The Great Depression was a very complicated economic depression which had many factors contributing to it. To pinpoint the exact causes of the Great Depression is so complicated because all the factors relied on each other. When one thing went wrong, other things were soon to follow. Over production and under consumption, the stock market speculation, and the inequity of wealth distribution would be considered majors causes that led to the Great Depression. The over production and under consumption of commodities in the United States was absolutely a contributing cause to the Great Depression. During World War One, the government encouraged farmers to buy more land and more efficient machinery in order to produce enough food to support the country and the soldiers during the time of conflict. Farmers followed the government’s request, buying farm machinery and more farmland with the use of credit. After the war had ended, farmers ended up with a huge surplus, causing the price of their produce to plummet. Commodity prices dropped 11 percent in 1921. When the prices plummeted, the farmers weren’t making enough money to pay back the money that they borrowed in order to buy more land to make more produce in the first place. The money that the farmers borrowed was from rural banks, and the banks paid out these loans with depositor’s money. At this time, there was no federal deposit insurance. When the people who had deposited money in the bank needed to get their money out, the banks were unable to give out the money due to the loan borrowers inability to pay the loan back. During the 1920s, people were buying consumer products with the use of credit. The economy was relying too heavily on industries that produced things such as radios and cars. These industries originally boomed when everyone was buying the products using credit, but once a family bought a car and a radio, they had no need buy another. When people bought these things on credit, the income that they were making was used to pay off the loan instead of buying new things, which meant that they weren’t putting new money into the circulating economy. During this time, forty percent of all US banks failed. A new deal plan that addressed this issue was the Emergency Banking Act. Franklin Roosevelt called a bank holiday on March 6, 1933. This act insured deposit insurance and helped decide which banks were healthy enough to stay afloat. After the banks reopened, people felt safe under the reforms and re-deposited their money resulting in the stabilization of banks. The new deal plan that assisted the farmers was called the Agricultural Adjustment Act. This act aimed to assist farmers by eliminating the surplus. Farmers were paid to reduce acreage and eliminate existing products. The AAA was later ruled as unconstitutional. Another major cause of the Great Depression would be the speculation of the stock market. After World War One, there was an excess of money supply in the United States due to an expanded workforce and other things. This excess of funds gave people high speculations about the future course of the stock market. The high speculation of the stock market gave out a false look that the stock market was doing really well. People assumed that the stocks were going to continue to rise, resulting in people buying stocks on margin. When people bought stocks on margin, they were either going to make a good profit if the stocks rose, or owe a good amount of money if the stocks crumbled. The stock market was represented by borrowed money which wasn’t an accurate representation of the market. Between 1928 and 1929, money given out by loan brokers rose from five billion dollars to eight and a half billion dollars. The big problem with buying stocks on margin is that if the stocks fall, the people who borrowed money to buy the stock owe even more money than they borrowed. When the stock market crashed at the end of 1929, all the Americans who bought stocks with
