LIBERTY UNIVERSITY

DEPARTMENT OF HISTORY

Research Design Assignment

Submitted to Dr.

in partial fulfillment of the requirements for the completion of

by
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Research Topic and Thesis

The global economy has encountered hurdles in the past. Events such as the great

depression demonstrate the international economy's resilience in the face of catastrophe. The

Great Depression was a catastrophic global era of persistent long-term economic contraction that

began in the 1930s. Even though the Great Depression affected the whole world, it started in the

United States of America. As a result, the Great Depression began at different times in different

nations. However, the reasons behind the start of the Great Depression remain to be the same

across the world.  While there are other plausible explanations for the cause of the Great

Depression, the federal reserve's errors prove to be the decisive factor, as they resulted in the

1920s speculative boom that eventually culminated in the market crash of October 1929,

signaling the start of the Great Depression in the United States.

Research Question

The research seeks to answer the questions: “What was the main cause of the Great Depression?”

“Would the Great Depression not have occurred if not for missteps by the federal reserve?”

The Federal Reserve's errors were the primary cause of the great depression. Banks had

been reckless during the 1920s, allowing their reserves to dwindle dangerously low. The Fed

contributed to the explosive boom in the early to mid-1920s by keeping interest rates low.

However, rather than decreasing interest rates, the Federal Reserve increased them, more than

doubling them from pre-Crash levels in 1931. The goal was to discourage lending and

borrowing, as well as the "wild speculation" that contributed to the market's boom and

subsequent crash. From this vantage point, the Federal Reserve not only influenced the events

before the Great Depression but also exacerbated its severity. Additionally, the Federal Reserve

endorsed former Treasury Secretary Andrew Mellon's "liquidationist" strategy, which allowed
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banks to fail.1The Federal Reserve reasoned that by filtering out financially problematic

institutions, a stronger, more sound banking sector would emerge. Rather than financially

reckless organizations being removed, however, it was mostly smaller banks that failed.

Eventually, the shrinking money supply resulted in deflation. This resulted in sky-high hikes in

real interest rates, effectively suffocating any possibility of businesses investing or growing.

Additionally, the Great Depression is ascribed to the 1920s speculative boom. During the

1920s, the GDP expanded at a 4.7 percent annual rate, while the unemployment rate was 3.7

percent. Within ten years before the Great Depression, overall wealth in the United States more

than doubled because consumer debt increased and businesses also overextended themselves.

Additionally, financial organizations developed a strong interest in stock market speculation. In

other instances, businesses established securities with their brokers covertly selling their shares,

which would constitute a conflict of interest in the modern-day. Weak rules had created a gap

that allowed for a time of uncontrolled speculation on stock markets. During this period, being in

the market was the real deal; yet, the bulk of investors were not researching businesses or

making purchases based on fundamentals; rather, they were betting on the stock continuing to

rise. Worse yet, the majority of consumers had purchased shares on margin, often just needing

10% of the price of a stock to make a transaction without realizing they would be liable for the

entire amount if prices plummeted. As a result, prices soared, with shares selling for more than

their businesses' real earnings warranted. The speculative boom did not begin spontaneously but

was sparked by the Federal Reserve's errors. Without a doubt, the core reason for the speculative

boom remains the cause of the great depression, since, without the mistakes, the likelihood of the

great depression occurring would have been minimal.

1
Wheelock, David C. "Monetary policy in the Great Depression: What the Fed did, and why."
Federal Reserve Bank of St. Louis Review 74, no. 2 (1992): 3-28.
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Furthermore, the Great Depression is attributed to difficulties with excess and

overproduction. This explanation, however, is connected to the 1920s speculative boom. The

1920s consumer boom resulted in mass manufacturing. Similarly, it resulted in an

overproduction of goods by a large number of firms. Even before the crisis, firms began selling

their products at a loss. This was seen in Agriculture. Farmers increased output during the first

world war, an expensive strategy that left them in debt; yet, in the postwar economy, they ended

up producing more than customers required. This resulted in a decline in agricultural and

industrial prices, decimating profitability and wreaking havoc on already overextended

businesses.

