Econtrader.com | What caused the great depression, bank failures

The great depression 1 of 6

The First World War created a huge demand for goods. Items such as Guns, ammunition, clothing and food experienced a surge in demand the world has yet seen. They are directly transported to factories and supply depots that are eventually delivered to the front lines. To compensate for this huge demand in supplies, countries involved abandoned the gold standard so their governments can create money without being backed by gold. After the war, Europe was mostly in ruins. The United States experienced a great demand for food stuffs from Europe. This volume of demand caused prices especially grain to rise in value. Farmers needed more money to compensate for this huge opportunity so they turn to their local banks for loans. Fortunately the values of their land were rising due to the rising prices of their produce. Farmers used the value of their land as collateral for loans and banks even allowed them to take out a second loan using the same land as collateral. This economic activity spurred demand elsewhere. People started buying luxury goods which shined the balance sheets of companies big or small. With this in place, investors took notice of their outstanding financials and started speculating on their stocks. Banks continued to lend out money and most of these newly created money made their way to Wall Street. For most people this is a new era of unmatched prosperity.

Across the Atlantic, as most of Europe began to recover slowly, the furnaces of European factories and farmlands started to come back to life. Europe now demands less imports from the United States as it started to produce its own
food stuff. For farmers in the United States, this spelled the beginning of an end to their prosperity as reduced demand overseas left them with huge surpluses. This reduced the prices of their produce as well as the value of their lands. The dust storms that ravaged the area due to soil erosion further worsened their situation. Most farmers can’t keep up with their debt and eventually defaulted on their loans. Banks are left on a weakened state as more people defaulted on their loans. Banks are interconnected as they lend to each other, so when a major bank fails the rest follows or are left on a very weak financial standing. One such case is the largest investment bank in the south, The Caldwell and Company based in Nashville, TN. Caldwell bought out smaller rural banks that were directly involved with the farmland speculation. Because of the credit defaults by farmers, its satellite banks were greatly affected that lead to the eventual failure of the Caldwell and company. The growing distrust of the masses lead to more difficulties as banks were running short in cash because people chose to keep their cash to themselves. As banks fail, businesses relying on them for credit closed shops leaving millions of citizens out of work. Falling land values stabilized by late 1920’s, but grain prices still continued to fall. To help remedy falling price levels for farm produce, the American government established the Federal farm board to support loans for farm cooperatives.

The great depression 1 of 6

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