To what extent do you agree with the proposition:
The Great Depression was caused by the stock market crash.
As the longest and the most severe economic downturn since the beginning of the industrialised Western civilisation, the real origins of the Great Depression in the 1930s has always been a matter of debate among economists and historians. It is a commonly held opinion that the stock market crash caused the Great Depression. However, evidence indicates that although the stock market crash caused the Great Depression to a great extent, it wasn’t the sole factor that led to the event. As weakness in the banking system and the uneven distribution of wealth also caused the Great Depression considerably, the economic downturn was the result of a combination of multiple factors.
The stock market crash of 1929 not only caused extreme damage to personal investors and business, but it also led to the downward economic trend which led to the Great Depression to a great extent. Until 1929, the stock market was filled with optimism and confidence, as it had experienced rapid expansion throughout the decade and reached its new peak. However, the rise of unemployment and the decline of production at the time revealed the increasing danger and uncertainty in the economy, suggesting the market had already highly overvalued and overbought. The stock market crash started on October 24, 1929, when panic selling began, nearly 13 million shares were traded, and billions of dollars disappeared. Panic set in, and on October 29, known as Black Tuesday, stock prices collapsed as everyone was selling and no one was buying. In only one week, more than 30 billion dollars was lost, wiping out thousands of personal as well as business investors. The stock market crash devastated the economy, causing the loss of over 100 billion dollars of investments. People had to give up their life savings or sell their homes in order to pay the margin; many people became bankrupt. The unemployment rate reached 25% of the workforce. People who kept their job suffered from the crash too. When poverty struck America, wages experienced a significant fell of 42%. The previously thriving economy drop nearly 50%, the prosperity of the Roaring 20s had come to an end. The society suffered greatly after the crash, and it caused the Great Depression to a great extent.
Weakness in the banking system during the 1920s was responsible for the Great Depression to a considerable extent. Due to the significant increase of farm debt and the Federal Reserve’s distrust in the central banking system, the number of unit banks had reached 16000 before the Great Depression. Unit banks are an individual, small institutions that relied on their own financial resources. Unit banks usually only held a fraction of the deposits as a reserve, while loaning out the rest of it to personal as well as business borrowers. Therefore, without the financial support from other branches during the economic crisis, unit banks could be extremely vulnerable, closing down without sufficient money reserve to operate. Furthermore, as deposits were uninsured at the time, depositors lost all their money when a bank failed. Another weakness is the lack of efficiency regarding the mobilisation of bank reserves during the economic crisis. For unit banks, only a small portion of the reserves was kept in the vaults, while the vast majority of them were stored in correspondent banks in designated cites. In the end, a large portion of the money went to the Federal Reserve System, as it was the ultimate correspondent for many banks. As a result, when bank runs occurred, the reserve pyramid restrained unit banks to gain instant access to their reserve, which aggravated the shortage of reserves when crisis occurred. In 1930, the stock market crash triggered a wave of bank failures, which eroded the confidence in the security of banks in American people. Fearing their money would also disappear when banks stopped functioning, many people desperately tried to convert deposit into cash, which caused more banks to cease operating due to lack of financial reserve. The panic continued, and by the end of 1933, nearly 10,000 banks failed. It not only made thousands of people penniless, but it also damaged the consumer industry to a great extent. With the fundamental weakness in banking system during the 1920s, it led to the Great Depression to a considerable extent.
The uneven distribution of wealth in American society during the 1920s serves as another notable cause of the Great Depression. The wage gap between upper and lower class before the Great Depression was enormous. In 1929, the income of the wealthiest 1% of the population was equivalent to the income of the bottom 42% of the United States. The same 1% of people possessed 30% of the bank savings while 80% of American citizens did not even have bank savings. The influence and power of Labour Unions had declined since the last decade, and they were unable to bargain fair salaries for the average American citizens. In the meantime, due to the highly centralised wealth and power, big businesses and the rich were able to influence government policies and decisions. The wealthy could easily bribe the politician, manipulating them to approve or repeal certain regulations in order to maintain the state of concentration of wealth. It eroded the economy and financial system, causing an imbalance in wealth distribution. The Republican government passed a series of laws and legislation that favoured interests of big businesses and wealthy individuals, further increasing the disparity between social classes. The increased manufacturing output during the 1920s serves as another cause for the income imbalance between the wealthy and the working class. While the average productivity of workers in manufacturing field increased 32%, the average wages only experienced a minor increase of 8% due to exploitation from manufacturers. The average wages for American workers rose at a rate only a fourth as fast as productivity did. Because the cost of production fell greatly, average wages went up little, and prices stayed constant, most of the wealth generated by increased productivity became corporate profits. From 1923 to 1929, corporate profits increased 62%, and dividend increased 65%. The income gap between social classes increased the instability of the economy. It also had a negative impact on American’s purchasing power, causing serious under consumption in society. The uneven distribution of wealth caused the Great Depression considerably.
“In other periods of depression, it has always been possible to see some things which were solid and upon which you could base hope, but as I look about, I now see nothing to give ground to hope — nothing of man.” Just as former President Calvin Coolidge put it, the Great Depression marks the toughest and the darkest time for American people when all hope was lost. The long-lasting depression had caused many suffering, and it was not until World War Two had the country fully recovered from its damage. When it comes to the cause of the Great Depression, the economic recession was not directly caused by any singular event that occurred in the 1920s, rather a combination of a series factors. The stock market crash of 1929 caused the Great Depression to a great extent. Also, factors like weaknesses in the banking system and the uneven distribution of wealth between the rich and the poor contributed to the occurrence of the Great Depression to a considerable extent. Together all these factors led America to the Great Depression.
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