18 April 2023

What is the Great Depression? – Discover the causes and consequences of the Great Depression

By Donald

The great Depression It was one of the deepest economic and social crises and lasting in history. It began in 1929 with the collapse of the New York Stock Exchange and spread throughout the world until World War II.

During said period, millions of people lost their jobs, their savings and their hope. What caused this disaster? What consequences did it have for politics, culture and society? Below, you will discover the answers to these questions and learn more about this fascinating subject.

What was the American Great Depression?

It was one of the most serious and prolonged economic crises in history. It began with the crash of the New York Stock Exchange. on October 29, 1929, which caused a drastic drop in stock prices and a massive loss of wealth. The crisis spread rapidly throughout the world, affecting industrialized countries and exporters of raw materials.

Production, trade, consumption and investment have been drastically reduced, causing a deflationary spiral and an increase in unemployment and poverty. The Great Depression had profound social, political, and cultural consequences that changed the world landscape.

Some countries took measures to combat the crisis. Like the New Deal in the United States or the Dawes Plan in Germany, which sought stimulate demand and regulate the financial system. Other countries adopted protectionist, nationalist or totalitarian measures. Like fascism in Italy or Nazism in Germany, which led to World War II.

The great Depression ended with the start of the war. That reactivated the economy in the world thanks to the increase in military spending and the demand for goods.

What were the causes of the great depression?

They were multiple and complexbut they can be summarized in the following points:

  • Overproduction and underconsumption. Economic growth in the 1920s was not evenly distributed among the population. This limited the demand for goods and services and caused a fall in prices and profits.
  • financial speculation. Many businessmen and savers invested in the stock market. Creating an asset bubble that inflated the value of the shares. In October 1929, a sell-off occurred, triggering panic and a market crash.
  • banking crisis. The stock market crash affected the US economic system. Many banks were unable to recover their loans or meet their own financial commitments. Between 1929 and 1933, more than 9,000 such institutions closed their doors.
  • contraction of international trade. The US economic crisis had a strong impact on world trade. As domestic and foreign demand for US products declined. Both exports and imports decreased. The United States government implemented protectionist measures, which set off a chain reaction of other countries that also raised their trade barriers.
  • Drought and agricultural pests. During the 1930s they hit the central regions of the country, turning what used to be an orchard into an arid and eroded land. This caused the loss of crops and the death of animals. In addition, a plague of locusts devoured what little was left in the fields.

political causes

The political causes of the Great Depression were diverse and complex. However, can be summarized in three aspects main:

  1. The first World War. He left behind millions of dead, wounded and refugees, as well as a huge public debt and war reparations to be paid by defeated countries, especially Germany. These conditions led to a major economic recession in Europe. In addition, they generated political and social tensions that led to the rise of totalitarian regimes such as fascism and Nazism.
  2. trade protectionism. It was a policy adopted by many countries to protect their domestic industry from foreign competition. However, this measure had a counterproductive effect, since it reduced international trade and aggravated the economic crisis. An example of this policy was the Smoot-Hawley Act of 1930. Which is a bill that imposed high tariffs on American imports and provoked retaliation from other countries.
  3. financial instability. It was another contributing factor to the Great Depression. Stock market speculation, easy credit and overproduction created an economic bubble that burst with the crash of 1929, when the New York stock market collapsed and dragged down others around the world. This caused a crisis of confidence, a flight of capital, a contraction of credit and generalized deflation that seriously affected the economy.

Social causes

Their efects were felt in all sectors of society, but it also had social reasons that contributed to its deepening and prolongation. Some of these causes were:

  • social inequality. The 1920s were a period of great prosperity for some groups, especially businessmen and financial speculators. However, it was also one of poverty and marginalization for others, such as farm workers and immigrants. This social gap generated resentment and frustration among the most disadvantaged, who saw how their living conditions worsened with the crisis.
  • political instability. The Great Depression coincided with the rise of totalitarian and nationalist movements in Europe and Asia. That they took advantage of the discontent of the population to propose authoritarian and violent solutions to economic and social problems. These regimes generated both internal and external conflicts, increasing tension and insecurity in the world.
  • The lack of international cooperation. To prevent its spread and alleviate its effects, The Great Depression required a united and coordinated response from the major powers. However, most countries opted for protectionist and individualist measures. For example, the increase in tariffs, devaluation of currencies or opting for diplomatic isolation. Actions that, in the end, only made the situation worse.

