How over speculation caused The Great Depression
This article will discuss how over speculation caused The Great Depression. For that, the article explained what The Great Depression was, and what were the other causes of it.
What was The Great Depression?
The Great Depression was a period between 1929 and 1939 in which the American economy went on a downturn, causing a huge effect all over the world. It was the highest economic crisis in the Western world.
Although it started in the United States because of a program called the golden standard, that handled the currency exchange through each country, all the other countries in the world were affected. But differently than Europe and America were extremely affected, in Asia and Latin America, there was only a mild effect.
It had many economical effects such as the high rate of unemployment, intense deflation, change in industrial production. Aside from that, it intensely impacted people’s lives. It changed how they dealt with money, and how families handled job opportunities.
During that time, many weddings were canceled, and the birth rate got lower. Kids that were born around that time had to grow fast to start and help their families survive. Aside from that, many women entered the workforce as a way to try to improve family income.
But after it, many labor laws were also created. The Social Security act that was created in the 1940s established the 40 hour week of work, the minimum wage, and prohibited child labor.
The Great Depression also had many political and cultural effects. After it, many laws around how banks work were created. After The Great Depression, it was created the
Federal Deposit Insurance Corporation (FDIC), guarantees that if the bank closed, people wouldn’t lose their money.
Now that you have a better notion of what The Great Depression was, let’s discuss if over speculation was responsible for causing it, and what were other factors may have impacted this process.
Did over speculation cause The Great Depression?
Yes, over speculation was one of the causes of The Great Depression. It started in the early 1920s when the economy in the United States was booming. Although there was a great disparity between rich and poor, the industry in America, especially the automobiles industry was going strong.
This differed a lot from what other countries, such as European countries were going through. They were still recovering from World War I, and because of that, we’re experiencing an economic decline.
Because the economy in the United States was so good, people started to look at opportunities to invest their money, and many of them started to invest in stocks. During that period, there weren’t many regulations for such investments or about how banks should work. This process is known as speculation.
As people started to invest indiscriminately in stocks, what is called over-speculation, they became more and more expensive, because it was a demand and offer process that put the price in it. This made people buy stocks even with the credit they got from the bank.
But since this process wasn’t based on the real increase of the value of the companies, it became a bubble. At some point, the economy started to slow down, and that is when everyone started to sell their stocks, scared that they would lose money.
This caused the famous crash of Dow Jones on The 29th of October of 1929, which was one of the main causes of The Great Depression. Let’s discuss what are other causes of The Great Depression after the over-speculation led to the crash of 1929.
What were other causes of The Great Depression?
The Great Depression was caused by many factors that impacted, not only the over speculation. But let’s discuss how it all went down.
Failure of many baking institutions
As soon as the market crashed people panicked. They started to withdraw money from the banks. They were so scared that they would become bankrupt, that it felt safer having the money in their hands. This caused many banks to fail. In that time, from the 25 thousand banks that existed in America, 11 thousand of them closed.
No more credit is available
As people took their money out of the banks, they were unable to offer more credit to people. This inability to have credit made The Great Depression even worse.
Change of spending habits
Since people were feeling extremely insecure about how the economy would work, and because many had become unemployed, getting to a point where 25% of Americans were unemployed, people’s spending habits changed.
They were no longer interested in buying things, or even services. This caused a crisis in demand, which made many industries close.
Aside from all the economic mischief, America still had to deal with a problem that came from nature. Before The Great Depression, the country’s wealth was divided between industry and farming.
But between 1930 and 1936 many states in the Midwest experienced a terrible drought that came to be called the Dust Bowl. It caused more than a million acres useless, and left many farms in the unemployed statistics as well, being another factor that contributed to The Great Depression.
With all of this, it is possible to assume that The Great Depression wasn’t only caused by over speculation. It rather was caused due to a confluence of factors. Some related to how people handled money back then, but also because of how dismissive the government was in creating rules to regulate investments.
Frequently Asked Questions (FAQ): Did over speculation cause The Great Depression?
Was President Hebert Hoover responsible for The Great Depression?
Yes, in some ways it is possible to say he was responsible for The Great Depression. As he got in charge, he had some ideas of what he wanted to do around labor laws and credit lines. In 1929 he created some pro-labor laws that had a direct impact on the gross domestic product, causing it to decline even more.
It is said that by his actions, the recession in which America was already in turned even worse, in The Great Depression. With his pro-labor laws, he made wages higher than they should have been, and once The Great Depression was set, he couldn’t find ways to fight the problems.
And only when Roosevelt took over, and created the New Deal it was possible to get some relief from the effects The Great Depression had brought to the country.
What does over speculation mean in the stock market?
In the stock market speculation means people are making an excessive amount of business, in this case, trading stock, to a point it can be detrimental for the economical health of a country.
When there is an over-speculation, be it of stocks, as it was before the Great Depression, be it of real estate, as it was in America during the crisis of 2007 and 2008, once there is an overinvestment in one area, it can lead to its decrease in value, since everyone has it, it is not as valuable anymore, which can make the market crash.
That is why it is important to have rules, such as the ones that were created after the Great Depression, to help control the selling and buying of stocks, so it doesn’t turn into this over the speculative market again.
What caused the crisis in 2008?
The global financial crisis of 2007 and 2008 was an intense one that affected many countries around the planet, and it was the worst economical crisis since the Great Depression.
It was caused by the real estate bubble that America was in, the intense availability of credit that focused on low-income buyers getting a house, and how risky the actions of the financial market were taking globally.
In the same way as the Great Depression, caused stock markets to crash, people took their investments out of the banks, and markets. It also led to governmental support, such as the one that George W Bush gave, called the Emergency Economic Stabilization Act of 2008.
Along with that, credit became harder to get, and after riots that spread through many countries, in the summer of 2009, it was possible to see that the economy was finding its stable pace again. After it, the same way as after the Great Depression, some rules were applied to prevent such an intense crisis from happening again.
President Barack Obama created the Volker Rule, which created a limit on how banks could be a part of property trading. He also created the Financial Crisis Responsibility Fees that were supposed to make the banking system more stable.
What was the Black Tuesday?
Black Tuesday was on the 29th of October of 1929z it was the day when the market stock crashed. Although stocks were things everyone was buying beforehand, they took a turn for the worse.
Because the stocks were going down, people started to sell them, and the more they sold, the more they lost their value. Until on Black Tuesday, it reached its lowest point, sinking the American economy, which was already in recession, to the point of the break.
Because of that last straw, America got in the Great Depression and spread its economic misfortune all over the globe.
How did The Great Depression affect each social class?
Before The Great Depression American society was divided into the lower class, middle class, and higher class. The lower class, which was mostly made of African American workers, was the one that was most affected by The Great Depression.
Those were people that went through starvation, needed shelter, and got into soup or bread lines to get something to eat. They were the first ones to become unemployed, and we’re the ones that lost everything. The people from the middle class had to be careful about the money they had.
Some of them lost everything and went on to be a part of the lower class. Especially the ones that were in farming, and experienced The Dust Bowl. As for the higher class, some of them experienced some loss of their economical power, while others remained living their lavish lifestyle, and some got even richer through The Great Depression.
This article discussed how over speculation caused The Great Depression. Aside from that, it showed what was The Great Depression, and what were other causes of it.
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