The Depression of the 1930s and Its Origins or Causes (2024)

San José State University
applet-magic.com
or Causes Thayer Watkins
Silicon Valley
& Tornado Alley
USA
The Depression of the 1930's and Its Origins or Causes

The terrible, terrible conditions which occurred in the United States and the rest of the world in the 1930's are known as the Great Depression. This depression was not only an economic catastrophe, it was social and political catastrophes as well. Its origins then and even now are notentirely clear. The document is an attempt to tell the story of theDepression in terms of statistics in the form of graphs and tables.

The first statistic for demonstrating the decline of the economy intodepression is the unemployment rate.

The Depression of the 1930s and Its Origins or Causes (1)

As the above graph indicates the economy descended from full employment inin 1929 where the unemployment rate was 3.2 percent into massive unemploymentin 1933 when the unemployment rate reached 25 percent. The first questionis why was there such high unemployment in 1933. The answer is that theeconomy was not producing (because it could not sell) as much output as itwas capable of producing. The output of an economy is measured by itsGross Domestic Product and the graph below shows the decline in productionfrom its high point in 1929 to its low point in 1933.

The Depression of the 1930s and Its Origins or Causes (2)

The decline in GDP, while dramatic, is not so spectacular as the explosionin the unemployment rate. This is because the umemployment rate representswhat is not produced that could be produced. A graph showing the percentageof the labor force employed would look much the same as the GDP graph. Whilethe Depression was a catastrophe it is well to keep in mind that at worst75 percent of the labor force was employed. But, the important question iswhy production had fallen off so much in 1933 compared with 1929. Here itis instructive to look at the components of the demand for the nation'soutput. The output is purchased by consumers, business investors, governmentsand foreign buyers as exports. The purchases of U.S. output by foreignbuyers is offset by American purchases of foreign production as imports.A glance at the table below tells what was happening to the components ofdemand.

YEARGDPCON
SUMP
TION
INVEST
MENT
GOVERN
MENT
PUR
CHASES
EXPORTSIMPORTSNET
EXPORTS
1929790.9593.992.4105.435.646.3-10.7
1930719.7562.159.8116.229.440.3-10.9
1931674.0544.937.6121.224.435.2-10.8
1932584.3496.19.9117.119.129.2-10.1
1933577.3484.816.4112.819.230.4-11.2

The above table indicates that consumer purchases fell somewhat, governments'purchases did not fall but there was a collapse of investment purchases. Exportsfell but imports fell as well so that there was not much of a change innet exports. It is investment purchases, the purchases of equipment andbuildings and inventory, which is the dramatic case, as shown below.

The Depression of the 1930s and Its Origins or Causes (3)

Consumer purchases fell also but this may have been an effect of the Depressionrather than a cause of it. People's incomes fell and quite naturally theyreduced their purchases. It is therefore reasonable to look into thecollapse of investment purchases for an explanation of the causes of theDepression. The collapse of investment purchases can be considered theimmediate cause of the Depression. The next question is why did investmentpurchases collapse so dramatically.

Interest rates affect investment. They are not the only thing thatdetermines the amount of investment and are not necessarily even the mostimportant determinant of investment but they do affect investment and sointerest rates need to be considered. The important thing concerning theaffect of interest rates on investment is that it is not the nominalinterest rate that is important but instead the interest rate relative tothe rate of inflation, the so-called real interest rate. The real interestrate is roughly the difference between the nominal rate and the rate ofinflation. The problem in the early 1930's was that the rate of inflationwas negative; i.e., there was deflation instead of inflation.

YEARPRICE
INDEX
RATE OF
INFLATION
%
NOMINAL
INTEREST
RATE
%
REAL
INTEREST
RATE
%
192913.12-1.155.857.00
193012.60-3.963.597.87
193111.34-10.002.6414.04
193210.05-11.382.7315.92
19339.78-2.961.734.54

As the above table shows the nominal interest rate was declining over thecourse of the decline but because the rate of inflation was negative thereal interest rate was much higher than the nominal interest rate. Thefollowing graph shows the trends.

