The Causes of the Great Depression
Published 28 Apr 2017
There is a reason behind every event that occurs. Throughout history, there are many unfortunate circumstances which happened; to be able to thoroughly understand these, one must trace its underlying causes. The Great Depression was one of the most difficult phases in history. In essence, the era was defined by economic failure and widespread unemployment. Though the Great Depression was experienced in various parts of the globe, the negative effects were heavily concentrated on the United States of America. This essay seeks to determine and explain the causes behind the Great Depression.
One major cause of the Great Depression was the consumerist American lifestyle in the 1920s which threatened the equilibrium between supply and demand (McElvaine 1). The 1920s in the United States, also known as the Jazz Age, was marked with the constant fixation on consumerism. People became focused on wealth and material goods. The excessive lifestyle was encouraged by the abundance of commodities which were easily produced by the industries (McElvaine 1).
It is important to note that the success of the economy relied on the balance between supply and demand (McElvaine 1). However, this balance was not maintained during that time. While there were many consumer goods available, only a fraction of American society could afford to purchase them. The wealth of the Jazz Age was unequally distributed; most of the income was in the possession of a few Americans. Hence, while there were many goods being produced, there were only a few who could buy them. To resolve this problem, credit was invented. This invention allowed the people to buy products now and pay the costs later. Nonetheless, the emergence of the credit only exacerbated the situation. People have relied heavily on credit, causing them to accumulate debt. In the end, people still cannot buy all the available commodities. There was too much supply and not enough demand (McElvaine 1). This caused the Great Depression.
Another cause of the Great Depression was the gold standard (Smiley). Other nations also suffered from an economic slump because of this. In 1914, most of the wealthiest nations established an unchanging rate between the currency of the country and gold. The United States maintained the gold standard, keeping the gold value of the dollar constant in the midst of the First World War. This decision prompted those who possessed gold to invest in the United States, since other countries had fluctuating exchange rates (Smiley).
However, keeping the existing exchange rates posed a big problem. There was an influx of money as a result of the war; if the gold standard was maintained, it was possible for devaluation and deflation to take place (Smiley). In time, the United States had a significant percentage of the world’s gold in their possession. The need for gold resulted in the return of the gold standard in various countries (Smiley). Meanwhile, this prompted the Federal Reserve System to increase the discount rate in 1928. By increasing the discount rate, the interest rates will increase as well. The United States sought to increase interest rates in an attempt to restrain the outpouring of their gold and slow down the stock market. In 1929, the United States and France had most of the world’s gold in their possession. The nations who had lost their gold were forced to enact policies for deflation. Through these policies, the said nations had controlled economic activity and decreased prices. This is what caused the Great Depression to begin (Smiley).
There were two major reasons why the Great Depression occurred. The first reason was the imbalance between the supply and demand, which was triggered by the prevalent consumerism and unequal distribution of wealth in the United States in the 1920s. The second reason was the maintenance of the gold standard in a time when there was much spending due to war, resulting in deflation. These two causes should be considered in understanding the origins of the Great Depression.
- McElvaine, Robert. “Great Depression in the United States.” Microsoft Encarta Online Encyclopedia.
- Smiley, Gene. “Great Depression.” The Concise Encyclopedia of Economics. Library of Economics and Liberty. 2008 http://www.econlib.org/library/Enc/GreatDepression.html