What Caused The Great Depression: All Finger Points at Herbert Hoover

– What Caused the Great Depression –

To unveil what caused the Great Depression, all fingers would be pointing at Herbert Hoover who was elected president in 1928 as a Republican in the United States. The Depression was a worldwide economic depression that lasted for 10 years. 

The saga began on “Black Thursday,” Oct. 24, 1929. At the interval of four days, stock prices drastically fell up to 22% in the stock market crash of 1929.

The crash cost investors $30 billion, the equivalent of $396 billion or thereabout today. That trembled the public because it depreciated more cost value than World War I. The Depression had earlier begun in August when the economy contracted.

To unveil deeply what caused the Great Depression, keep reading through this article as you will get to learn more about it

Causes of the Great Depression

The Great Depression was known to have affected all aspects of society. At its peak in 1933, unemployment had risen beyond 3% to 25% of the nation’s workforce as well. Wages for those who were then working had fallen.

U.S. gross domestic product was divided in half ranging from $103 billion to $55 billion, partly because of deflation what caused the Great Depression.

The Consumer Price Index fell 27% from November 1929 to March 1933, as reported by the Bureau of Labor Statistics.

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Panicked government leaders passed the Smoot-Hawley tariff in 1930 just to protect many domestic industries and jobs, though it actually worsened the issue.

World trade plummeted 66% as estimated in U.S. dollars to range between 1929 and 1934.8

The Depression’s pain was felt worldwide, thus leading to World War II. Germans were already burdened with financial constraints from World War I what caused the Great Depression.

This Beginning of Hyperinflation

And as a result, the people became so curious enough to elect Adolf Hitler’s Nazi party to the majority in 1933.

The Great Depression of the late 1920s and ’30s was the longest and most severe economic drawback in modern history.

Lasted for about 10 years (from late 1929 up until 1939) and affected almost every country in the world.

This was marked by steep declines in industrial production besides a fall in prices, mass unemployment, banking panics, and immediate increases in the rate of poverty and homelessness.

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In the United States, where the striking effects of the depression were worst, industrial production between 1929 and 1933 fell nearly 47 percent.

Also, gross domestic product (GDP) declined by nearly 30 percent while unemployment reached over 20 percent.

By comparison, during the Great Recession of 2007–2009, the second-largest economic setback in U.S. history. This leads to a GDP decline of 4.3 percent, and unemployment reached nearly less than 10 percent.

There is no consensus among economists and historians relative to the exact causes of the Great Depression. Notwithstanding, many scholars had agreed that the following four factors had played their role as to what caused the Great Depression.

The Stock Market Crash of 1929

During the 1920s, the U.S. stock market underwent a historic expansion.

As stock prices rose to unprecedented levels, investing in the stock market came to be seen as an easy way to make money, and even people of ordinary means used much of their disposable income or even mortgaged their homes to buy stock.

By the end of the decade, hundreds of millions of shares were being carried on margin, meaning that their purchase price was financed with loans to be repaid with profits generated from ever-increasing share prices.

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Once prices began their unavoidable decline in October 1929. Sequel to this, millions of overextended shareholders fell into a panic rushing to liquidate their holdings and exacerbating the decline alongside engendering further panic.

Between September and November, stock prices fell to about 33 percent. The outcome was a profound psychological shock, which leads to the loss of confidence in the economy among other consumers and businesses.

Basically, consumer spending, particularly on durable goods and business investment, were curtailed drastically, leading to a reduction in industrial output and job losses alongside a further reduction in spending and investment.

Banking Panics and Monetary Contraction

Between 1930 and 1932, the United States experienced about four extended banking panics. Large numbers of bank customers were fearful of their bank’s solvency. As a result, they simultaneously attempted to withdraw their deposits in cash.

Basically, the accruing effect of a banking panic is to bring about the crisis that panicked customers aim to protect themselves against. It was so pathetic that even financially healthy banks were also ruined by a large panic.

By 1933, one-fifth of the banks in existence from 1930 had failed, thus leading the new Franklin D. Roosevelt administration just to declare a four-day “bank holiday” (which was later extended by three days).

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All the country’s banks were closed until they prove their solvency to government inspectors.

The natural outcome of widespread bank failures was to reduce consumer spending and business investment because there were fewer banks to lend money.

There was also less money to lend because many people were hoarding it as cash. According to some scholars, that problem was escalated by the Federal Reserve which raised interest rates (further depressing lending) and intentionally reduced the money supply.

This reduction was done with the belief that doing it was necessary just to maintain the gold standard by which the U.S. and many other countries had to hold the value of their currencies to a certain fixed amount of gold.

