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Causes and Consequences of the Great Depression

In 1929, the stock market of the United States crashed and the stock market values declined significantly, an event often referred to as the Great Crash/the Wallstreet Crash. This major crash in the stock market was what led to the great depression which was a serious worldwide economic decline that started in the United States in the year 1929 and lasted for about 10 years. It caused a dramatic decline in production and output, high unemployment rates, and acute deflation all over the world. During the mid-1920s, all the way to the late 1920s, the United States stock market experienced rapid expansion as the stocks soared to great heights and people rushed to brokers to invest liquid assets and savings to sell at a profit. People poured all their money into the stock market from the wild speculation that convinced people to borrow money to buy shares.[1] To many people’s surprise, the stock prices begun to decline until the market went into a freefall as people rushed to sell. What followed was that American and the rest of the industrialized world fell into the great depression.

By this time, production had already deteriorated and unemployment rates had risen tremendously, leaving stocks in great excess of their actual value. What is more, wages declined, the agricultural sector started struggling and huge bank loans could not be liquidated. Investment corporations and top bankers tried stabilizing the market by purchasing the huge amounts of stocks but what followed was a free-falling market and stocks collapsed completely. Many investors were wiped off as billions of dollars were lost. Due to the lack of employment as a result of the depression, people had low buying power. Therefore, the demand for goods was extremely low. Consequently, low demand resulted in low production and output thus a low general economic output. Like a chain reaction, the decline in economic output led to a decline in consumer confidence as consumers were not only unsure of the overall state of the economy but also a majority of these consumers were unsure of their financial situation as most of them did not have a stable income.

The 1929 wall street crash is arguably the first cause of the great depression. It destroyed considerable wealth and most importantly, it sparked qualms about the wellbeing of the economy which made consumers and corporations to cut back on spending. Even though it had a huge impact on world economy, the stock market alone did not cause the great depression.[2] Instead, it snowballed into other occurrences that led to the great depression. Some economists believe that protectionist trade policies and international trade collapse contributed to the great depression.

As businesses failed during the great depression the government of the United States, in an attempt to protect American companies, created the Smoot-Hawley Tarif which meant that imports would be highly taxed leading to less trade relations between America and foreign countries, which affected the American foreign policy. The new tariff led to retaliatory actions by the United States’ major trading partners with foreign countries.[3] It has been argued that WWI was one of the factors that led to the great depression. The United States’ involvement in the Second World War had a huge impact on its workforce and economy. At the start of the war, the US was still recovering from the Great Depression because the unemployment rate was still high and the economy was still struggling to stabilize. Therefore, the involvement of the United States in the war meant that most of the economic activities would be aimed at supporting the war. Most of the American factories began producing goods to support the war and this further led to a rise in the unemployment rate and, as more men went into the war, more women began working in factories. As a result, economic production was greatly affected.

The US stock market crash, together with the economic downturn that happened in Germany and the financial crisis in Great Britain and France coincided to cause the global financial crisis. The main factor that led a national economic difficulty into a worldwide depression is seen as a lack of international coordination as governments, together with financial institutions turned inwards. The great depression destabilized global politics from Asia to Europe as economies all over the world were greatly affected. The US requested accelerated reimbursement of their post war (World War I) to Germany, a country already suffering economically (inflation, economic downturn, crippling post war financial reparations). This had a direct contribution to the quasi collapse of the economy and particularly the hyperinflation that have helped the Nazis gain power. The rest as well known, led to the largest disaster Europe had ever seen. Notice that the US debt repayment has only contributed to the terrible German economic crisis. It is interesting to know that the inter-world war hyperinflation in particular is so entrenched in the German memory that to our days the German politicians are wary about it and insist, sometimes counter productively, on austerity measures to control overall European debt.

After the wall street crash, the US could no longer afford to support Germany’s economy as it did before the crash. As economies across the globe suffered the results of the great depression, the loss of jobs and reduction in exports affected Germany to a great extent. Unemployment in Germany soared to uncontrollable levels and people turned to parties that offered alternatives to the failing democratic system. These parties were not comfortable with the Treaty of the Versailles and vowed to change the situation created from the unfair reparations, unjustified land losses, and restrictions to have armed forces. Japan along with other Asian countries were also impacted by the great depression. Japanese goods were no longer selling to other countries and this led to a collapse in the Japanese industry which struggled to source raw materials at cheaper prices.[4] The great depression led to the rise of fascism all over Europe which led to political chaos all over Asia and Europe. For instance, political chaos as a result of the great depression led to the rise of dictatorship regimes such as that of Germany’s dictator, Adolf Hitler, and the militaries in Japan. These propelled the world closer to war. After the war finally started in both Europe and Asia, the United States tried stay away from the war but found itself in it when Japan attacked the US Naval base at Pearl harbor. As seen, the great depression caused a lot of economic havoc and political chaos all over the world and remains a major historical catastrophe that is remembered to date.


Cheong, Kee-Cheok, Kam-Hing Lee, and Poh-Ping Lee. “Global economic crises, migration, and remittances: China and Southeast Asia during the great depression of the 1930s.” Malaysian Journal of Economic Studies 51 (2014): 45-55.

Green, George D. “The economic impact of the stock market boom and crash of 1929.” In Federal Reserve Bank of Boston, Consumer Spending and Monetary Policy: The Linkages, Monetary Conference, pp. 189-220. 1971.

Wheelock, David C. 2021. “The Great Depression: An Overview”.

[1] Green, George D. “The economic impact of the stock market boom and crash of 1929.” 196.

[2] Wheelock, David C. 2021. “The Great Depression: An Overview”. 10.

[3] Ibid. 10.

[4] Cheong, Kee-Cheok, Kam-Hing Lee, and Poh-Ping Lee. “Global economic crises, migration, and remittances: China and Southeast Asia during the great depression of the 1930s.”


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