Economic History

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Thomas McVeigh
What Explains the Great Depression?

The Great Depression was a worldwide economic downturn that originated and particularly affected

the US in 1929. It is characterized with widespread unemployment and a decline in industrial output

throughout the 1930s due to lower consumer and government spending. Half of the US banks were

forced to shut, and 15 million Americans were left unemployed. The great depression was caused by

the recklessness of the 1920s in both government economic policy and consumer speculation. This

culminated in the stock market crash of 1929. A loss of consumer confidence led to widespread

panic and selling of stocks, destroying banks and Americans savings. It was the longest and most

severe economic depression the Industrialised Western World had faced and resulted in new

economic polices being tried and implemented across the world (Romer and Pells, 2021)i.

The roaring twenties was a time of high spending and expansion in the economy however to fuel this

consumption credit was used. This credit was not regulated, and the Average American could get a

loan without any real restraints. The US’s wealth more than doubled in the 1920s. However not all

industries were booming. Agriculture was incredibly high during WW1 to fulfil the high demand for

food, farmers responded by mechanising many of their operations and mounting debt in order to

fund this. Throughout the 1920s agricultural goods were overproduced and as a result food prices

were lowered. This led to the foreclosure of many farms. Other industries such as car manufacturing

and residential construction were also beginning to slow in the later stages of the 1920s ii(FEDERICO,

2005).

Due to the age of high consumerism and expansion, businesses were booming, and profits were

high. Consumers were willing to invest in the rapidly growing businesses in the form of stocks and

invest in property as prices were skyrocketing in that industry too. A trend of buying stocks rose.

Everyone from poor labourers to rich business owners were investing. Many were not educated on

the stock market and believed the profits would keep increasing and stocks would keep rising in
price, however, in reality many of the stocks were incredibly overpriced and could not be justified by

future earnings. Banks were giving more loans for stock market investment and property investment

than for commercial ventures.

On the 24th of October 1929 some investors began to sell their stocks as they began to realise that

they were way higher than their value and a rising interest rate. This led to mass hysteria and a

snowball effect resulted in the mass selling of stock. 12.9 million stocks were traded on what was

later known as “Black Thursday” and on the 29th of October 1929 the “Wall Street Crash” occurred

where 16 million shares were traded. This rendered the majority of the stocks worthless, and many

Americans savings had been destroyed in a day.

The US had a particularly weak banking system in place. Instead of having big banks with high levels

of reserves, many small banks competed with each other. The president at the time President

Herbert Hoover was also a believer in free market economics and therefore did not financially

support banks, as a result each bank had a small reserve. The banks were heavily involved in the

stock and property markets too. They used the money deposited by the American citizens to trade

stocks. This was called margin buying. When the markets crashed the banks did not have enough

reserve money to pay back their depositors. The banks were forced to sell their assets for cut prices

and did not provide credit at time. Half of American banks were forced to close for this reason. The

circular flow of income had little injections, and this led to the contraction of the economy due to

deflation (Ohanian, 2009)iii.

The lack of credit destroyed American businesses, they were unable to afford to function and pay for

their workers. Unemployment rose astronomically, particularly in urban areas and among the

African American population. Relief payments were not impactful, and millions went hungry and

homeless. Industrial production fell by nearly 47 percent in the US, GDP decreased by 30 percent

and unemployment rose past 20 percent (Romer and Pells, 2021). An area that was nicknamed “The

Dust Bowl” in the centre of the US that was heavily invested in agriculture was particularly badly hit
during the Great Depression. Not only did it experience the economic impacts of the crash, but a

drought also led to low output and resulted in it becoming one of the poorest regions of the 1930s.

This caused mass emigration.

President Herbert Hoover oversaw the US during the Great Depression. He was a believer in free

market economics and therefore had a hands-off approach towards the Great Depression. He did

not ensure the banks had a reserve ratio and following the crash he still did not pump money into

the government to stimulate growth. This was one of the main reasons the Great Depression went

on for so long. He claimed that WW1 was the primary cause of the Great Depression. Although the

lack of reparations from Germany did not help it was not the primary cause.

The Wall Street Crash impacted all the large economies across the world. Purchasing power for

imports declined and trade was beginning to slow. Hoover decided to raise tariffs rather than lower

them. This was called the Smoot-Hawley tariff and was introduced in 1930. The government claimed

this would protect American businesses but, it just led to increased tariffs worldwide and a

deepening of the Great Depression as world trade declined (Mitchener, Wandschneider and

O'Rourke, 2021)iv.