The reduced money supply leads to a reduction in prices, which later discouraged lending and investment (owing to the fear that the future wages and profits would rather not cover loan payments).

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The Gold Standard

Whatever effects what caused the Great Depression were also on the funds supply in the United States, the gold standard vividly played a role in the spread of the Great Depression from the US to other countries.

As the United States experienced both the declining output and deflation, it caused them to run a trade surplus with other countries, mainly because Americans were buying fewer imported goods.

However, this was on the contrary that American exports were relatively cheap.

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Such imbalances gave rise to outstanding foreign gold outflows to the US, which threatened to depreciate the currencies of those countries whose gold reserves were depleted.

Sequel to this, foreign central banks attempted to oppose the trade imbalance by increasing their interest rates. The interest rate was known to have the effect of reducing the output and prices alongside exacerbating unemployment in their countries.

The resulting international economic decline, particularly in Europe, was closed as bad as that incurred in the United States. 

Decreased International Lending and Tariffs

In the late 1920s, while the U.S. economy was still proactive and expanding, lending by the U.S. banks to foreign countries declined partly due to relatively high U.S. interest rates.

The drop-off also added to contractionary effects in some borrower countries, especially Germany, Argentina, and Brazil.

The economies of these countries were known to have entered a downturn prior to the beginning of the Great Depression in the United States.

Notwithstanding, American agricultural interests suffered because of overproduction and raised competition from European and other agricultural producers alongside lobbied Congress for passage of new tariffs on agricultural imports.

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Congress drastically adopt broad legislation, the Smoot-Hawley Tariff Act (1930) which imposed steep tariffs (up to 20 percent) on a broad range of agricultural and industrial products.

The legislation basically provoked retaliatory measures to other countries. The cumulative effect leads to the declining output in several countries and a decrement in global trade.

Countries that abandoned the gold standard or devalued their currencies recovered first. As Britain abandoned the gold standard set in 1931, the United States proactively devalued its currency in 1933.

Fiscal expansion, as New Deal jobs alongside social welfare programs and increased defense spending during the onset of World War II, was suggested to have also played a role by raising consumers’ income and aggregate demands.

However, the importance of this factor will remain an issue of debate among scholars.

Effects of the Great Depression

Relative to the outcome of what caused the Great Depression, many effects have been reported to have occurred in certain principal areas of society. The Depression made many farmers lose their farms.

This lead to years of over-cultivation and drought, thus creating the “Dust Bowl” in the Midwest and destroying agricultural production in previously fertile areas.

To survive this drought, thousands of these farmers and other unemployed workers had to left for California in search of work.

The Great Depression of 1929 Devastated the U.S. Economy.

A third of all banks failed as unemployment rose up to 25% alongside homelessness increment.

Housing prices fell by 67%, international trade collapsed by 65% while deflation rise above 10%.

 It took about 25 years for the stock market to recover better.

Despite the saga, there were also some beneficial effects attached to it. The New Deal programs installed safeguards just to make it less likely that the Depression may happen again.

Nine Principal Areas Affected by the Great Depression 

All the same, what caused the Great Depression it led to a deteriorative impact on the nine principal areas given below:

1. Economy

During the initial years of the depression, the economy shrank about 50%. In 1929, economic output was about $105 billion, as estimated by gross domestic product. That is equivalent to about $1 trillion today.

During that era, the economy began shrinking in August 1929. And by the end of the year, 650 banks had failed.

In 1930, the economy shrank to about 8.5% with a report from the Bureau of Economic Analysis. GDP fell 16.1% in 1931, and 23.2% in 1932.

By 1933, the country had suffered nearly four years of economic contraction. That only produced $56.4 billion half of what it produced in 1929.

Reports from the Bureau of Labor Statistics had it that the Consumer Price Index fell 27% between November 1929 and March 1933. The inflation sent many firms into bankruptcy.

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The BLS reported that the unemployment rate reach a climax of 24.9% in 1933.

 It grew another 11.1% in 1935, 14.3% in 1936, and 9.7% in 1937. However, the New Deal spending boosted GDP growth by 17% in 1934.

Unfortunately, the government proactively cut back on New Deal spending in 1938. At this time, the depression returned, and the economy shrank 6.3%.

Preparations for World War II vividly sent growth up to 7% in 1939 and about 10% in 1940. The following year, it was reported that Japan bombed Pearl Harbor, which made the United States enter into World War II. 

The New Deal and spending for World War II drastically shifted the economy from a pure free market to a relatively mixed economy. This depended very much on government spending for its success. 