The Depression of the 1930s and Its Origins or Causes (4)
-->

The high real interest rate which came as a result of deflation couldhave been a major factor in the collapse of investment which was theimmediate cause of the Depression. To find a cause of the deflation inthe early 1930s we should look at monetary policy and the money supplyduring those years. Here is the record of the quantites of money beforeand during the decline into the Depression.

The Depression of the 1930s and Its Origins or Causes (5)

M1 is the money supply including currency and demand deposits (checking accounts).M2 is M1 plus the savings account deposits. As can be seen, after 1929 all but one of thequantities declined at increasing rates. The amount of currency in circulation actuallyincreased but it is such a small component of the money supply its increase was of nosignificance.

The significance of the money supply is its correlation with the price level. Here is thecorrelation of M2 with te consumer price index.

The Depression of the 1930s and Its Origins or Causes (6)

For more details on the money supply and the Depression see Monetary Policy and theMoney Supply

Appendix

YEARGDPCON
SUMP
TION
INVEST
MENT
GOVERN
MENT
PURCHASES
EXPORTSIMPORTSNET
EXPORTS
1929790.9593.992.4105.435.646.3-10.7
1930719.7562.159.8116.229.440.3-10.9
1931674.0544.937.6121.224.435.2-10.8
1932584.3496.19.9117.119.129.2-10.1
1933577.3484.816.4112.819.230.4-11.2
1934641.1519.031.5127.321.431.1-9.7
1935698.4550.958.0131.322.640.7-18.1
1936790.0606.975.5152.523.740.2-16.5
1937831.5629.794.0147.029.945.3-15.4
1938801.2619.561.3157.829.635.2-5.6
1939866.5654.079.5171.831.236.9-5.7
1940941.2688.0111.3174.235.437.8-2.4
19411101.8737.1137.3288.036.446.5-10.1
19421308.9719.772.1692.023.942.2-18.3
HOME PAGE OF applet-magicHOME PAGE OF Thayer Watkins
The Depression of the 1930s and Its Origins or Causes (2024)

FAQs

The Depression of the 1930s and Its Origins or Causes? ›

Among the suggested causes of the Great Depression are: the stock market crash of 1929; the collapse of world trade due to the Smoot-Hawley Tariff; government policies; bank failures and panics; and the collapse of the money supply.

What were the causes of the Great Depression of the 1930's? ›

The Great Depression was the worst economic crisis in modern history, lasting from 1929 until the beginning of World War II in 1939. The causes of the Great Depression included slowing consumer demand, mounting consumer debt, decreased industrial production and the rapid and reckless expansion of the U.S. stock market.

What was a significant cause of the Great Depression of the 1930's group of answer choices? ›

(1) The stock market crash of 1929 shattered confidence in the American economy, resulting in sharp reductions in spending and investment. (2) Banking panics in the early 1930s caused many banks to fail, decreasing the pool of money available for loans.

What was one of the most important causes of the Great Depression was the fact that during the 1920's? ›

There were many aspects to the economy of the 1920s that led to one of the most crucial causes of the Great Depression - the stock market crash of 1929. In the early 1920s, consumer spending had reached an all-time high in the United States. American companies were mass-producing goods, and consumers were buying.

How did the depression of the 1930s contribute to the causes of World War? ›

In summary, the Great Depression of the 1930s created conditions that enabled the rise of totalitarian regimes, intensified resource competition among nations, and weakened international diplomacy, all of which contributed to the causes of World War II.

Which of the following best explains the main cause of the Great Depression of the 1930s? ›

A significant aspect was the instability within the financial system, characterized by credit despair and subsequent panic. The correct option that best explains this cause is C. Episodes of credit and market instability undermined the financial system.

