What Led to the Depression

The main factors which caused the Great Depression in America following the Wall Street Crash of 1929. Discusses issues with the 1920s American economy.

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  • What Led to the Depression
    • Unequal distribution of wealth
      • 60% of all American families were living on less than $2000 per year
      • The top 5% of Americans earned 1/3 of the income
      • The only way that poorer Americans could consume was by credit and consumption
      • 80% of Americans had no savings at all
      • The purchasing power was held by the top margins of society
    • Farming problems
      • The average farmer's income was $477 below the national average
      • Crops were devastated by natural disasters, for example the boll weevil plague
      • Farmers did not cut production after the First World War, leading to overproduction and lowering prices
      • Out of 5280 farms, there were 3500 foreclosures
      • Farmers did not participate in the boom
    • Decline in old industries
      • Traditional industries such as coal and textiles couldn't compete with the oil industry
      • The New England Textiles industry fell in workforce from 190,000 to 100,000 in 1933
    • Trade problems
      • Republican protectionism led to the raising of taxes and retaliation, effectively cutting off international trade
      • Production rises meant that surplus couldn't be sold abroad
      • Surplus agricultural produce couldn't be sold abroad
        • Farmers did not cut production after the First World War, leading to overproduction and lowering prices
    • Stock market speculation and lack of regluation
      • The American banking system was not regulated at all
      • The stock market was not regulated, encouraging 'on the margin' speculation (75% of a share's value could be borrowed)
      • After 1927, there was an average of 5m transactions per day
      • In 1927, the FRB lowered the interest rate by 0.5% making it easier to borrow
      • People had blind faith in the market (dips were seen as temporary)
      • Brokers had persuasive selling techniques e.g. 'rags to riches' tales
      • FTC was half-hearted at best
      • Bank failures were common during the 1920s
      • Contradictory regulatory measures: Charles Mitchell pumped $25m of his own money into the brokerage industry
      • No one wanted regulation of the stock market
      • FRB was made up of private bankers who put their own interests before the nation
      • Evaluation points
        • After the Crash, stock prices were still higher than they had been in 1928
        • Share prices did not plummet until 1932
        • Historians argue that the Crash was symptom, rather than a cause, of the Depression
        • There were already problems with the economy
    • International debt
      • Great Britain and France did not have strong enough economies to pay back the war debts owed to the US
      • The devaluation of British and French currencies made US goods more expensive in Europe

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