In this essay I have explained the prelude to the Great Depression and the reasons for it happening

such as the increased consumerism and materialism leading to increased spending and loans in the

roaring 20s, the over speculation and trend following of investing in stocks without adequate

knowledge from the public and corporations alike. I described the loss of faith of the overvalued

stocks and increase interest rates which led to the mass hysteria and rapid selling of stocks. I then

illustrated the impacts of this on both the economy and the US population. I detailed the lack of

change in policy which led to the Great depression lasting so long. Overall, my essay explained the

Great Depression and how it would define future American life.

Explain how and why the world economy became

globalized between 1870 and 1913.

The first major period of globalisation of trade began in 1870 and lasted until 1913. International

trade grew for many reasons during this period such as technology advancements, reduced freight

rates and a focus on transport which resulted in a larger number of people emigrating. Countries

also opened to trade with more open trade policies. The Gold Standard, which allowed countries

convert their currency to gold, created financial stability. This period of globalisation not only

brought financial wealth, but it also brought cultural wealth. The Olympics began in 1896 and

brought a global platform for athletes and the 1876 World Fair highlighted the advances in each

country and allowed for exchanges of customs and traditions. Globalisation grew during this period

as businesses were beginning to produce high levels of output with the recent technological

advancements in the industrial revolution and therefore wanted to access new markets.

The Industrial Revolutions of the 19th century brought new technologies in both production and

transportation. The introduction of the steam engine made production quicker and easier. Britain’s

output in agriculture, mining, clothes production, and manufacturing quickly grew. This coincided

with advancements in transportation. Trains were becoming more widespread and steam ships

allowed for goods to be moved all around the world. Previously sail boats were used to transport

large goods. The ships were reliant on wind direction and speeds and therefore were very

unpredictable to time and to plan. Britain was the epicentre of this. They began exporting their coal,

iron, and other goods to areas of high demand all over the world. Transport was not only more

accessible but also much quicker and cheaper than beforev(Lay, n.d.).
Foreign Direct Investment was growing as businesses expanded into new regions and new trade

routes were being created such as the Suez Canal, which was completed in 1869, constructed by the

French Compagnie de Suez. This opened up trade to the East.

Mines were being built in Africa by foreign companies. The introduction of the refrigerated cargo

ship in the 1870s allowed for the exporting of meat and allowed countries such as Argentina and

Uruguay to focus their production on thisvi(Vanham, 2019).

The Gold Standard was originally introduced in Britain in 1821, however in the 1870s it was adopted

by many of the world superpowers such as France, Germany, and the United States. Smaller

countries then joined in response. It was adopted at this time because gold was becoming more

plentiful as supplies had been found in the United States. The Gold Standard allowed for gold to be

bought and sold at a fixed price in many currencies. This allowed for greater stability between

currencies as there was a standard reference currency. It was vital in increasing international trade

and globalisation as stabilised prices for purchasing imports. It also took some power away from

governments to cause price inflation. Exchange rates began to become fixed which allowed for

businesses to operate abroad with a lot lower risk. It also reduced transaction costs (gold standard,

n.d.) vii.

Many countries were able to trade more during this period. They adopted a more open trade policy

to boost growth. They did this as transport costs were reduced therefore it allowed for high profit

margins. Demand was also rising due to the improvements towards technology. Resources such as

iron were highly demanded in order to allow for the building of infrastructure and expand railway

lines. Information technology was also on the rise with the increased use of the telegraph and

inventions such as Alexander Graham Bell’s first patent of a phone in 1876. This greatly improved

communication between businesses and internally within businesses.

As a result of increased globalisation, countries GDP’s rose rapidly. This was particularly apparent in

the more developed regions of the world, specifically Europe at the time. Europe’s GDP rose from
502 billion dollars in 1870 to 1242 billion dollars in 1913. This over doubling of GDP can be

associated with the rapid rise in trade and increased Foreign Direct Investment by the largest

countries. Asia- Pacific, Latin America, US, Canada, Australia, and New Zealand also had large rises in

GDP during this period. Africa is the region that did not experience a large rise. This could be due to

the exploitation and of resources by other nations in these countries and the reparation of profits

made in Africa. It may also be due to the lack of technology available and therefore unable to exploit

their natural resources, the region may lack necessary transport links or machinery to excavate

resourcesviii(GDP per continent 1820-1913 | Statista, 2006).

