Economic Causes:

1. Gold standard:

   1. In order to preserve the Gold Standard in America, the Federal Reserve allowed the money supply to decline. Having a gold standard means that a country sets their value of its currency in terms of gold, and that they take monetary actions to ensure that the prices are stable. The Federal Reserve kept the money supply low when there were many bank panics and failures. They believed that if they expanded their supply, foreigners would lose confidence in US’s commitment to the gold standard. If the foreigners lost confidence in their commitment, then a large number of gold outflows would occur, and US’s currency would devalue. The gold standard gave rise to international gold flows. When the economy of US started to decline in the 1930s, more and more gold started to flow out of other countries and into US. This is because deflation caused American goods to be desirable to foreign countries due to their reduced prices. Along with that, Americans stopped buying foreign goods when their income dropped. So America had a huge trade surplus as there were much more exports than imports. To maintain the gold standard, other countries needed to match the contraction that America’s economy was facing. This ended up causing the output and prices in other countries to also decline. If America had let go of the gold standard, it would have allowed the government to devalue their currency. This is a good thing because it would have allow them to pump in much needed money into its economy.

   2. In 1931, Britain abandoned the gold standard and stopped payments in gold. But America did not abandon the gold standard, which caused the world financial markets to freeze up even further. This is because the standard at which they exchanged at became totally different.

 

 

 

 

 

 

 

 

 

 

 

1. Banking system:

   1. Most of America’s banks were independent institutions that were only dependent on their selves and not the Federal Reserve. After the stock market crash, many depositors started to lose confidence in their banks. This created a panic and many depositors, simultaneously, started to withdraw their money from their banks. If the banks did not have the money, as they loaned out most of the deposit they received, the bank failed.

   2. When many depositors tried to withdraw their money, the banks tried to call in loans and sell their assets. When the banks did this, it meant that the credit froze up. When credit freezes up, there is less money in the circulation, which ultimately causes deflation. When the overall prices decrease, the producers fire workers, and these workers don’t have enough money to buy anything, and prices drop even more. This became more of a problem because banks were not able to borrow any money, due to the frozen credit, which meant that business owners did not have enough money to pay their workers and businesses became bankrupted. When business bankrupted, more workers became unemployed and consumer spending decreased. 

   3. The main reason why this occurred was because the banking system was still kind of new. The banks did not work together and did not rely on the Federal Reserve. When banks faced problems, there were no adequate regulations to fix that problem. Along with that, when the depression hit, banks did not know how to place proper regulations, which further deepened the depression. If the proper regulations had been placed when the depression start, it could have been stopped faster.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. There was signs of a recession before the Great Depression :

   1. When the war ended many munition factories had to be closed down because they were no longer needed. The economy had been devoted to the war, and when it ended, the transition from that was difficult. Also, during WW1 many factories tended to overproduce because that was a necessity. But when the war ended there was too much overproduction and too less demand for these goods. The sector that was affected the most was the agriculture sector. The agricultural sector had been suffering through the 1920s as the prices of farmed goods continued to drop. This is because farms in World War I had expanded greatly, as they provided food for the soldiers in the war. To run these farms, many farmers bought different technologies, like the tractor. But since they did not have enough money to finance these technologies, the farmers went into debt. When the war ended, there was still an overproduction of these goods and, along with that, the demand for goods exponentially dropped as their main consumers, the soldiers, no longer had an immediate need for these goods. So the prices of crops significantly dropped.

   2. In 1925, the growth of car manufacturing became slowed, along with residential construction.

   3. In the beginning of the 1920s, buying on credit was highly popular because it allowed ordinary people to buy expensive goods. But this system caused people to go way over their heads. People started to buy goods with money they did not have. By the end of the 1920s, buying on credit decreased because of the enormous debt the people had gotten using this system.

 

 

 

 

 

 

 

 

 

 

 

 

 

Political Causes:

1. World War I ended

   1. Much of the production in the economy, before the 1920s, was geared towards the war efforts. During WW1, factories and farms were producing over their previous capacities. This was because MANY supplies were needed for the war efforts, so that meant that factories and farmers were gaining from selling their supplies to the war effort. But when the war ended, the factories and farmers continued to produce at this rate. There was huge overproduction, which was unnecessary with the amount of consumer spending that was happening. When the war ended, it also brought an end to government guaranteed high prices on crops. Also foreign consumption of American crops also decreased as foreign nations began to grow their own crops. Also the wartime government controls on the economy quickly disappeared. Progressives wanted more government regulation on big businesses, but the government refused to get involved.

2. The whole government system was weak.

   1. In 1921, President Harding was inaugurated. He was a weak president that was unable to detect corruption in his own government. He was a very soft guy and did not like to hurt people’s feeling. In 1922 the Congress passed the Fordney-McCumber Tariff Law, which raised tariffs from 27% to 35%. There was also a lot of corruption in the government and there were many scandals in Harding’s administration. The biggest scandal to occur was the Teapot Dome scandal. In this scandal, the Interior Secretary of Harding, Albert B. Fall, convinced the secretary of the navy to transfer priceless naval oil reserves to the Interior Department. Then Fall leased these lands to Harry F. Sinclair and Edward L. Doheny for a bribe of 100,000 dollars. 

   2. In the beginning of the 1920s, the Supreme Court removed many of the progressive legislation passed before the war. For example it took away child- labor laws. It also placed restrictions on government intervention in the economy.

   3. On August 2, 1923, President Harding died and vice president Coolidge became president. He was a really quiet president and he did not change any business friendly policies of Harding. He continued with isolationism- government was still remaining apart from the affairs of the economy.

3. Government Involvement Decreases:

   1. After the war, all wartime government controls on the economy disappeared. The government did not want to interfere with the economy any longer. The government passed the Esch- Cummins Transportation Act of 1920. In this the railroads went to private management. Labor, continued to get worse because of the lack of government support. In 1919, there was a bloody strike in a steel company, which was stopped ruthlessly. The Railroad Labor Board cut wages by 12%, which led to another strike. Labor problems continued to go worse because of the lack of government intervention.

   2. The farmers were frustrated with the lack of government involvement in the agriculture sector. When the war ended, it brought an end to government guaranteed high prices on crops. Also foreign consumption of American crops also decreased as those nations started to grow their own crops. Also with the introduction of new machinery, and the farmers’ easy access to these items, due to the credit system, the production of crop increased significantly. This created a crop surplus. Since the supply was greater than the demand, the prices of crops declined.

   3.  This idea of isolationism continues on even after the stock market crashes. President Hoover was a strong believer of “rugged individualism” - meaning that each individual should be able to help themselves and should not need the help of the government or anyone else to succeed. He believed that if the government intervened, it would weaken US as a whole, because citizens would become too dependent on the government.

 

 

 

 

 

 

 

 

 

 

 

How does the historical function of the economic cycle relate to the Great Depression?

 

In economics there is a business cycle. In this the economy faces upturns, called expansions, and downturns, called contractions. If the contraction has been occurring for 2 successive quarters then it is classified as a recession. But the Great Depression is classified as neither. It is classified as a depression, which is a prolonged and more severe recession. The business cycle is periodic, meaning that it repeats itself, so there always going to be upturns and downturns in the economy. So economy is always facing upturns and downturns and there is no way to prevent that from happening. Before the Great Depression occurred the economy was already facing a downturn, as the boom period of the 1920s was coming to an end. This downturn become more and more severe because of the lack of government intervention and the lack of regulation placed in the economy.