Causes of the 1929 Crisis
The crisis of 1929, known as the Great Depression, marked a significant downturn in the global economy that lasted from 1929 to 1939. Several factors contributed to this economic catastrophe, with the most notable being outlined below:
Stock Market Crash of 1929
The year 1929 saw a significant decline in the stock market, igniting panic among investors who had heavily invested their funds when stock prices soared to unprecedented levels. Many believed that the rising prices represented a straightforward path to wealth. However, as stock prices began to plummet, investors rushed to liquidate their holdings, but found no buyers. This downward trend continued until stock prices dropped by 33%, leading to a widespread loss of confidence in the market.
Errors Made by the Federal Reserve
Many argue that the Great Depression was exacerbated by decisions made by the Federal Reserve. In an effort to protect the gold standard, which tied the value of many currencies to a fixed amount of gold, the Fed raised interest rates. This action resulted in a contraction of lending, as the Fed believed that reducing the money supply was necessary. However, the decrease in money supply triggered falling prices, ultimately leading to diminished lending and investment and worsening the Great Depression.
Vulnerabilities in the Global Economy
The global economy exhibited numerous vulnerabilities as it evolved in various countries. In the 1920s, nations were beginning to recover economically after World War I, but consumer interests shifted dramatically. For instance, American consumers increasingly focused on purchasing durable goods such as electronics and automobiles rather than other types of products.
This surge in consumption greatly enhanced the wealth of business owners but also made them more susceptible to sudden changes in consumer confidence. Simultaneously, fierce competition among exporting countries intensified, eroding cooperation, which was essential for managing the international financial system. The inability of countries to work collaboratively in addressing financial challenges diminished the effectiveness of individual nations’ efforts to self-manage their economic issues.
Gold Standard
In the wake of the stock market crash, anxious investors began to exchange their dollars for gold. At the time, the United States, like several other nations, adhered to the gold standard, allowing dollars to be convertible into gold. Consequently, there was a substantial influx of foreign gold into the United States.
This situation prompted foreign central banks to increase interest rates in an effort to mitigate the threat posed by the United States to their currencies, which risked devaluation as their gold reserves were depleted from exchanges with anxious investors. This increase in rates contributed to reductions in production, prices, and a significant rise in unemployment, consequently deteriorating economies in numerous countries.
Consequences and Effects of the 1929 Crisis
The roots of the Great Depression originated in the United States, yet its repercussions rippled through economies nearly worldwide, yielding numerous results and effects, summarized as follows:
Economic Consequences
The economy diminished by 50% in the first five years of the Great Depression, beginning in 1929, while the Consumer Price Index (CPI), a measure of inflation, also declined. This drop in prices triggered bankruptcies among many businesses and led to soaring unemployment rates, which peaked at 24.9% in 1933.
Social Consequences
The Great Depression wreaked havoc on the agricultural sector, driving prices for agricultural products to abysmal lows for nearly a decade. Many farmers were forced to migrate in search of work, becoming homeless. The severity and prolonged nature of the economic downturn fostered widespread despair, leading citizens to believe that the American Dream of prosperity and guaranteed rights had dissipated.
Political Consequences
The 1929 crisis undermined confidence in the capitalist system within the United States, particularly principles of non-intervention championed by President Herbert Hoover. This disillusionment resulted in the election of Franklin D. Roosevelt, who implemented a series of measures aimed at alleviating the economic downturn.
Effects on Banks
During the depression, one-third of the banks in the country failed. Consequently, depositors lost an estimated $140 billion in their bank accounts, as institutions had utilized these funds for investments in the stock market. This situation prompted many to withdraw their savings hastily, leading to the closure of numerous banks.
Effects on the Stock Market
Between 1929 and 1932, the stock market lost 90% of its value and did not recover for 25 years. As a result, public trust diminished, leading to significant losses for companies, banks, and individual investors alike, including those who had not directly invested in the market.