2. Politics

The Depression affected the political system by shaking confidence in unfettered capitalism. That kind of laissez-faire economy was what President Herbert Hoover advocated but failed.

As a result, people had to vote for Franklin Roosevelt. His Keynesian economics made promises that government spending would surely end the Depression. In 1934, the economy grew 17% while unemployment declined. 

But FDR became much more concerned about adding to the $5 trillion U.S. debt. He cut back government spending in 1938 leading to the resumption of the Depression.

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What caused the Great Depression? Nobody.

The Depression ended in 1939 as the government spending emerged for World War II.

This change in spending had led to the belief that military spending is better for the economy even though it doesn’t rank as one of the four best real-world ways to create jobs.

3. Social

The Dust Bowl drought devastates the farming in the Midwest. It lasted about 10 years, which was long for most farmers to hold out.

Prices for agricultural products dropped drastically to their lowest level since the Civil War.

As farmers left in search of work, they eventually became homeless.

In 1933, Prohibition that allowed the government to get taxes on sales of now-legal alcohol was repealed. This is in lieu of the reason that FDR used the money to assist them to pay for the New Deal.

The depression was so worst and lasted for so long that many people thought it was the end of life. However, that dream was changed to include a right to material benefits.

The ​American Dream, as envisioned by the Founding Fathers, endorsed the right to pursue one’s vision of happiness. 

4. Unemployment

In 1928, at the ultimate time of the Roaring Twenties, unemployment was 4.2%. That was much less than the natural rate of unemployment specified. By 1930, it had more than doubled to 8.7%.

Moreso, by 1932, it had increased to about 23.6%. It reach a climax in 1933, thus reaching up to around 25%. At this time, nearly 15 million people were out of work.

This was so pathetic because it was the highest unemployment rate America has ever recorded relative to what caused the Great Depression.

New Deal programs assisted reduction of unemployment up to 21.7% in 1934, 20.1% in 1935, 16.9% in 1936, and about 14.3% in 1937.

Alongside this, less robust government spending in 1938 had sent unemployment back by 19%. This remained above 10% up until 1941.

5. Banking

During the Depression, a third of the nation’s banks failed. By 1933, about 4,000 banks had failed. As a result, many depositors lost $140 billion.

People were eager to find out that many banks had used their deposits just to invest in the stock market. Sequel to this, they rushed to take their money out before it got late. These “runs” forced even the most committed banks out of business.

Depositors are safeguarded by the Federal Deposit Insurance Corporation created by the FDR during the New Deal.

6. Stock Market

The stock market lost about 90% of its value between the years 1929 and 1932. It didn’t recover its value for 25 years. This led to many people losing all their confidence in the Wall Street markets. 

Businesses, banks, alongside individual investors, were puzzled. Even people who did not invest also lost money. The banks get to invest their money from their savings accounts.

7. Trade

As countries’ economies worsened, trade barriers were erected to protect local industries. In 1930, congress passed the Smoot-Hawley tariffs that seek to protect U.S. jobs.

Alongside that, other countries retaliated, leading to trading blocs that were based on national alliances and trade currencies.

World trade fell by 66% as estimated in dollars and 25% in the total number of units. Meanwhile, by 1939, it was still below its level.

Here’s what happened to U.S GDP for the first five years of the Depression:

➛ 1929: $103.6 billion

➛ 1930: $91.2 billion

➛ 1931: $76.5 billion

➛ 1932: $58.7 billion

➛ 1933: $56.4 billion

8. Deflation

Prices fell 30% between the years 1930 and 1932. Deflation assisted consumers whose income had fallen woefully. This hurt many farmers, businesses, and many homeowners.

As their mortgage payments had not fallen by 30% led to many people losing everything and subsequently seeking work wherever they could find it. 

What caused the Great Depression, here are the price changes that set in during the depression years:

➛ 1929: 0.6%

➛ 1930: -6.4%

➛ 1931: -9.3%

➛ 1932: -10.3%

➛ 1933: 0.8% 

➛ 1934: 1.5%

➛1935: 3.0%

➛ 1936: 1.4%

➛ 1937: 2.9%

➛ 1938: -2.8%

➛ 1939: 0.0%

➛ 1940: 0.7%

➛ 1941: 9.9%

9. Long-Term Impact

The success of the New Deal made the Americans hope that the government would save them from any form of economic crisis.

During the Great Depression, people depend on themselves and each other just to pull through. Alongside this, the New Deal enjoined they could depend on the federal government, rather.