What are the main causes of the Great Depression Quizlet? ›

  • #1. Stock Market Crash. -Throughout the 1920s, people invested in the stock market in hopes of making money. ...
  • #2. Banking Crisis. -People deposit money in banks for safe-keeping. ...
  • #3. Overproduction. -Industry thrived in the 1920s because of mass production. ...
  • #4. Under-consumption. -By 1929 the buying spree began to end.

What was the event that triggered the depression of the 1930's? ›

The Great Depression was a worldwide economic downturn that began in the fall of 1929 and did not end in many places until the Second World War. It was triggered in large part by a sudden crash of the American stock market on October 29, a day widely known as Black Tuesday.

What president was blamed for the Great Depression? ›

By the summer of 1932, the Great Depression had begun to show signs of improvement, but many people in the United States still blamed President Hoover.

What were two basic causes of the Dust Bowl during the early 1930s? ›

What circumstances conspired to cause the Dust Bowl? Economic depression coupled with extended drought, unusually high temperatures, poor agricultural practices and the resulting wind erosion all contributed to making the Dust Bowl. The seeds of the Dust Bowl may have been sowed during the early 1920s.

What was the number one cause of the Great Depression? ›

The Great Depression started following the stock market crash of 1929, which wiped out both private and corporate nominal wealth.

Which event triggered the onset of the Great Depression of the 1930s? ›

The Stock Market Crash of 1929.

What are two important facts about the Great Depression? ›

At the height of the Depression in 1933, 24.9% of the nation's total work force, 12,830,000 people, were unemployed. Wage income for workers who were lucky enough to have kept their jobs fell 42.5% between 1929 and 1933. It was the worst economic disaster in American history.

What caused the Great Depression of the 1930s? ›

What were the major causes of the Great Depression? Among the suggested causes of the Great Depression are: the stock market crash of 1929; the collapse of world trade due to the Smoot-Hawley Tariff; government policies; bank failures and panics; and the collapse of the money supply.

Which war led to the Great Depression? ›

The origins of the Great Depression were complicated and have been much debated among scholars. The initial factor was the First World War, which upset international balances of power and caused a dramatic shock to the global financial system.

What helped to end the Great Depression in the United States? ›

In the short term, New Deal programs helped improve the lives of people suffering from the events of the depression. In the long run, New Deal programs set a precedent for the federal government to play a key role in the economic and social affairs of the nation.

What caused the large drop from 1930 to 1950? ›

The large drop between 1930-1950 was caused by the Great Depression, which was triggered by factors like an agricultural recession, a speculative stock market bubble, and a reduction in the demand for goods and services.

What caused the crash of 1929? ›

What Were the Causes of the 1929 Stock Market Crash? There were many causes of the 1929 stock market crash, some of which included overinflated shares, growing bank loans, agricultural overproduction, panic selling, stocks purchased on margin, higher interest rates, and a negative media industry.

Which of the following contributed most to causing the Great Depression? ›

The lack of regulation on speculation in the stock and real estate markets, leading to the 1929 stock market crash, contributed most to causing the Great Depression. Protective tariffs like the Hawley-Smoot Tariff Act also worsened the situation by significantly reducing international trade.

What was the cause of the Great Depression for kids? ›

There was no single cause, but several things factored together made it happen. A weak banking system, overproduction of goods, overspending, and bursting credit bubble were just some of the reasons. The Wall Street Crash of 1929 was one of the main causes of the Great Depression.

References

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Tyson Zemlak

Last Updated:

Views: 5431

Rating: 4.2 / 5 (63 voted)

Reviews: 86% of readers found this page helpful

Author information

Name: Tyson Zemlak

Birthday: 1992-03-17

Address: Apt. 662 96191 Quigley Dam, Kubview, MA 42013

Phone: +441678032891

Job: Community-Services Orchestrator

Hobby: Coffee roasting, Calligraphy, Metalworking, Fashion, Vehicle restoration, Shopping, Photography

Introduction: My name is Tyson Zemlak, I am a excited, light, sparkling, super, open, fair, magnificent person who loves writing and wants to share my knowledge and understanding with you.