What is the history that precedes the Great Depression?

He had various backgrounds weakened the world economy and made it vulnerable to a collapse. Some of these were:

  • Black Friday of 1869. It was a financial crisis caused by two speculators who tried to manipulate the price of gold in the United States. Causing a great loss of confidence in the market and in the government.
  • The economic crisis of 1873. It was a global depression that originated from the bankruptcy of an American bank that had invested in the railway sector, and which was aggravated by the fall of the Vienna stock market. It lasted until 1879 and is considered the first systemic crisis of industrial capitalism.
  • The panic of 1893. Another economic crisis that began in the United States due to the drop in international prices of wheat and silver, and the overexpansion of railway lines. This crisis ended in 1897 and resulted in the victory of the Republican party in the presidential elections of 1896.

Before The Great Depression, there were international financial crises and commercial and monetary imbalances between countries. World War I caused destruction and increased public debt and inflation. The American economy boomed during the 1920s, but this growth was neither sustainable nor equitable.

October 24, 1929 (Black Thursday) there was a massive stock crash on Wall Street and on October 29 (Black Tuesday) the biggest stock market crash in history until then was recorded. This event marked the beginning of the Great Depression.

What are the characteristics of the Great Depression in the United States?

Some of its characteristics were:

  • international effect. The crisis spread rapidly across all continents. Affecting both rich and poor countries. International trade was reduced. What caused many nations to choose to implement protectionist measures to protect their economies.
  • Long duration. The depression lasted for several years, with varying degrees of intensity depending on the country. In some cases, the effects lasted until the start of World War II.
  • Bank bankruptcies. Many banks that had invested in the stock market or lent money to companies and individuals they were ruined by the lack of liquidity and solvency. This caused a crisis of confidence and a massive withdrawal of deposits, which worsened the financial situation.
  • Mass unemployment. The fall in production, consumption and investment generated a wave of layoffs and company closures. The lack of employment reached record levels in many countries, reaching a third of the active population in some cases. This caused poverty, misery and despair among the workers and their families.
  • Price drop. Agricultural and industrial overproduction, coupled with low demand, caused a general deflation of the value of products and goods. This harmed the producers, who saw their income and profits reduce, and made it difficult to pay the debts they had contracted.
  • Political and social changes. The Great Depression had an exponential impact in these areas. On the one hand, there was a discrediting of liberal democracy and capitalism, and a rise of totalitarian movements such as fascism and Nazism. On the other hand, protests, social and union mobilizations, and demands for greater state intervention in the economy were generated.

Inflation in the Great Depression

Two phases of inflation can be distinguished: a first of deflation from 1929 to 1932 and a second phase of recovery and moderate inflation that starts from 1934 and ends with the start of World War II.

The deflation was caused by the decline in aggregate demand and money supply, which worsened the crisis. Recovery and moderate inflation. They were driven by expansionary fiscal policies implemented by some countries, especially the United States with the New Deal. However, not all nations adopted these policies or they did it with the same intensity or opportunity.

What were the consequences of the Great Depression?

They were multiple and varied. So much in the economic field, as well as in the social and political. Some of the most important were:

  • The drop in consumption and investment generated a deflationary spiral that aggravated the situation.
  • Many countries took measures based on protectionism. This in order to favor their national industries. This made it difficult for world trade to recover.
  • The crisis too affected the international monetary systembased on the gold standard, which was gradually abandoned.
  • Some countries like the United States and Germany. They adopted intervention policies to promote employment, following the ideas of the economist John Maynard Keynes.
  • had a strong impact on the living conditions of millions of people.
  • The increase in unemployment and poverty caused the eviction of many families, who had to live in makeshift camps called “Hoovervilles”.
  • Was large migratory movements looking for better job opportunities.
  • The crisis also affected the health, education and culture of the population.
  • Many countries witnessed a rise in populist, nationalist, and totalitarian movements. They proposed authoritarian and radical solutions to problems.
  • caused a crisis of confidence in the democratic and capitalist system.
  • In Europe, fascism and Nazism gained ground and came to power in Italy and Germany.
  • In Asia, Japanese imperialism spread to China and the Pacific.
  • In Latin America, populist regimes emerged such as that of Getulio Vargas in Brazil or that of Lázaro Cárdenas in Mexico.
  • The Great Depression also contributed to the deterioration of international relations and the outbreak of World War II.