As FDR changed the gold standard to safeguard the dollar’s value. That set a precedent for Richard Nixon who was a President, to end it completely in 1973.

The New Deal Public Works Administration (PWA) is known to build many of today’s landmarks. For instance, iconic buildings include the Rockefeller Center, Chrysler Building, and Dealey Plaza in Dallas.

This also includes bridges such as New York’s Triborough Bridge, San Francisco’s Golden Gate Bridge, and the Florida Keys Overseas Highway.

Depression-era public works include the Lincoln Tunnel, La Guardia Airport, and Hoover Dam. They also construct towns, including Greendale, Wisconsin; Greenhills, Ohio; and Greenbelt, Maryland. 

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What Were the Major Causes of the Great Depression?

According to Ben Bernanke, a past chairman of the Federal Reserve, the central bank helped create the Depression. It used tight monetary policies when it should have done the opposite.

According to Bernanke, these were the Fed’s five critical mistakes:

1. The Fed began raising the fed funds rate in the spring of 1928. It kept increasing it through a recession that started in August 1929. 

When the stock market crashed, investors turned to the currency markets. At that time, the gold standard supported the value of the dollars held by the U.S. government.

Speculators began trading in their dollars for gold in September 1931. That created a run on the dollar. 

2. The Fed raised interest rates again to preserve the dollar’s value. That further restricted the availability of money for businesses. More bankruptcies followed.

3. The Fed did not increase the supply of money to combat deflation.

Investors withdrew all their deposits from banks. The failure of the banks created more panic. The Fed ignored the banks’ plight. This situation destroyed any of consumers’ remaining confidence in financial institutions.

Most people withdrew their cash and put it under their mattresses. That further decreased the money supply.

4. The Fed did not put enough money in circulation to get the economy going again. Instead, the Fed allowed the total supply of U.S. dollars to fall by a third. Later research has supported parts of Bernanke’s assessment.11

Who is to blame for the Great Depression?

What caused the Great Depression that left many people frustrated, all fingers are pointing to a certainty.

Among the rudiments of famous political history is that almost everyone below the level of President often winds up being forgotten, and one-term Presidents are always remembered as failures.

Nobody would ever illustrate this better than Hoover.

President Hoover was elected in 1928 with four hundred and forty-four electoral votes. He won all but exempting eight states, even though that was the first time he had run for a political office position.

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Four years later, he got fifty-nine electoral votes but carried just in six states. What really intervened between his two presidential runs was the 1929 stock-market crash alongside the early years of the Great Depression.

Herbert Hoover was doomed to be remembered as the man who was too strong to be conservative and react adeptly to the Depression, as the hapless foil to the great Franklin Roosevelt, and as the politician who turned a Republican country into a Democratic one.

Even now as regarding what caused the Great Depression, if you were to become a politician running for office then, you would rather invoke Hoover just to compare your opponent to him.

Iowa-born Herbert Hoover was elected president in 1928 as a Republican. He had a distinguished career as a mining engineer and obtained international fame and reputation in leading efforts to feed starving Europeans, especially children, after the war.

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In 1921, he began an eight-year profession as Secretary of Commerce under Presidents Harding and Coolidge. Soon after assuming office, Hoover had to face a national crisis.

Half of the American families were engaged in agriculture. When they did not have the money to buy manufactured items, factories could not sell their products, and a such they laid-off workers.

This created a downward spiral because unemployed workers could not purchase products either. The trouble continued to spread across the entire economy.

In October 1929, the value of stocks on the New York Stock Exchange began a sudden downward slide that touched off panic among investors.

As in land prices earlier, there had been assumptions in stocks that exceeded the companies’ ability to produce. Banks and financial institutions that had loaned money to the people began to fall in value.

The credit necessary to keep the economy moving became hard to acquire.

With Hoover’s presidency, the situation was bleak and many had to blame the president as what caused the Great Depression. About one-third of the workforce was unemployed.

Alongside that, more and more families were homeless. While many young people took to the road in the desperate hope of finding work, some were just getting confused.

In Iowa, farm families had the advantage of large gardens and homegrown livestock, yet struggled just to find the cash to pay their taxes and other necessary purchases.

They formed gangs to threaten veterinarians doing the testing. The governor offered special protection for the vets. In western Iowa, farmers were so annoyed with a judge who deliberately refused not to make promises about the cases of farm foreclosure.

How Did the Great Depression End?

In 1932, the country elected Franklin D. Roosevelt as president. He promised to create federal government programs to end the Great Depression.

Within 100 days, he signed the New Deal into law, creating 42 new agencies throughout its lifetime.

