The Great Depression: causes and consequences

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The Great Depression is the extended period of economic calamity that hit the economy of the world which commenced in the United States in 1929 and later hit other nations. The economic crisis ended officially in 1940, but on the ground, the economy of the United States embarked on the path to recovery after an end to the World War II. The calamity was comprehensive and synchronized and affected all global economy sectors. The Great Depression was mainly a global economy crisis, but the name is derived from the emotional state which the society found itself in. People drowned in a depressive state of torpor. In this paper, we will intensively examine economic and social causes of the Great Depression and also examine its consequences through different angle approaches. I maintain that the economic distortions were as a result of Federal Reserve System monetary policy in addition to the authorities making incompetent policy that finally caused the World War II.

Causes of the Great Depression

Numerous researchers have now dedicated their time to analyzing the Great depression of 1929 to 1940 and the effect it had on the United States and the million lives of Americans. Politicians, social scientists, and economists are devoted to finding the “black box” that could reveal the main cause of the disaster. Some researchers believe the Great depression horror lies in the fact that no univocal explanation has been fronted. People still hold on the thoughts that an unprecedented economic slowdown can strike at any moment without any reason or warning. This fear is the tool the government uses to justify their unlimited intervention into the economic sphere. Consequently, many researchers today also adopt a position of support for the economically destructive policy of governments and criticize market capitalism.

The start of the great Depression in the United States is dated October 29, 1929, and this day is termed as the “Black Tuesday.” The day saw the collapse of the stock market as shares dropped by 10 billion U.S dollars which translates to the loss of the equivalent amount in credit money. This drop meant 20-25 million Americans incurred losses (Ross 2000, p.12).

The Keynesian theory of the Great Depression of 1929, in the U.S, explains the cause of the depression to be due to overproducing commodities while there was no cash to purchase them because the funds were tied to gold reserve and there was a limited amount of this metal (Rothbard 2009, p.38). There was acute money shortage and consequently limited demand for services and goods. In addition, the chain reaction led to bankruptcy of businesses, a fall in prices for goods, unemployment, drop in consumer demand, protective duties on the importation of goods, and a sharp decline in standards of living (Rothbard 2009, p.38-39).

In the period leading to the Great Depression, the United States gold reserve rate  of growth was lower than the rate of economy development. This caused the emergence of unforeseen inflation as the U.S printed new money to boost a quick growth to the economy. Therefore, the supply of the dollar’s gold was undermined leading to an increased budget deficit as the Federal Reserve System decreased the discount rate (Bernanke 2013, p.122). A situation emerged whereby the growth of labor productivity in industry reduced, and the pseudo-money amounts in terms of receipts, bills, etc. increased causing an imbalance that eventually culminated to the “Black Tuesday.”

There is also another angle of perception to the cause of the economic meltdown. The Marxist viewpoint describes the Great Depression to have been preceded by a quick growth of the United States’ economy. Therefore, the period of 1917 to 1927 saw the national income of the United States almost triple. The stock market was developing at a rapid pace, conveyor production was invented, there was an increased number of speculative trade and real estate prices were escalating. The increased production of goods needed a boosted supply of money, but the dollar was tied to gold.

Another common perception of the Marxist approach is the effect of market economy and capitalism that caused the Great Depression and only the intervention by the government facilitated economic recovery. This simplified approach asserts that the United States was destroyed and sucked into depression the stock market which is considered to be one of the pillars of capitalism. The U.S president at the time Herbert Hoover an avid supporter of the Laissez-faire principle declined to use tools of state power which further led to the deterioration of the situation. His successor, Franklin Roosevelt did not hold back and used the state tools to guide the country to recovery. The conclusion to the two approaches was clear: capitalism could not be trusted and the government ought to use its tools to save the country from inevitable calamity to the economy.

Further explanation for the crash of the stock market is centered on the criticism of using borrowed money to purchase securities. Numerous researchers argue that widespread speculation of a spike in shares was linked to the extravagant use of leverage. However, Gene Smiley who was a Marquette University economist contradicts the legitimacy of this observation. He asserts that by the time of the Great Depression, people had already had significant experience in using leverage and in the late 1920’s the margin requirement were not any lower than those of 1920’s or earlier decades. In addition, 1928 drop in margin requirements meant that borrowers had to pay in cash for the shares that they purchased. Thus, the leverage argument fails, but credit flows and manipulation with money is an entirely different issue.

Numerous economists-monetarists, specifically the Austrian school representatives state that there is a close link between economic activity and cash flow. When the government makes money and credit injections, the rates of interest initially drop. Enterprises invest this easy cash in the production sector, and the market of their commodities is booming. After the situation stabilizes, the cost of conducting business shoots up, the rates of interest are changed upwards, and profits drop. Therefore, the acquisition of easy cash comes to nothing and the monetary authorities in fear of price inflation cut down on the cash supply. In any situation, these changes are significant enough to shake the shaky foundation on an economic card-castle.

By use of a complex criterion while incorporating currency, perpetual and term deposits among other factors, Rothbard calculated that between 1921 and 1929, the Federal Reserve System inflated the supply of money by over sixty percent (Rothbard 2009, p. 89)..  Such a high increase in credit flows and money resulted in a reduction in interest rates and raised the stock market indexes to unexpected levels and the situation of the roaring twenties. Uncontrolled increase in credit monetary mass developed into what Benjamin Anderson termed as the start of the New Deal a popular proactive policy later adopted by President Franklin Roosevelt. Some scientists, however, express doubts that the actions of the Federal Reserve System caused inflation and cite stable consumer goods and raw material prices in 1920 which in their view absolves the policy from any responsibility in the calamity.