This period was not only vital in terms of developing economies, but it also was a period of great

social change and cultural change. As transport technologies increased it allowed for increased travel

of people. Some of these people travelled for work while others travelled for pleasure. American and

Australian workers were often paid more than their European counterparts, many Europeans

migrated for this reason. Migration particularly affected Ireland, Italy, and Greece as their standards

of living were relatively low at the time. The increased migration globalised the world as migrants

brought their own customs and traditions into cities abroad. This created large diverse cities such as

New York and Paris.

The World Fair was held in 1876. It was held in Philadelphia in the US as an anniversary of the signing

of the declaration of Independence. This was such an important event for globalisation as it showed

how much easier travelling had become. It attracted 10 million visitors and 37 countries participated

in the fair. It highlighted the technological and industrial progress made in the last few years and it

was an example of how globalisation was going to rise in the coming years.

The first modern Olympics was held in Greece in 1896. This showed how travel had begun to

transition from being exclusive for work to also being recreational. 14 nations participated and it

attracted 65,000 spectators. The second modern Olympics was held in 1900 in Paris and 26 nations

participated.ix (Goldblatt, 2016)

Between 1870 and 1913 the world underwent a change Jurassic change, in many ways becoming a

lot closer together. This was due to the technology advancements that had happened previously in

the industrial revolution and greater stability in world economies. It resulted in an improvement in

economic standards worldwide and a rise in cultural diversity as migrants and events increased

interactions between nations. Unfortunately, World War 1 led to a decline in the first era of

globalisation as tensions rose across Europe and many protectionist policies were adopted

worldwide.
Describe how the first and second Industrial

Revolutions differed and explain why.

The Industrial revolutions were one of the most important developments in modern human history,

they advanced technology massively and greatly expanded economies worldwide leading to

increased standards of living in the years after the revolutions as more goods and services became

available. The first industrial revolution focused on textiles, steam power and natural resources. It

occurred between 1760 to 1830. The second industrial revolution focused on advancing technology,

particularly in transportation and the use of large-scale machine tools to increase output.

Information transfer also improved with the more widespread use of technology. The second

industrial revolution took place between 1840 until World War 1 in 1914.

The first industrial revolution changed production methods from largely hand made production to

the use of machinery that would be powered by steam. The steam engine was originally invented in

1712, however, it became more advanced when James Watt perfected the design in the 1760s,

making it safer. The textile industry benefited from these inventions and began to boom in Britain

and many British inventors created new designs which led to a higher output, the most advanced of

which was Richard Arkwright’s spinning machine first used in 1769. This got rid of the need for

intensive manual labour. It used running water to power it. The advancements were also seen in the

farming industry as cotton production increased massively with the use of machinery. Most of this

development happened in urban areas in Britain, particularly in Liverpool, Manchester, and London

due to the availability of resources. This led to population spikes in these regions as people migrated

from rural regions for work.

Britain, although forming a monopoly in the early parts of the 19th century, wasn’t the only region

that experienced advancements in the first industrial revolution. Many of the inventions from Britain
were brought to countries across Europe by British people. Belgium adopted a very similar

framework to Britain, focusing on textile and iron production. And later France experienced their

own industrial revolution. Other countries were hindered by their lack of wealth and power of their

leaders. Germany experienced rapid growth when unified in 1870 and although this was the period

of the second industrial revolution, their growth had the characteristics of the first revolutionx

(Industrial Revolution | Definition, History, Dates, Summary, & Facts, n.d.).

The Second Industrial Revolution was also known as the “technological revolution”. It overlapped

with the first industrial revolution and in many ways just advanced the technology used. The use of

coal and the steam engine was once again vital in the second industrial revolution. However, it was

primarily used in the transport industry, the steam engine allowed for trains and boats to travel long

distances with heavy loads being fuelled by coal or later by petroleum. The steel and iron industry

were also vital for building railroads. This was one of the key reasons for the globalisation that

followed. (Lay, n.d.).

Large businesses were expanding at a greater rate as they furthered the mechanisation seen in the

first industrial revolution. The use of electricity allowed for a lot more machine tools to be used and

semi-automated assembly lines began to be developed towards the latter stages of the revolution.