Moreover, the great depression was ascribed to the poor demand and significant

unemployment that preceded the onset of the great depression. Companies were compelled to

reduce output and personnel due to financial losses. Consumers who were in debt then ceased

spending. However, that action exacerbated the issue, resulting in more firms collapsing or

cutting back and laying off further employees.2 Similarly, the genesis of this scenario was the

1920s boom, which was triggered by the Federal Reserve's errors.

President Herbert Hoover's restrained approach also contributes to the list of Great

Depression causes. He advocated for little government interference and saw direct public

assistance as character-weakening. Eventually, he began spending and embarked on loans and

public works projects. Nonetheless, many economists believe it was too little, too late. His

contribution to the Great Depression is negligible, given he served as president from 1929 to

1933, and by this time the Federal Reserve's actions had already wreaked havoc on the economy.

As president, his approach would have done nothing to avert the Great Depression.

2
Magdoff, Harry, and Paul M. Sweezy. Stagnation and the financial explosion. NYU Press,
1987.
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Finally, the October 1929 stock market crash is attributed to the precipitation of the Great

Depression. In the autumn of 1929, recognizing the overheated state of the market, seasoned

investors began "to take profit." Prices of stocks began to stall. They suffered their first crash on

24 October 1929 when markets opened lower than the previous day.3They rallied momentarily

after this "Black Thursday." The next Monday, though, prices collapsed again. Many investors

could not fulfill their margin calls. Wholesale panic followed, leading to higher sales. On "Black

Tuesday," 29 October, investors dumped and proceeded to dump millions of shares. There were

hardly any buyers. The market lost nearly 85% of its value between 1929 and July 1932. Due to

the crisis, other simmering economic problems came to a climax. However, a single day cannot

be faulted entirely for the Great Depression as the market succumbed to the financial

irresponsibility which the Federal Reserve had fostered over the last few years.

Explanation of Historical Significance

The Great Depression was a catastrophic global era of persistent long-term economic

contraction that began in the 1930s. Although the Great Depression affected the whole world, it

started in the United States of America. As a result, the Great Depression began at different times

in different nations. The Great Depression had a catastrophic effect on the entire planet. Among

the Great Depression's impacts are a major contraction of the economy and a loss of trust in

unrestrained capitalism.4 Additionally, the downturn led to job losses and the bankruptcy of

several banks, wiping out people's savings. Given the catastrophic consequences of the Great

Depression on the global economy and the Federal Reserve's involvement between 1913 and

1930, it is critical to study the subject to avoid a repetition of such events. The Federal Reserve

maintained insufficient control over credit, contributing to post-1911 inflation and the Great
3
Field Anne. The main causes of the Great Depression, and how the road to recovery
transformed the US economy. Business Insider Africa, 2020.
4
Amadeo Kimberly. The 9 Principal Effects of the Great Depression. The Balance, 2021.
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Depression.5 The Great Depression's existence was noteworthy because it highlighted the Federal

Reserve's shortcomings and prompted the search for acceptable remedies.

5
Schweikart, Larry, and Lynne Doti. American Entrepreneur: A History of Business in the
United States. Amacom, 2009.
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Bibliography

Amadeo Kimberly. The 9 Principal Effects of the Great Depression. The Balance, 2021.

Field Anne. The main causes of the Great Depression, and how the road to recovery

transformed the US economy. Business Insider Africa, 2020.

Magdoff, Harry, and Paul M. Sweezy. Stagnation and the financial explosion. NYU Press, 1987.

Schweikart, Larry, and Lynne Doti. American Entrepreneur: A History of Business in the United

States. Amacom, 2009.

Wheelock, David C. "Monetary policy in the Great Depression: What the Fed did, and why."

Federal Reserve Bank of St. Louis Review 74, no. 2 (1992): 3-28.