The Great Depression: Causes and Consequences of an Economic Catastrophe

Introduction

The Great Depression had an impact on the entire world, especially the US, from 1929 to the early 1940s. One of the most influential causes of the US economic crash was the Great Depression, which was created by people making big purchases with installments, overproduction, and marginal buying.

Installment Purchases and Bank Strain: Precursor to Economic Crash

In the 1920s, many people went on a shopping frenzy and began to make big purchases of things like furniture and radios, but they didn’t have the money at the time, so they purchased it in installments. As can be seen in Document 1, 60% of all automobiles and furniture were bought in installments. When something is bought in installments, the bank has to spot the rest, which means that the bank has less money until the customer pays the rest of the price. This all contributed to the banks shutting down when people wanted to withdraw their money and couldn’t, which led to the economic crash.

Overproduction, Unemployment, and Tariffs: Seeds of the Great Depression

Farmers and factories in the 1920s were producing too many goods, and people couldn’t afford to purchase all of them. As a direct result of this, prices dropped, and fewer workers were needed. As people were laid off, more people had no income, which meant they couldn’t buy goods which meant goods weren’t being bought, etc. It was the beginning of a vicious cycle that led to the Great Depression. Document 3.

Document 2 shows that the minimum income necessary to meet the basic needs of the average American family was $2,000. However, in 1929, less than 40% of the US population had an income of at least $2,000. This is the direct result of overproduction because, without a job, many families had little income. On top of having produced too many goods and not being able to sell them in the US, they didn’t have much luck being able to sell them to countries either. The reason behind this is that Congress became greedy and decided to step up tariff rates higher and higher despite warnings from American economists. Document 5.

Margin Trading and Stock Market Precipice: Documenting Instability

In the 1920s, many people began to purchase stock, however, they didn’t always have enough money to pay for the stock at the moment. So they purchased it on margin, which meant that the investor only had to pay a fraction of the price, and the additional money would be supplied by the broker. Unfortunately, the investor usually did not have enough money to pay the remainder, especially if there was a decrease in security values, and then the downward spiral was set into motion, and there was no apparent way to stop it. Document 4.

Conclusion

The Great Depression heavily impacted the US economy in such a way that caused it to crash. This can be blamed on making big purchases with installments, overproduction, and marginal buying.

References:

1.Statistical Abstract of the United States, 1930. U.S. Bureau of the Census.

2.The State of Working America, 12th Edition.” Mishel, Lawrence et al. An Economic Policy Institute book, Cornell University Press, 2012.

3.The Great Depression: A Diary.” Rothbard, Murray N. Ludwig von Mises Institute, 2010.

4.A Monetary History of the United States, 1867-1960.” Friedman, Milton, and Anna J. Schwartz. Princeton University Press, 1963.

5.The Tariff History of the United States.” Taussig, F.W. Putnam’s Sons, 1910.