1. Over speculation
As we learned in the documentary in class today, Americans in the 1920's started moving to a new form of payment: credit. In fact, 75% of American' household items were bough on credit. While credit did have some benefits, it also had some drawbacks, notably over speculation.
Specifically, in the stock market, enterprising investors could buy millions of stocks on margin, meaning that they only had to pay 10% up front (they would pay off the rest of the loan when they sold the stock for a profit). The easiness of buying stocks led to rampant speculation which led to falsely high stock prices, and when the stock market began to tumble in the months leading up to the October 1929 crash, speculative investors couldn’t make their margin calls, and a massive sell-off began.
The massive stock sell-off hit its peak on Black Tuesday of October 29, 1929 when over 16 million shares of stocks were sold. By the end of 1929, stockholders had lost $40 billion (WWI had cost about $32 billion).
2. Increased Tariffs
The Fordney-McCumber Tariff of 1922 and the Hawley-Smoot Tariff of 1930 increased tariff rates to the highest it had ever been in the nation's peacetime history: 60%. While benefitting American business, the tariffs adversely affected the struggling European economies. Already debt stricken from the war, these high tariffs prevented the European countries from trading with the U.S. In response, the Europeans imposed their own tariffs which further dried up international trade and decreased markets for American goods.
3. Overproduction
Fewer markets proved to be detrimental to U.S. businesses, especially considering the voluminous amount of goods they were producing. In a vicious cycle, too much money was going to the wealthy who invested the money into building more factories, which simply led to more production. Not enough money was going into wages and salaries, which meant less buying power for the average American and fewer markers. Essentially, the nation's ability to produce goods had outrun its capacity to consume them.
While these 3 problems contributed to the Great Depression, I am sure that there were many more. Please add on to the list by commenting below.
As we learned in the documentary in class today, Americans in the 1920's started moving to a new form of payment: credit. In fact, 75% of American' household items were bough on credit. While credit did have some benefits, it also had some drawbacks, notably over speculation.
Specifically, in the stock market, enterprising investors could buy millions of stocks on margin, meaning that they only had to pay 10% up front (they would pay off the rest of the loan when they sold the stock for a profit). The easiness of buying stocks led to rampant speculation which led to falsely high stock prices, and when the stock market began to tumble in the months leading up to the October 1929 crash, speculative investors couldn’t make their margin calls, and a massive sell-off began.
The massive stock sell-off hit its peak on Black Tuesday of October 29, 1929 when over 16 million shares of stocks were sold. By the end of 1929, stockholders had lost $40 billion (WWI had cost about $32 billion).
2. Increased Tariffs
The Fordney-McCumber Tariff of 1922 and the Hawley-Smoot Tariff of 1930 increased tariff rates to the highest it had ever been in the nation's peacetime history: 60%. While benefitting American business, the tariffs adversely affected the struggling European economies. Already debt stricken from the war, these high tariffs prevented the European countries from trading with the U.S. In response, the Europeans imposed their own tariffs which further dried up international trade and decreased markets for American goods.
3. Overproduction
Fewer markets proved to be detrimental to U.S. businesses, especially considering the voluminous amount of goods they were producing. In a vicious cycle, too much money was going to the wealthy who invested the money into building more factories, which simply led to more production. Not enough money was going into wages and salaries, which meant less buying power for the average American and fewer markers. Essentially, the nation's ability to produce goods had outrun its capacity to consume them.
While these 3 problems contributed to the Great Depression, I am sure that there were many more. Please add on to the list by commenting below.
Another factor that contributed to over speculation before the Great Depression was Secretary of the Treasury Mellon's tax policies placing the brunt of the burden on the middle class. He argued that the high taxes on the wealthy discouraged investment in larger payrolls that would benefit more Americans. Since there was more national income unabsorbed by taxes, there was more money left for over speculation. The textbook explains more about the effects of his tax policies on pg. 768.
ReplyDeleteWhile it may have not necessarily been a direct cause, one factor many people speculate that added to the stress of the Great Depression was the droughts occurring in the Mississippi River that had detrimental effects on farms and crops. Farmers now had no income and failed to pay taxes and debt and ultimately further affected the downward movement of the market and economy.
ReplyDeleteSource: http://americanhistory.about.com/od/greatdepression/tp/greatdepression.htm
It is interesting thing to see that Over Speculation has been a theme throughout America's history as a manner of causing widespread economic panics. From the early days of the 19th century on to the stock market crashes of the modern times. The question then becomes what was the importance of this crash that gave it the notorious name of great depression. I believe just like Ashwin stated the idea of credit was the biggest cause. In the past the idea of over speculating in land has been a constant theme however the idea that this could be now be not only land but buying daily things and investing in businesses. This is what caused the depression. The overspeculation that occurred was over a greater scheme of things and for this reason it became known as the Great Depression.
ReplyDeleteGreat post Ashwin. Adding on to your 2nd point about international trade and increased tariffs, one can look at the Dawes Plan, which lasted from 1924-1930. The US would loan money to Germany, so Germany would be able to pay war reparations to the Allies. The Allies, in turn, would pay there war debt off to the US. Everything was working beautifully until the economic crash in 1929, causing President Hoover to decide the US would not participate in this triangle of trade in 1931. This caused the entire system to collapse and worsen the American economy. The economy on an international level war terribly hurt. Europe was not happy. There are even accounts of American tourists being attacked in France. Fun fact: Finland was the only country that ever continued to pay off it's war debt, until they were told they could default in 1976.
ReplyDeleteAdding to this litany of causes of the Great Depression, let's not forget about the structure of the American economy.
ReplyDeleteThe American economy was basically limited to two industries (construction and automobiles), and when symptoms of the Great Depression began emerging and these two industries were badly hit, (think back to some of the graphs and charts that Mr. Stewart showed us in class in his presentations: construction expenditures decreased from $11 billion to $9 billion from 1926-1929 and car sales fell by 33% in the first 9 months of 1929) essentially, so were the vast majority of American workers. Companies laid off workers in droves to save money.
By extension, other industries were also hit hard because no other area of the economy could compensate for the fall of the economy's two biggest sectors. When people aren't buying the most popular commodities from the biggest companies/industries, chances are, they aren't buying things that smaller industries are offering, either.
It's important to recognize all of the points that we've listed out as something of a chain reaction, like dominoes, or a vicious cycle, rather than separate causes. All of these causes somehow relate to, or worsen the effects of others. Having a solid understanding of each of these points is good, but knowing how each relates to and affects another is also something we should try to do.