Causes and Effects You are here: History The Great Depression:
Bring fact-checked results to the top of your browser search. Causes of the decline The fundamental cause of the Great Depression in the United States was a decline in spending sometimes referred to as aggregate demandwhich led to a decline in production as manufacturers and merchandisers noticed an unintended rise in inventories.
The sources of the contraction in spending in the United States varied over the course of the Depression, but they cumulated in a monumental decline in aggregate demand. The American decline was transmitted to the rest of the world largely through the gold standard. However, a variety of other factors also influenced the downturn in various countries.
Stock market crash The initial decline in U. The s had been a prosperous decade, but not an exceptional boom period; prices had remained nearly constant throughout the decade, and there had been mild recessions in both and The one obvious area of excess was the stock market.
Stock prices had risen more than fourfold from the low in to the peak in In andthe Federal Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices.
These higher interest rates depressed interest-sensitive spending in areas such as construction and automobile purchases, which in turn reduced production. Some scholars believe that a boom in housing construction in the mids led to an excess supply of housing and a particularly large drop in construction in and People gathering on the steps of the building across from the New York Stock Exchange on Black Thursday, October 24,the start of the stock market crash in the United States.
AP By the fall ofU. As a result, when a variety of minor events led to gradual price declines in Octoberinvestors lost confidence and the stock market bubble burst. As a result, the price declines forced some investors to liquidate their holdings, thus exacerbating the fall in prices.
Between their peak in September and their low in November, U. Because the decline was so dramatic, this event is often referred to as the Great Crash of The stock market crash reduced American aggregate demand substantially. Consumer purchases of durable goods and business investment fell sharply after the crash.
A likely explanation is that the financial crisis generated considerable uncertainty about future income, which in turn led consumers and firms to put off purchases of durable goods.
Although the loss of wealth caused by the decline in stock prices was relatively small, the crash may also have depressed spending by making people feel poorer. As a result of the drastic decline in consumer and business spending, real output in the United States, which had been declining slowly up to this point, fell rapidly in late and throughout Thus, while the Great Crash of the stock market and the Great Depression are two quite separate events, the decline in stock prices was one factor contributing to declines in production and employment in the United States.
Banking panics and monetary contraction The next blow to aggregate demand occurred in the fall ofwhen the first of four waves of banking panics gripped the United States.
A banking panic arises when many depositors simultaneously lose confidence in the solvency of banks and demand that their bank deposits be paid to them in cash. Banks, which typically hold only a fraction of deposits as cash reserves, must liquidate loans in order to raise the required cash.
This process of hasty liquidation can cause even a previously solvent bank to fail. The United States experienced widespread banking panics in the fall ofthe spring ofthe fall ofand the fall of Roosevelt on March 6, The bank holiday closed all banks, and they were permitted to reopen only after being deemed solvent by government inspectors.
The Great Depression was a decade of poverty for many United States citizens. Starting in , The Great Depression was a rough time not only for the U.S. but for many other countries. There are many causes for the Depression but the main cause was the combination of the greatly unequal distribution of wealth throughout the 's and the. The Great Depression was the worst economic downturn in world history. Learn about the Dust Bowl, New Deal, causes of the Great Depression, a Great Depression timeline more. Great Depression, worldwide economic downturn that began in and lasted until about It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory. Although it originated in the United .
The panics took a severe toll on the American banking system. Byone-fifth of the banks in existence at the start of had failed. Roosevelt in March By their nature, banking panics are largely irrational, inexplicable events, but some of the factors contributing to the problem can be explained.
Economic historians believe that substantial increases in farm debt in the s, together with U. The heavy farm debt stemmed in part from the high prices of agricultural goods during World War Iwhich had spurred extensive borrowing by American farmers wishing to increase production by investing in land and machinery.
The decline in farm commodity prices following the war made it difficult for farmers to keep up with their loan payments. The Federal Reserve did little to try to stem the banking panics.
Economists Milton Friedman and Anna J. Schwartz, in the classic study A Monetary History of the United States, —argued that the death in of Benjamin Strong, who had been the governor of the Federal Reserve Bank of New York sincewas a significant cause of this inaction.
Strong had been a forceful leader who understood the ability of the central bank to limit panics. His death left a power vacuum at the Federal Reserve and allowed leaders with less sensible views to block effective intervention.The United States has seen its share of recessions in its years as a country, but none quite compares to the Great Depression and the financial devastation it left in its wake.
The Great. Sep 01, · When the Great Depression began, the United States was the only industrialized country in the world without some form of .
The Great Depression began in the United States of America and quickly spread worldwide. It had severe effects in countries both rich and poor.
Personal income, consumption, industrial output, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Great Depression, worldwide economic downturn that began in and lasted until about It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory.
Although it originated in the United . The Great Depression of devastated the U.S. economy. Half of all banks failed. Unemployment rose to 25 percent and homelessness increased. Housing prices plummeted 30 percent, international trade collapsed by 60 percent, and prices fell 10 percent per year.
It . The effects of the Great Depression were huge across the world. Not only did it lead to the New Deal in America but more significantly, it was a direct cause of the rise of extremism in Germany leading to World War II.