What Triggered the Great Depression?

Following the roaring twenties was a period of drastic economic downturn which resulted in the Great Depression. The decade that followed the stock market crash experienced high levels of unemployment. By 1933, unemployment levels had reached 24.9%.

The cause of the Great Depression remains controversial. There is no universally agreed explanation to why it happened.

The Great Depression began as a recession, between 1929 and 1933 the GDP fell by 36%. One of the causes of this that has been heavily discussed is the tighter monetary policy. The Federal Reserve had begun to raise the federal reserve rates in 1929 as they were concerned about excess liquidity further triggering a bubble. This resulted in less borrowing and less spending and this led to the nation’s GDP decreasing.

(Source: Unemployment during the great depression - Economics Help)

The Wall Street Crash is said to be the initial cause of the recession as real output rapidly declined after the collapse of  the stock market. However, many economists argue that the crash did not trigger the Great Depression as output was already declining before the stock market crashed. Economists believe that the two events are only slightly related.

The decline of consumer spending is another important trigger. There is no agreed upon opinion on why consumer spending declined like it did. Ben Bernanke has expressed his opinion, in the past, that the decline in consumer spending was caused by income uncertainty. People were unsure what the future held and therefore were less willing to spend their money especially on the stock market. Unemployment levels were also high, and therefore people has less disposable income. Temin (1976) argued that the fall in income levels was not the  reason  why consumer spending fell as during other recessions consumer spending remained stable.

Another trigger of the Great Depression is the Smoot-Hawley Tariff. As part of Hoover’s presidency campaign, he promised to protect American farmers by raising taxes on imports through the Smoot-Hawley Tariff to reduce competition. In response to this act, foreign countries began to raise their own tariffs on imports and soon global trade began to decline. During the 1930's, America was also suffering from a drought that dried soils. Hundreds of miles of farmland were impacted causing farmers to lose their farms and many farmers had to move in the search of work.

The reasons discussed in this blog post helped trigger the Great Depression, but the recession did not turn into the Great Depression until the 1930's. In my next blog post I will discuss what caused the Great Depression to deepen and become the worst economic disaster in history.