UNIT THREE

Causes and Consequences of the Great Depression

How did the following factors cause the Great Depression?
1. Overproduction
During World War One, farmers in agriculture expanded their production in order to contribute to
the war effort. Though, as the War came to a close, farmers continued to produce more than the
population was capable of consuming. As demand dropped but supply increased, the price of
products fell, forcing many farms to foreclose. Overproduction would prove to be a detriment to
industry as well. Before the Great Depression, as technology vastly improved, consumers rushed
to buy products such as household appliances and vehicles. Companies believed that these high
levels of consumption would continue, but would eventually be forced to lay off a multitude of
their employees, which then resulted in even less people being able to afford consumer goods. As
a result of these factors, unemployment would rise and production of goods and agriculture would
fall.
2. The Stock Market
Although the Stock Market was a symbol of American economic prosperity, overspeculation and
buying on margin proved to be fundamental issues within the economic system. People would
spend more money on stocks than they could afford, but would justify doing so by buying on
margin, or only paying a certain percentage of their debt. Panic caused the population to rush to
sell their stocks all at once in order to receive as much value for their investment as possible, but
this caused the Stock Market to collapse, and consequently, American money to dry up.
3. Economic Nationalism and Tariffs
In order to ensure the American economy would be prosperous, the government created tariffs
that placed heavy taxes on international goods. The government believed that this method would
see the increase of production and consumption of local goods, and therefore the stimulation of
the economy. However, as other countries were hindered by these tariffs, many nations were
forced to impose tariffs of their own in response. This would result in the suppression of trade
worldwide, an increase in the price of foreign goods, and a decrease in the purchasing of these
products, which instead negatively affected the economy.
4. International Debt after the First World War
Due to the excessive cost of warfare, along with the immense reparations certain countries were
required to pay, the United States loaned a multitude of money to foreign countries during World
War One. In order to repay these debts, many countries relied on the selling of goods to the
United States. However, when international tariffs were imposed, many nations lost the ability to
pay back their debts, so the United States was never reimbursed.

Explain the following consequences of the Great Depression:

1. Unemployment
Due to lack of demand for production, the foreclosure of many farms, and the bankruptcy of
industrial businesses, the Great Depression saw an extreme increase in unemployment. At the
time of the Depression, social welfare programs, such as employment insurance and welfare
payments, did not exist. This worsened the effects of unemployment, resulting in widespread
homelessness and starvation.
2. Banking Failures
Before banks were chartered and regulated by law, they were free to invest any amount of money
in the stock market they wished. When the stock market crashed and those who had outstanding
loans were unable to pay, banks began to go bankrupt themselves, as they could not produce
enough currency for people to withdraw their savings. The failure of these banks, including six
thousand bankruptcies, caused an enormous decrease in confidence in the American economic
system.
3. Political Consequences
Due to the desperation for a solution to the economic crisis much of the American population felt,
many politicians feared that Americans would turn to alternative political ideologies. During
hardship, radical ideologies often have an easier time coming to power, and it was believed that
the United States was at risk of falling to a dictatorship or communist form of leadership.
4. Change in the Role of Government
Previous to the Great Depression, many politicians believed in a laissez-faire style of
government. It was thought that the government should perform very little intervention within the
economy. As time progressed and the economic situation did not improve, however, the
government began to take on a greater role in the economic and overall welfare of the country. In
response to the Great Depression, the size and power of the government in America and other
countries ultimately increased.