A considerable trimming of the high rates of income tax under Coolidge obviously aided the economy and maybe softened the price effect of the Federal Reserve System policy. The tax trimming facilitated real growth in the economy and investment which additionally contributed to new technological and business innovations in terms of cheapening production. Of course, the increased labor productivity growth stabilized the effect of prices which would have been higher. Still on the Federal Reserve System policy, market experts and economists who have contrasting estimates of the scale of the Federal Reserve Systems monetary growth in the early 1920’s, are in agreement as to the events that proceeded it: the last days of the decade saw a shard monetary reduction and Central bank was fully credited for it. The response of the Federal Reserve System only served to further aggravate the recession.

Generally, the disruptions in the economy due to the Federal Reserve System monetary policy put the nation on the journey of recession, but further actions by the state turned the situation into a calamity. Therefore while the quotes were falling apart, Congress was joking around: for instance on the “Black Tuesday” morning the newspaper had reports that in the Capitol there was full support for increased fees for transactions in securities.

Consequences of the Great Depression

The Great Depression had massive consequences for both the economy of the United States and that of the globe. In the United States, the consequences included: closure of many banks, real estate prices collapsed, the industrial production reduced by half, cereal harvest also dropped by half, and many farmers became bankrupt (Ross 2000, p.68). The actions of the government caused not only limited free international trade but also the massive reduction in free entrepreneurship activity because on the unfavorable conditions for developing small and medium-sized businesses, there were increased taxes for large businesses, and investors lost stimuli and initiative. Furthermore, there was an increased monopoly by the government authorities in the making of decisions related to the economic sector.

However, the largest burden of the economy distortion mainly befell the ordinary citizens. The large drop in industrial production, shutdown of thousands of mines, factories and widespread underemployment at production facilities massively resulted in unemployment. The numbers of the unemployed people which was already high during the capitalist stabilization period of the 1920’s now increased even more. Add to the fact that the United States lacked a social insurance system, the collapse of many banks with the deposits of citizens meant that citizens had no hope for help from the state or recovering their cash back. A lot of people were faced with the threat of starving. People no longer had faith in their abilities and were in psychological depression state for extended periods which had hit them harder than the economic calamity that was befalling them.

The situation for people who remained employed was not any much better. The evr present feeling of oppression, insecurity, and fear of becoming jobless any time was worsened by the constant reduction in their salaries. The impoverishment process was just gaining its momentum.

Furthermore, despite enforcing economic reforms, new dealers were primarily under the guidance of pragmatic considerations that certain historical pattern was in the shadow of the steps they took: they forced and pushed the government-monopolistic tendencies in establishing American capitalism. Therefore, the economic reforms turned out to be a way of boosting the government-monopolistic capitalism nature. Generally, the ineffectiveness of economic and financial reforms of the New Deal set precedence for the collapse of the new economy in 1937.

The Great Depression rapidly spread to the economies of European nations, but in this region, the full impact was felt in 1931. The mighty Austrian bank “Creditanstalt” collapsed in May and marked the start of the collapse of Central Europe economy. It was an extremely difficult period for Germany who depended on depleting American investments and loans. The number of unemployed people in Germany reached six million. Within weeks a crisis ensued in Britain, and it also had an impact on less industrialized countries such as Italy and France. With rapid fall in demand for many products such as sugar, silk, and cotton, most exporters from Japan to Brazil got impoverished.

The depression contributed to significant political shifts during the early 1930’s. In the United Kingdom, the Labor government collapsed, and the party was divided. The leaders of the party joined with the Liberals and the Conservatives and formed a coalition government which reduced wages and employment benefits to civil servants. These harsh decisions contributed to mutiny in the navy, in the Inver-Gordon and sparked hunger marches by the unemployed in London. The government could not save the pound, and the United Kingdom had to refrain from the gold standard that was a mark for financial stability. To protect domestic producers, the principle of free trade was sacrificed, and the nation adopted protectionism by imposing duties on many imports.

In Germany, the Great Depression was a source of much anger and frustration such that Adolf Hitler took over power. Hitler elected to pursue and an economic course where the government did not save but rather embarked on spending big on public works projects to give new impetus to the economy and while creating jobs. His Nazi government spent large cash amounts on constructing roads and buying firearms, and in the end, the plan worked. There was no more unemployment, and Hitler became a miracle worker in the eyes of many.

Consequently, we can attribute one of the causes of World War II to be the Great Depression. The reduced world trade due to protectionism adopted by many countries led to World War II which started only a few years later. The United States citizens were owed thirty billion dollars by other countries in 1929 (Rossides, 1993, p.131). The Weimar Republic was not paying high reparations they were obliged to pay under the Treaty of Versailles. When the foreign businessmen lost the opportunity to sell goods to the United States due to large fees, their debt burden became heavier, and this was an inspiration to demagogues such as Adolf Hitler.

Conclusion

The United States economy took about twenty years to recover but in the end finally managed to come out the Great Depression calamity in the 1950s. This was mainly aided by the Lend-Lease act of 11th March 1941 which later enabled the United States to supply weaponry to Russia, Great Britain, Brazil, China and many other nations due to the World War II. This gave employment to many people by way of war industry development. Therefore, the Great Depression not only led to war but was also the cure to the war as paradoxical as it was from both the economic and historical view point.

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  1. Bernanke, Ben. The Federal Reserve And The Financial Crisis. Princeton: Princeton University Press, 2013. Print.
  2. Ross, David Frederick. Competing Through Supply Chain Management. Boston [u.a.]: Kluwer, 2000. Print.
  3. Rossides, Daniel W. American Society. Dix Hills, N.Y.: General Hall, 1993. Print.
  4. Rothbard, Murray N. America’s Great Depression. Baltimore, Maryland: Eigal Meirovich, 2009. Print.
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