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Causes and Consequences of the Great Depression in America

Before 1930, that is when the Great Depression occurred, America had gone through

other tough economic times. In 1820’s the economy of the country plummeted to worrying

levels. The reason for this decline in economic performance has been blamed on bank panic,

which subsequently led to depression. In 1830s and in the mid 1970s, the country went through

other hard economic times (Robins 10). All these hard times, however, cannot be compared with

the real effects of the Great Depression. Almost every sector of the American economy was

affected; social, economic and political spheres felt the blunt of the crisis. The economic crisis

remains one of the severest economic catastrophes that have ever hit America; its causes are

several but intertwined, while the consequences remain fresh in the minds of those who

witnessed the catastrophe.

Economists and other stakeholders in the economic sector concur that one of the major

causes of the great depression was the collapse of the stock market (Smiley 122). It is evident

that the United States experienced an economic boom in the 1920s. This boom attracted an

extremely high number of investors to the stock market. Some of these investors bought stocks

on margin; meaning that they paid only part of stocks’ value when they bought them and the rest

when they sold the stocks (Smiley 134). As long as stock prices kept on rallying, this worked

fine for the entire securities market. It is worth mentioning that some investors borrowed capital

to buy the stocks. When Wall Street crashed in 1929, stock prices fell drastically. Investors were

forced to sell their asset, stocks, at a price that was far below their worth. Whatever they made

from the sales was not enough to pay for the loans they had taken leave alone breaking-even in

the investment they had made (Robins 127).

Economists also blame bank failures for the devastating effects of the Great Depression.

It is noted that small banks in the United States, especially those that operated from the rural

areas, overextended credit facilities to farmers (Robins 55). These farmers, unfortunately, ended

up producing more than the local economy would absorb. Subsequently, the farmers had to incur

losses as they lacked market for their product. It is even noted that some farmers had to use their

corn for fuel rather than for sale. Other banks extended loans to foreign countries and especially

those that had participated in World War I. unfortunately most of these borrowers ended up

defaulting putting US banks in a deposits crisis. The crisis further led to bank panic whereby

depositors decided to withdraw all their deposits because they feared that their banks would not

be able to repay them (Smiley 45).

Farm failures were another reason behind the Great Depression. Literature shows that the

farming, or the entire agriculture sector in America, did not benefit from the economic boom of

the 1920s. Farmers produced more that the local economy could absorb. Farmers were

disadvantaged to an extent of turning some of their crops, including corn, into fuel or compost

manure (Robinson 149).

President Hoover’s administration’s inaction also contributed to the catastrophe.

Although Americans expected President Hoover’s government to take quick and effective

decision, this government failed to act fast enough. It was expected that the administration would

lend banks that were struggling with crisis deposits money at a low interest rate. In this way,

bank panic that was witnessed in the US could have been protected. The administration did too

little when it was already too late (Smiley 99).

Although there is no consensus as to the number of causes that caused the Great

Depression, economists, academicians, and financial analysts admit that the Wall Street crash,

farm failures, and inaction of President Hoover’s government were the major causes of the Great

Depression. Even with lack of consensus on the causes of the disaster, the consequences were

and remain clear to be seen.

The American economy suffered more than any other economy in the world. Its gross

domestic product (GDP) declined by a whopping 46 percent. As GDP fell, unemployment levels

continued to rise from a single digit (4 percent) in 1929 to 25 percent by 1933; and remained as a

double digit till 1941 when it fell to 9.9 percent. Commodity prices manufactured by firms in the

US also suffered greatly as they fell by a margin of 72 percent (Smiley 87).

As job hunters hunted for jobs without any success, they changed their mission from that

of looking for jobs to that of looking for food. Employers advertising for one opening received

between 2,000 and 3,000 applications. To prevent people who were now starting to starve

because of lack of food, the government responded by establishing bread lines (Robinson 56).

Food, as a basic need, was not the only need that was lacking. Citizens, especially those

who had mortgage balances were evicted from their houses. More than one million families lost

their houses and had to live in makeshift camps made of packing crates and scrap metals. Tens of

thousands of farming communities from Oklahoma and Arkansas fled their homes to find better

incomes in states like California; here, unfortunately, the farmers ended up as immigrant laborers

in their country (Smiley 67).

Academicians, economists and other stakeholders admit that the Great Depression is the

severest economic crisis that has ever hit America. Although there are various stakeholders

blame varied causes for the Great Depression, there are is an agreement that the Wall Street

crash, President Hoover’s administration’s inaction, and farming failure were the major causes of

the crisis. Consequences of the crisis were felt by all spheres of the US economy. The country’s

gross domestic product (GDP) declined by 46 percent, while unemployment rate increased to 25

percent from a 4 percent in 1929. More than a million families were evicted from their houses

and had to live in makeshift camps or shantytowns.

Works Cited

Robins, Lionel. The Great Depression. Auburn: Ludwig von Mises Institute, 2010.

Smiley, Gene. Rethinking the Great Depression. Stamford: Cengage Learning, 2009.