They were designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs still exist. They help safeguard the economy and prevent another depression. 

Many argue that World War II, not the New Deal, ended the Depression. Still, others contend that if FDR had spent as much on the New Deal as he did during the War, it would have ended the Depression.

In the nine years between the launch of the New Deal and the attack on Pearl Harbor, FDR increased the debt by $3 billion. In 1942, defense spending added $23 billion to the debt. In 1943, it added another $64 billion.

Resolution of Great Depression to Stock Market Crash

To relieve the strain of what caused the Great Depression, the New York Fed had to spring into action.

It purchased government securities on the open market, offer lending via its discount window, and lowered the discount rate. It promises commercial banks that it would certainly supply the reserves they needed.

These actions elevated the total reserves in the banking system and relaxed the reserve constraint faced by banks in New York City. This also gets to enables the financial institutions to stay open for business and meet their customers’ demands during the crisis.

The actions also kept short-term interest rates from rising to disruptive levels, which frequently occurred during financial crises.

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The New York Fed’s actions were controversial. The Board and several reserve banks made complaints that New York exceeded its authority.

In hindsight, these actions help contain the crisis in the short run. The stock market collapsed, but commercial banks closer to the center of the storm continued in operation.

While New York’s actions safeguarded commercial banks, the stock-market crash continued to harm commerce and manufacturing.

The crash frightened many investors and consumers. Also, men and women lost their life savings, jobs, and worried whether they could pay their bills.

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Fear and uncertainty plummet purchases of big-ticket items like automobiles always bought on credit. When certain firms like Ford Motors saw how the demand decline, they immediately slowed the production and furloughed workers.

Unemployment rose as the contraction that had begun earlier in the summer of 1929 narrowed down.

While the crash of 1929 curtailed economic activity, its impact collapse within a few months by the fall of 1930 economic recovery emerge imminently.

Then, challenges in another portion of the financial system emerged from what may have been a short, sharp recession into the nation’s longest and deepest depression.

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Reasons a Great Depression Could Not Happen Again

While anything is possible, it is uncommon to happen again presumptuously. Central banks nationwide, including the Federal Reserve, have learned lessons from the past.

They have better protection in places to safeguard against catastrophe, and developments in monetary policy what caused the Great Depression just to manage the economy. The Great Recession, for example, had a significantly great impact.

Besides, monetary policy cannot offset fiscal policy. Some debate that the size of the U.S. national debt and budget can trigger an economic crisis. Also, experts predict that climate change can cause profound losses.

Such was the scale of the world market crash some time ago in the wake of the coronavirus outbreak. As the specter of the 1929 Wall Street rout, the accruing Great Depression of the 1930s has been raised. Comparisons is no longer fanciful.

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The failure of the US and the UK to swing into action with a wide range of mitigation measures despite the lessons of Italy’s slow response to the Covid-19 outbreak has heightened concerns that a continuous, epochal downturn lies in wait.

And a depression would rather mean an almost exact repetition of the same period of one hundred years ago.

When a deeply divided society elevated the stock markets during the 1920s led to a tortuously slow return of economic health in the 1930s. 

Meanwhile, the global economy absorbed a downgrade from 2.5% to zero growth for 2020, “which would certainly mark the second year for the global economy given from almost 50 years of comparable data.

Exceptions were given only for 2009 in the depths of the financial crisis being worst at then.

But the consultancy still hopes for a strong bounce-back in GDP by the middle of the following year. With Sunak’s latest estimation in place, the UK could return in 2021 with at least 3.7% growth.

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Relative to this, the government will have to launch modalities to mount a massive fiscal response. ‘We’ve already had 10 years of stunted growth.

It will be unacceptable to have an additional 10 years. We thought the spending taps would open as possible in response to the climate emergency. Now it will need to occur in order to tackle the economic consequences of the pandemic to save the planet,” he said.

That means a repeat of the 1930s when it took the US economy until 1939 to reach the level of GDP as was seen in the 1920s, may probably be delayed or prevented by a double-barrelled blast of funds emerging from central banks and governments in the next years.

“And the Great Depression occurred with a perfect storm of bad scenarios, including a tightening of monetary policy of the US central bank.

We have learned how to give support to the economy, and I solemnly observed that the central banks are doing the perfect thing now, with expansionary monetary policies.

I remain confident that we will neglect the repetition of the Great Depression: still, there will also be massive economic and social costs alongside longer-term economic restructuring.”

As central banks learned the lessons of the 1929 crash, it seems to be seen as if governments had learned the lesson of the last 10 years to put austerity behind them.

StudentsandScholarship Team.