Friday, January 17, 2020

Causes of Economic Decline and Crash in the 1920s

Hello readers. It's been a while since I posted an update here on The Half-Pint Historian Blog. In that time, life has thrown me some curveballs, partly of my own doing, but the time away has done myself good as I was able to focus on the upcoming publication of my book with The History Press/Arcadia Publishing (I'll post an update about that probably in a couple of weeks), focus on putting together my presentation for History Camp in Boston in March, and focus on a new romantic relationship I'm in. This blog, though, isn't about what's been going on in my life, it's dedicated to the history of my country and so let us continue from where we left off. The previous post here on the blog was about the legal and constitutional issues in the 1920s, and this post will delve into the causes of the Great Depression, the economic downturn beginning in 1929 and lasting through the 1930s.



The stock market crash of 1929 was the worst economic crash in American history, carrying other countries to fall into economic downturns as well. According to history.com, the stock market crash began on Thursday, October 24, 1929 as stock investors traded a record 12.9 million shares. On October 28th, known as "Black Monday", the Dow Jones Industrial Average plunged 13% and then plunged another 12% the following day, on "Black Tuesday". While this economic crisis sent shockwaves throughout the country, there were signs that this crash was coming. The remainder of the this post will examine the causes of the inevitable stock market crash.

During the period of the Roaring Twenties, the economy and stock market expanded rapidly as the U.S. exited the Great War and entered into a period of manufacturing consumer goods rather than war goods and the introduction of buying on credit on a large scale, including the purchasing of stocks on margin.

From August 1921 through September 1929, the Dow Jones Industrial Average shot up, leading economists at the time to believe that the stock market had reached a permanently high plateau. The market officially reached its peak in September 1929 when the Dow Jones shot up to 381. By this point in history, even common working-class citizens became interested in the stock market and investing, and with the new purchasing power allotted to these workers in the booming economy, many were able to purchase stocks on margin, meaning they paid a small percentage of what the stock was worth and the bank or a broker lent the rest of the cost of the stock. Despite the purchasing of stocks on margin, which is undoubtedly one of the causes of the economic decline, the economy was in a boom cycle at the time--unemployment was down, purchasing power was up, and various industries were prosperous.

Although there is no one cause for the Great Depression, and economists and historians often debate about the primary cause, there are several theories as to the smaller bumps in the road which led to the Great Depression.


1. Overconfidence leading to a burst bubble--Just as the economy was on an uptick during much of the late 1990s through the mid-2000s, eventually leading to the crash of 2008, one of the causes of the Great Depression was overconfidence when it came to purchasing. Some economists and historians have argued that at the time of the crash, stock market prices were soaring to record highs (which can be both good and bad, as it would turn out), leading to a sense of overconfidence in how prosperous the U.S. economy was at the time as well as stocks being too expensive for many to purchase on their own without assistance from a broker or the bank. This led to an "asset bubble" which would burst.

2. Buying stocks "on margin"--With the economy on an uptick during the early 1920s, people who otherwise would not be able to purchase stocks and play the market were able to do so due to the ability to purchase stocks "on margin". This meant that rather than paying the full amount to purchase a stock, the buyer paid a percentage of the stock's cost while a bank or broker covered the remaining amount. This may have boost the stock market for a short time, but would have major repercussions in the wake of the stock market crash. When the crash occurred, millions of stock market shares became worthless and those who bought stocks "on margin" were saddled with debt they could not afford to repay.

3. Bank failures and distrust--In the 1920s and into the 1930s, the American banking system suffered distrust and hardship. Smaller banks had been forced to close, and as monetary deposits were not insured at the time, those with accounts in the banks that closed lost their money without the ability to gain it back. This led to a widesweeping distrust in the American banking system and many Americans began to cash their checks and withdrawal their funds. Due to that, many banks had to liquidate loans and assets in order to supplement their cash reserves  as they were insufficient.

4. Production decline and a rise in unemployment--What comes up must come down, and during the 1920s the U.S. industrial and manufacturing complexes hadd declined by half. Thousands of Americans lost their jobs and by 1931, more than 6 million Americans were unemployed. Homelessness became a common sight in American cities. Farmers couldn't afford to harvest their crops and often left them rottinin the fields while people elsewhere starved. Meanwhile, due to the Dust Bowl, there was a mass migration of people from rural farming areas to cities in search of employment.

5. Lack of European Competition--In order to attempt to protect American industry, Congress passed the Tariff Act of 1930. This act imposed significant tax increases on imported goods, making it so Americans would not wwwant to purchase goods produced outside of the U.S. However, this led to many of America's European trading partners imposing tariffs of their own, which limited American trade and thus led to a decrease in purchasing.

6. Drought Conditions--The environment played a role in the Great Depression as well. A years-long drought coupled with harsh farming practices that failed to use soil preservation techniques created a region known as the Dust Bowl, which comprised southeast Colorado down to the panhandle of Texas. Dust storms choked towns, killed livestock as well as people, damaged crops, and cause damage all arouuuuuund to the region. People fled the region for the cities, where they believed that the economic situation was better despite the contrary being the case.


There are other causes which led to the Great Depression, but these factors are labeled by historians and economic experts as being the most significant. These facttors would lead to various government reforms, which will be written about in a future post.

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2 comments:

  1. This was very well written blog. The reasons for the Great Depression that were listed makes a lot of sense. New ways of investing into the market that had never been done before helped set this up to be a very volatile recession. I'm no economist but just studying history on recessions it's obvious that the economy does a "reset" every so often. Between people's feelings and decisions help guide the stock market. The panic that was experienced during those dark days in October plus the margin buying with getting banks involved just made it a perfect storm.

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