FREE ESSAY ON THE CAUSE OF THE GREAT DEPRESSION

THE CAUSE OF THE GREAT DEPRESSION

The economic expansion of the 1920's, with its increased production of goods and high
profits, culminated in immense consumer speculation that collapsed with disastrous
results in 1929 causing America's Great Depression. There were a number or contributing
factors to the depression, with the largest and most important one being a general loss
of confidence in the American economy. The reason it escalated was a general
misunderstanding of recessions by American policymakers of the time.
The U.S. economy was booming in the 1920's. Stocks prices soared, as they were bought on
margin for as little as 10% down. Market speculation is cyclical-that is, if one stock
appears profitable, you buy it, which causes the price to rise and others to buy as well.
However, the economy was not stable. National wealth was not distributed evenly. Instead,
most money was in the hands of a few families who saved or invested rather than spent
their money on American goods. Thus, supply was greater than demand, and some people
profited, but others did not. As such, the bubble had to inevitably burst, since the
stock market boom was very unsteady and people borrowed money on false optimism.
Black Tuesday in 1929 was that bubble burster. In the summer of 1929, a few stock market
investors began selling their stock. They predicted that the bull market might end soon,
leaving them in debt. Seeing these few investors begin to sell, others soon followed to
minimize their losses, creating a domino effect, which exacerbated the situation.
Regardless of the governments attempt to place the modern equivalent of tens of billions
of dollars into certain banks, the liquidation continued, as folks wanted out quickly at
whatever cost. Many people lost as much as ten times their initial investment, which
shook consumer confidence. In an effort to cover their margins, people rushed the banks
in masses, demanding their money. Soon, banks began to run out of cash and went bust. 
With the economy falling in shambles and companies defaulting on loans, nearly all
private and corporate investment ceased. Companies couldn't afford to expand, and in
fact, many had to consolidate in order to cover the margins on their loans. This meant
postponing hiring and laying workers off, which caused unemployment to skyrocket. With
people now willing to work for less money, wages lessened too. At the same time prices
rose in an attempt by companies to make some amount of profit off the goods.
Because the governments' prevailing economic theory was based on laissez-faire economics,
the government believed that recessions were self-correcting. Eventually unemployment and
inflation stopped declining, but not before the U.S. lost 1/3 of it's output and 25% of
the workforce was unemployed.
In the end, it was World War II that brought us out of the Great Depression. With war at
hand, the government began pumping massive amounts of money into the economy. Production
and inflation increased. More jobs were available and wages rose. At the war's end there
was a brief recession while the economy reacted to a loss of the money the government had
been pumping in, but the big picture demonstrated American optimism for victory was high,
and as such the faith of Americans in their country followed their increased patriotism.
The market had finally corrected.