Very few Americans owned stocks in the 1920s. When the market crashed in 1929, so very few felt the direct affects of the crash. The market actually began to rebound after the crash and it appeared the economy would survive. By 1930, the market had recovered 73% of its losses. So why did the Great Depression Happen? There are number of reasons that could have been avoided if those making the decisions would have been aware of what was going on.
Here are the steps that were taken that put the country and the world towards the largest economic collapse in history.
- The Federal Reserve, for some weird reason, decided to raise interest rates by 1% in the months before the stock market crash of October 1929. This spooked investors and they began to sell stocks in large numbers.
- The Smoot-Hawley Act of 1930 increased tariffs on 20,000 goods imported to the United States. Other countries responded in-kind and put tariffs on American goods, thus hurting Americans, including most farmers, dependent on exports. This contributed to the onset of the Great Depression
- The run on banks and the eventual collapse of banking system is when the Great Depression officially began. The banking system at the time had no FDIC protections and many of them were “mom and pop” banks ran by small business owners. When people started to get worried about the economy, they started withdrawing their money. Most banks did not have enough money in their reserves to pay out all the people demanding their money. This caused great panic as people realized their banks were collapsing. Hoover, and later Franklin Roosevelt, ordered banking holidays, it wasn’t enough. The Great Depression had began.
The stock market crash of October 1929 was a terrible day, but there were so many poorly planned government policies that led to the Great Depression. Many of the prime players in the collapse, the Federal Reserve, Congress, and President Hoover were not aware of the implications of their polices since there had never been a Great Depression, but they may could have stopped it early on if they would not have placed tariffs on good and the Federal Reserve would have had better monetary policy. I will close from a statement from Ben Bernake, who was the Federal Reserve Chairperson in 2002 when this statement was given.
“Regarding the Great Depression, … we did it. We’re very sorry. … We won’t do it again.” -Ben Bernake, Federal Reserve Chairperson
