Explain the Causes and Effects of the Great Depression.

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Explain the Causes and Effects of the Great Depression

By: Liran Morav

        The Great Depression was one of the most significant periods in American history. It came as a blow to the American people who were used to living in the “American Dream” (Paul. A., 1996, p.1), or the “Roaring Twenties”. The Depression was described as “The Rise and Fall of a Nation” (Tower Records, 1998). Lasting for about a decade, it is still considered to be “The worst economic slump ever in US history” (Paul. A., p.1, 1996). This essay will examine the causes of the Great Depression, and its effects on USA.

        Perhaps the events that most clearly associated with the Great Depression were the Wall Street crashes on October 24th and 29th, 1929. Although not acting as direct causes of the Depression, they worsened it to a horrible extent.

        The Crashes were inevitable. Premature market Speculation was common throughout the 1920’s, and it artificially increased shares’ value, allowing many Americans to become rich. It was only a matter of time until investors realized they were investing in what Aaron Gibes (cyberessays.com, 2002), an economist during the Depression, called “markets that were only prosperous ‘share-wise’ ”.

        Along with market speculation, the “Credit System” also made the crash inevitable. Stock Brokers prior to the Depression were so confident in the market that they began loaning people money to invest in shares. In return they asked for a percentage of the profit their clients would make. This system, also known as investing on the “Margin”, put more money in the stock market than people actually had. It worked well as long as the rise trend continued. Once shares’ value fell, however, brokers quickly demanded their money back from ordinary investors. These, in turn, reacted by selling their shares. This sequence of events resulted in a steeper fall in stock value, leading to a faster downfall of the market. (Brooman, p.26, 1997)

        Finally, by October 29th, “Bankers and the government were absolutely powerless to halt the crash, and… many of the fortunes so rapidly accumulated had been completely lost” (Smith, 1997, p.27). The rapid collapse of the American markets worsened poverty and unemployment throughout USA, symbolizing the “Downfall of the prestigious American economy” (Ernie Pyle, 1936).

        Another cause of the Great Depression was the uneven wealth distribution throughout USA. Despite the general raise in incomes and purchasing power throughout the 1920’s, most Americans did not get a share of the era’s prosperity. Throughout the 1920’s about 60% of the American population earned less than $2000 annually, which was considered to be the ‘poverty minimum’ (Sandiego.edu). The situation was so bad that during the same period, 5% of the population earned 33% of incomes (socialstudieshelp.com, 2002). As time passed, the gap only grew. Working class Spending was falling whilst production was increasing, thus resulting in the overproduction of consumer goods. Once every able American owned all possible consumer goods, industries had to drastically cut production. As a result, an increasing amount of workers were fired, and unemployment rose (Brooman, 1997, p.26).

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         An additional cause of the Great Depression (and closely related to that above) was the disproportional increase in incomes. Between 1923 and 1929 “average worker output increased 32% in manufacturing. During that same period of time, average wages for manufacturing jobs increased only 8%” (Paul A. p.1, 1996). This meant that purchasing power was decreasing in relation to productivity. As a result, the market became oversupplied with good that couldn’t be sold.

To solve the problem, businesses began selling their products through installment credit. The concept of ‘paying later’ appealed to many Americans who couldn’t afford buying ...

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