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| A Dust Storm Approaching Texas |
The Great
Depression
Top 5 Causes of the Great
Depression – Economic Domino Effect
Waqas Ali
On
October 29th 1929, the US Stock Market crashed and before anyone could take
effective action, the country had reached its melting point.
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| Crowd outside NYSE |
.
A several successive event across the globe set off a chain reaction, impacting numerous countries around the world, as well as America.
The
authorities didn’t know what to do in the face of such a catastrophe of this
scale.
Many
subsequent years were spent dealing with the fallout from this chaotic fiasco,
with millions suffering due to its far-reaching effects.
With
that being said, it was also the longest & most widespread economic decline
of the entire 20th century and truly showed the extent and speed to which an
economy could decline.
1. The
Roaring 20’s
Before
the world entered into an economic decline, the performance of the stock market
was well above par, and the industrial output more profitable than it had ever
been.
This
situation was quite evident during the 1920’s – was also known as “The Roaring
20’s” – in the US. At this time the US was overdependent on its production
industries, including automobiles and ship building docks.
Income
inequality was increasing, and during this decade more than 60% of the
population were living below the poverty line. Just 5% of the wealthiest
classes received 33% of the nation’s income.
This
false sense of prosperity led to flooding of products in the markets that
weren’t affordable to the masses, setting off a chain reaction that started
with the closing of factories and sudden withdrawal of investments.
The
middle class tried to save its money by reducing spending. When spending was
reduced, even more goods on the market went unsold.
With
profits falling, work forces had to be cut, increasing poverty and fueling a
negative economic cycle.
2. Ensuing
Global Crisis
Europe
hadn’t exactly come to terms to the effects of World War I.
There
were horrible consequences of the Great War; the surviving population had lost
their jobs and there was no way the Government could provide unlimited
catalysts for reconstruction.
The
US was the prime exporter at the time and was supplying Europe with almost all
commodities, basic and advanced.
The
European Governments that had taken loans from American banks couldn’t pay them
back and one after the other started defaulting on them.
The
American banks had no option but to stop giving out loans. This brought
Europe’s purchasing power even further down, setting the scene for the Great
Depression.
3. The
Stock Market Crash
The
Roaring Twenties gave almost all US bankers and investors a false sense of
pride, especially those dealing in stocks.
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| Depression Strikes |
On
October 24th over 12 million shares were traded! The panic was mounted and
investment companies rushed in to stabilize the situation.
However,
it was too late. On the coming Monday, the market was in complete free-fall.
The
stock prices had collapsed. Successful recovery after October 29th forced the
stock prices up but it was too late.
Investors
had lost confidence in the stock exchange and globally prices were dropping.
The US was now slumping into economic collapse and by 1932 the stocks were
worth only 20 percent of their 1929 value!
By
1933 the domino effect forced the banking system to fail. On top of this,
people were migrating from farms to cities in search of jobs.
All
this was too hard on the economic structure in place and now, more than 15
million people were unemployed.
4. The
Dust Bowl
Severe
drought hit the US and Canadian prairies during the 1930’s, which also fueled
the Great Depression.
US
agricultural output was heavily affected by this drought and failure to apply
dry-land farming methods forced the US market to look for other sources.
At
the same time, the farmers in the effected region had no idea what to make of
their predicament. The situation worsened to such a level that that majority of
the population of the Great Plains couldn’t pay their taxes.
These
taxes, even though they made up only a nominal part of the Government’s
Revenue, accounted for too much when the drought hit in three successive waves.
The
nickname “Dust Bowl” has been given to the damaged ecology and landscape.
5. The
Smoot-Hawley Tariff Act
The
situation was only getting worse, and the Smoot-Hawley Tariff Act didn’t help.
Introduced
on March 13th, 1930 initially with the intention of protecting American
companies, the maneuver quickly backfired on the US itself.
When
it was obvious that a steep economic decline was coming, the US government
hurriedly started introducing measures that could slow down its arrival.
One
such measure was this Smoot-Hawley Tariff which put on a special tax over
20,000 types of imported goods.
This
was done so that American companies wouldn’t lose to competition to foreign
companies but the nature of the tax was such that it forced several companies
to stop exporting goods to the US.
This
move came in the form of a double edge sword as it reduced production &
revenue of all such companies. Workforce had to be laid off, fueling the
economic crisis in their parent country.
.
Food for thought: US imports decreased 66% from 4.4 Billion (1929) to 1.5 Billion (1933)
.
Food for thought: US imports decreased 66% from 4.4 Billion (1929) to 1.5 Billion (1933)
There
are whole books, theories and papers on the subject as to why the world plunged
into Great Depression.
All
we can hope for is better economic structures and mechanism to catch such
situations before the water’s over the bridge!
Waqas Ali. Hey there! I have an undying love for history and
spend most of my free time going through history books or articles online. I’m
greatly intrigued by the conflicts in the past century as well as those that
took place a 1000 years ago!
Have a Great Day.
Have a Great Day.
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| The heart of Berlin in ruins. |
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