Economic Theories of The Great Depression

The great depression that lasted between 1929 and 1941 was a 12-year period that experienced an abrupt downward trend in GDP and took years to recover. We know that the US being brought into WW2 ended the depression, but there have been debates about what started the depression. Known as black Thursday, October 24, 1929, when investors heard about rising interest rates and an article written by the New York Times on Sunday, October 27, 1929, stating investigations in public holdings fueled more dumping of stocks on Tuesday, October 29, 1929[1]. The depression officially started with black Thursday and black Tuesday, but what caused that to occur is still speculation. We will look at some factors that may have caused the depression and may have caused it to last longer than expected.

To fully understand what caused the great depression one must look back at the financial effects of WW1 and how it affected the global economy. To fund the war, the federal reserve authorized the sale of liberty bonds, to bring money out of circulation and into funding for the war. This caused inflation to increase and the US government with a debt of $25 billion by the end of the war[2]. That didn’t cause the great depression but set the stage by creating imbalances in the economy. During WW1 the federal government offered guaranteed minimum prices for wheat and hogs and encouraged overproduction to send products overseas. In July 1920 farm prices collapsed due to the government stopping the guaranteed minimum prices and the lack of export demands[3]. Farm prices and revenue per bushel fluctuated but stayed on the decline over the next decade. Throughout the 1920’s farm coalitions called for legislation to maintain farm prices and income but was vetoed twice by President Coolidge in 1926 and 1927. Legislation was passed in 1929 for government loans to farm cooperatives to hold products until prices stabilized. This was a temporary band aid for the cooperatives until the federal funded program ran out of money in 1933. This eventually led to many farmers losing their farms and livelihood, picking up their families and attempting to move where there may be potential work. By this point in 1933 a quarter of the US population was unemployed and more than just farming families were feeling the effects of the depression.

The Treaty of Versailles was a major factor that led to an economic global downturn in the 1920’s, which led to The Great Depression. The treaty was signed in 1919 following the end of WW1, it placed blame on Germany and forced them to pay substantial reparations, lose territory and industrial capabilities, and resulted in economic instability. Germany was forced to pay 32 billion dollars to the reparations commission starting in May 1921. The only viable option they had was to borrow money and print currency, this led to levels of inflation never seen. Prior to the printing the German Mark was exchanged at 8.9 to 1 US Dollar, after printing the Mark inflated to an exchange of 25 billion Marks to 1 US Dollar. In April 1924 Germany and the reparations committee created the Dawes Plan, it allowed Germany to have an international loan in exchange for American and British investors to purchase German railway and industrial bonds at below face value. The latter half of the 1920’s consisted of American investors making money off German industries, France and Britain receiving reparation payments from Germany. Following the New York Stock Market collapse of 1929, Germany was no longer receiving money for bonds from the US and Germany was unable to pay reparations to Britain and France. By 1933 German industrial production dropped by 50 percent and unemployment rose to 13.3 percent[4].

The culmination of 1933 led to US President Roosevelt to establish the new deal, a series of domestic programs, public works projects, financial reforms and regulations. A major proclamation made by President Roosevelt was to suspend the gold standard, a policy that the US had been under since 1879. The gold standard was a monetary system where the value of a country’s currency was fixed to a specific amount of gold. In 1933 the price of gold was $32.32 per ounce, which is over $700 today. Americans were losing faith in paper currency during the depression and started hoarding gold instead of exchanging gold for paper currency. Therefore, Roosevelt signed Executive order 6102, requiring all people to deliver on or before May 1, 1933, all gold but a small number of coins to the federal reserve in exchange for $20.67, slightly over $500 today[5]. This was done to increase circulation of paper currency to boost the economy. However, in 1934 the Gold Reserve Act changed the value of gold from $20.67 to $35 an ounce[6]. This devalued the dollar by needing less gold to back it, in turn allowing more paper currency to be printed and put into circulation.

It’s difficult to put one’s finger on the one act or date that caused the Great Depression, but easier to look at it as a multitude of factors over time that led to it. We covered only a few factors and glimpses into the many issues following WW1 that eventually led to the depression and acts in the 1930’s that may have exacerbated and prolonged the depression. It’s simpler to look back at the past and wonder how they didn’t see certain aspects of history coming, but at the time no one knows what to expect and what the ramifications may be. We need to learn from history and avoid what went wrong, while trying to do what may be right for the greater good.

[1] Bierman, Harold, jr., 2023. “The 1929 Stock Market Crash.” Economic History Association, Cornell University, https://eh.net/encyclopedia/the-1929-stock-market-crash/#:~:text=Tuesday%2C%20October%2029%2C%201929,by%20more%20than%20$5.1%20billion.

[2] Davies, Phil, 2013, “The Federal Reserve’s Role During WW1.” Federal Reserve History, https://www.federalreservehistory.org/essays/feds-role-during-wwi#:~:text=The%20New%20York%20Fed%20was,the%20money%20supply%2C%20fueling%20inflation.

[3] Rasmussen, Wayne, nd. “Historical Overview of U.S. Agricultural Policies and Programs.” Agricultural Food Policy Review: Commodity Program Perspectives, Accessed November 19, 2024, https://www.ers.usda.gov/webdocs/publications/40556/50960_aer530b.pdf?v=0#:~:text=World%20War%20I%20led%20to,with%20the%20trend%20always%20down.

[4] Olsen, Sven, nd. “Seeds of Weakness: The Impact of the Treaty of Versailles on the Economic Collapse of the Weimar Republic.” Loyola University New Orleans, Accessed November 19, 2024, http://cas.loyno.edu/sites/cas.loyno.edu/files/Seeds%20of%20Weakness_The%20Impact%20of%20the%20Treaty%20of%20Versailles%20on%20the%20Economic%20Collapse%20of%20the%20Weimar%20Republic.pdf

[5] Roosevelt, Franklin, 1933. “Executive Order 6102-Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates.” The American Presidency Project, https://www.presidency.ucsb.edu/documents/executive-order-6102-forbidding-the-hoarding-gold-coin-gold-bullion-and-gold-certificates

[6] Richardson, Gary, 2013, “Gold Reserve Act of 1934.” Federal Reserve History, https://www.federalreservehistory.org/essays/gold-reserve-act