Ever wonder what actually caused the Great Depression? It might hit close to home once you take a careful look.
The Great Depression happened far enough in the past that it doesn’t seem all that real to today’s young scholars. The Depression may occupy space in history books and is certainly a part of standardized curriculum in contemporary history classes, but it is still simply “history” to many. It gets more interesting, though, when you look at the main causes of the Great Depression and then compare these drivers to today’s economic indicators. Let’s look at the top five causes for the Great Depression – you may begin to see some parallels to the world we live in today.
- European Trade Policies: In an effort to protect American interests, the Federal Government passed the Smoot-Hawley Tariff in 1930, with the intention of taxing imported European goods to spur domestic consumption of homegrown products. The high taxes put forward effectively killed trade between America and Europe, and economic retaliation occurred. Today’s economic policies toward trade partners are beginning to take on the same confrontational tone seen around the Depression.
- The Dust Bowl: This is an often-overlooked cause of the Depression, and the drought conditions witnessed during the Dust Bowl forced many farming families to lose their farms, sell their properties (sometimes at a loss), and relocate to the city to find work. They often couldn’t pay their debts and local economies suffered. Farmers today report similar concerns, with many farming families forced to take government subsidies just to keep their businesses alive.
- Stock Market Crash of 1929: While most people peg the start of the Great Depression as occurring on October 29, 1929 – the day the stock market tanked, the Depression really began several months later when investors realized their losses were not recovering as they had hoped. The market lost about 7% of its value in a matter of a week during late 1929, and it took years to recover, which can easily be pegged as one of the main causes of the Great Depression. It was simply too much, too quickly – and the Depression took hold. Many feel our current Dow Jones Industrial Average is simply overvalued and that another major market drop is right around the corner.
- Consumer Spending: For an economy to thrive, people need to spend money. And after the Stock Market Crash of 1929 and the subsequent years leading up to the New Deal, Americans were simply too scared to spend a dime. This resulted in drastically reduced retail sales and a corresponding reduction in the workforce. Credit defaults on items purchased on credit were rampant, and a high unemployment rate further minimized discretionary income. Interestingly, we’re seeing flat spending figures in the US right now – much of it attributed to market insecurity and weak income growth.
- Bank Failures: 9,000 domestic banks failed during the Great Depression, and that was before the advent of FDIC. With their life savings at risk, people either lost their money entirely or withdrew it prior to the collapse – thereby hamstringing the financial system. Banks were not willing to make loans, and that led to the self-destruction of thousands of these institutions. Paralleling this concept to today – from 2003 to 2008, five US banks failed. From 2008 to 2012, 465 banks failed. Since 2010, only three new banks have opened across the entire United States.
Causes for the Great Depression was likely due to dozens of underlying issues, but these five represent some of the most compelling drivers of our historic and unprecedented market collapse. Scarily enough, we’re starting to see some of the same indicators today. Through it all, investors have hedged against market risk by adding precious metals to their portfolios, and you can do the same by investing in gold, silver, platinum and other tangible commodities. For more information about gold investing, contact American Bullion today.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.