. Roosevelt, elected in 1932, primarily blamed the excesses of big business for causing an unstable bubble-like economy. The problem the Democrats believed was that business had too much power, and the New Deal was intended to remedy that by empowering labor unions and farmers (which it did) and by raising taxes on corporate profits (which they tried and failed). Regulation of the economy was a favorite remedy. Some of the New Deal regulation (the NRA and AAA)) was declared unconstutional by the U.S. Supreme court. Most of the New Deal regulations were abolished or scaled back in 1975–1985 in a bipartisan wave of deregulation. However the Securities and Exchange Commission, Federal Reserve, Social Security and other laws and regulations have won widespread support and continues to this day.


Government deficit spending
The British economist John Maynard Keynes argued in his book "The General Theory of Employment Interest and Money" published in 1936, that the lower aggregate expenditures in the economy contributed to a multiple decline in income, well below full employment. In this situation, the economy may reach perfect balance, but at a cost of high unemployment. Keynesian economists have increasingly called for governments, during times of economic crisis, to take up the slack in the economy by increasing government spending by taxing those working to redistribute income to those not working. Experience has shown this deficit spending or income redistribution is most effective when used to finance government infrastructure improvements to employ people and least effective when given as a government "dole" to do nothing. Experience has also shown that a government cannot run in a permanent deficit without large-scale inflation which cancels any gains from deficit spending. Economic experience has also shown that deficit spending for capital improvements and education that improve how well the economy and the people in it work can also more than pay for themselves if used responsibly.

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Massive increases (by 1930s standards) in taxes, deficit spending, new banking regulation etc. did start turning the U.S. economy around in 1933 but it was a slow and painful process with the U.S. not returning to 1929s GNP for over a decade and still having a unemployment rate of about 15% in 1940--up from 25%+ unemployed in 1932 but still high. The unemployment problem was not "solved" until the advent of World War II and the drafting of 11 million men (about 20% of the work force) removed them from the labor pool. All the deficit spending during World War II did little initially to improve the economy even though nearly everyone who wanted a job could have one. Rationing and wage controls meant you could only buy a limited number of consumer items as 40% of the economy went to producing war goods. Finally by about 1944 all of this deficit spending and investments in capital goods started showing up in the civilian economy as 10 years of depression and 5 years of war finally ended.

Answer 2

Causes of the Depression

Buying on Margin

In the 1920s more people invested in the stock market than ever before. Stock prices rose so fast that at the end of the decade, some people became rich overnight by buying and selling stocks. People could buy stocks on margin which was like installment buying. People could buy stocks for only a 10% down payment! The buyer would hold the stock until the price rose and then sell it for a profit. As long as the stock prices kept going up, the system worked. However, during 1928 and 1929, the prices of many stocks went up faster than the value of the companies the stocks represented. Some experts warned that the bull market would end.


Buying on Credit

Buying on credit was a huge problem in the 1920s. Since the 20s was a period of great economic boom, not many people took the future into consideration. Many people bought refrigerators, cars, etc. with money that they did not have. This system was called installment buying. With this system, people could make a monthly, weekly, or yearly payment on an item that they wanted or needed. This happened until Black Tuesday, when the stock market crashed. The two systems, installment buying and buying on credit, left millions of people in debt . When many lost their jobs, they could not pay back the debts they had incurred


Supply and Demand

Supply and demand helped bring about and also lengthen the Great Depression. The American farms and factories produced large amounts of goods and products during the prosperity before the Depression. On average people's wages stayed the same even as prices for these goods soared. People who lived on farms had even less than urban dwellers.

Because people had no money, they stopped buying these products, but factories and farms still continued to produce at the same rate. As the farmers and industry leaders realized fewer people were buying, they cut back production. To do this, they had to lay off more and more workers. These unemployed workers didn't have money to buy anything, so the factories continued to lay off people. This trend continued in a downward spiral until twenty-five per cent of the population was unemployed.


The Stock Market Crash

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 creating a domino effect. The sudden selling caused stock prices to fall. President Herbert Hoover tried to reassure the investors saying the country's economy was fine and that they had no reason to worry. The words of the President were not enough, however; the selling continued.

Many investors in the stock market had bought large amounts of stock on margin. Nervous brokers asked investors to pay their debts, and when they couldn't repay they were forced to sell, causing stock prices to fall even more.

On Tuesday, October 29, 1929, stock prices plummeted because there were no buyers for the stock offered by desperate sellers. Millions of dollars were lost that day due to the decrease in stock prices. Black Tuesday, as it was soon called, led directly to the Great Depression in the 1930s.


Drought

In the 1930s, states from Texas to North Dakota had severe drought. This drought was caused by years of overgrazing, plowing, lack of rain, and wind erosion. The result was the Dust Bowl which occurred in many states in both the southwest and the midwest.

The Dust Bowl of the 1930s hurt farmers of Oklahoma and Arkansas the most. These farmers, called Okies and Arkies, packed up and headed west following Route 66, escape route to the "land of milk and honey." However, once these migrant workers reached the West, they soon found that they were not wanted. Tactics such as blocking main roads and highways were used to keep migrants away. Those who did find work only received minimum pay

Answer 3

1. No one knows.
2. No one still knows, outside of opinion.
3. No one will ever know.
4. No one took responsibility for allowing it to happen.
5. No one ever formally determined there were five causes.
6. Lack of National Brainpower is the single, correct answer.

Answer 4

There really was only one cause. Everybody bought so many stocks and put their life savings into stocks and borrowed money to buy stocks, and then the stock market crashed, and all the stocks became worthless, and the things everybody spilled in all thier money to buy were no bare of product.