The factories in the larger nations were beginning to get so large that the oligarchical ownership

structure seen previously were no longer sustainable and they began to adopt a share structure. This

allowed for individuals and companies to buy into businesses. Workers’ wages were still relatively

low, and the increased automation also reduced the number of workers needed.

Science was becoming more advanced during this period with the inventions of new synthetics and

the exploitation of rarer natural resources around the world. Harder metals were being discovered

and alloys were being utilised to reduce costs. A method for producing steel was invented in 1860

which allowed for the quick and cheap production of a hard metal compared to the relatively slower

production of pig iron.

Plastics were invented which could be produced cheaply. Germany became one of the world leaders

in chemical industries.

In 1866 the first underwater telegraph cable under the Atlantic Ocean was installed and the

Alexander Graham Bell invented the phone soon after. This Information Communication Technology

advancement was a major difference between the two industrial revolutions as it allowed for

increased globalisation. The two industrial revolutions brought about massive change. They both

increased the economic powers of countries and led to social change. However, they often differed

in how they brought about change.

The first industrial revolution led to economic growth as much of the production in industries such

as textiles were a cottage industry and therefore very inefficient and wouldn’t meet demand,

therefore the change to the factory system led to a major increase in output and supplied more jobs.

This could also be seen in the mining industry. The factory system led to mass immigration to cities

to find work as rural life was becoming unsustainable at the time. The standard of living was often

worse in the cities as there was not proper infrastructure for the high demand for housing, therefore

many low-income earners were forced to live in slums. Even though workers were earning more

money, the average height went down during the first industrial revolution indicating

malnourishment. However, mortality rates in children decreased dramatically (Gallardo-Albarrán

and de Jong, 2020)xi.

The second industrial revolution led to economic growth through increased globalisation and further

technology advancements compared to the first. The extra resources available and increased

automation allowed for much higher output and less labour was necessary leading to lower costs.

Socially, standard of living dramatically increased in the second industrial revolution. Workers were

now being paid a more sustainable wage in comparison to previously and life expectancy rose

significantly. Workers conditions also rose as factories became more automated and coal was
beginning to be replaced by petroleum in some industries. Workers had more free time and leisure

sports such as football were rising. Literacy was also widespread xii(Voth, 2003).

The two industrial revolutions brought about massive change. They both increased the economic

powers of countries and led to social change. However, they often differed in how they brought

about change. The first laid the foundations for the second the build upon and the second allowed

for the world to become more diverse and trade dramatically increased as a result.

i
Romer, C. and Pells, R., 2021. Great Depression. [online] Encyclopedia Britannica. Available at:
<https://www.britannica.com/event/Great-Depression.> [Accessed 3 May 2022].
ii
FEDERICO, G., 2005. Not Guilty? Agriculture in the 1920s and the Great Depression. The Journal of Economic
History, 65(04).
iii
Ohanian, L., 2009. What – or who – started the great depression?. Journal of Economic Theory, 144(6),
pp.2310-2335.
iv
Mitchener, K., Wandschneider, K. and O'Rourke, K., 2021. The Smoot-Hawley Trade War. SSRN Electronic
Journal,.
v
Lay, M., n.d. The harnessing of power: how 19th century transport innovators transformed the way the world
operates.
vi
Vanham, P., 2019. A brief history of globalization. [online] World Economic Forum. Available at:
<https://www.weforum.org/agenda/2019/01/how-globalization-4-0-fits-into-the-history-of-globalization/>
vii
n.d. gold standard. [online] Available at: <https://www.britannica.com/topic/gold-standard>
viii
Statista. 2006. GDP per continent 1820-1913 | Statista. [online] Available at:
<https://www.statista.com/statistics/1076289/gdp-continent-1820-1870-1913/>
ix
Goldblatt, D., 2016. The games: a global history of the Olympics.
x
Encyclopedia Britannica. n.d. Industrial Revolution | Definition, History, Dates, Summary, & Facts. [online]
Available at: <https://www.britannica.com/event/Industrial-Revolution>
xi
Gallardo-Albarrán, D. and de Jong, H., 2020. Optimism or pessimism? A composite view on English living
standards during the Industrial Revolution. European Review of Economic History, 25(1), pp.1-19.
xii
Voth, H., 2003. Living Standards During the Industrial Revolution: An Economist's Guide. American Economic
Review, 93(2).