The lead up to the Great Depression

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Introduction

Economic downturn can be very challenging to the industrialized world.  Depending on the magnitude of downturn, many businesses end up being closed while very few survive the challenge. It is argued that Great Depression in the United States was the biggest market failure to be experienced (Chong-Yah et.al, 166). United State being the most powerful in the world meant that every other country especially the developed nations such as Europe were greatly affected by the market failure. It started from 1929 and continued in various places until the end of Second World War.  It gave a threat to liberty that was of importance to the American democracy.  Additionally, the Great Depression resulted into economic chaos as well as the hardships which make it be referred as a catastrophe (Backhouse & Roger, 99). This paper explores the major causes of the great depression and gives ways in which the same nightmare can be prevented from reoccurring.

Causes

Both the economists and historians argue the Great Depression in U.S was caused by the stock market crash of 1929 which was in the month of October 29thwhen downturn started (Backhouse &Roger, 106). The Stock Market Crash is vividly remembered as the” Black Tuesday”. This was not only the single reason of the Great Depression nor was it the first crash in the month but market begun to decline in the previous month. In October, there was a great panic of market failure in United State. Although investors had tried all the possibilities to adapt to the situation, the market crashed few days later losing a good percentage of the value and wiping out several billions of entire investments. The market crash continued to affect businesses to a greater extent such that after two months, more than $40 billion dollars were lost. By the end of 1930, the stock market covered some of the losses though the economy was left devastated. However, there are many other events that caused the Great Depression but not this single event.

Another cause of Great Depression in United State was bank failures. Almost 700 banks failed in 1929 and 3000 plus collapsed in the following year. This failure made people lose their money since there was no federal deposit insurance at the moment. Some panicked and withdrew all the money in their respective banks, making more and more banks to close. By the end of 10 years there was a total of 9000 banks and more which had collapsed. The few surviving institutions failed to lend money due to the fear of the economic situation which led to people spending less and less.

Consequently, there was reduction in purchasing across the board. Since no investments were made, savings became depleted and there were no credits thereby spending by both consumers and companies came to a standstill. As a result, workers were laid off in big numbers as there was no money to pay them. Therefore, it was impossible for people to continue paying their debts leading to repossessions as well as evictions and at the end of it all there was more and more of inventory accumulation. The high rate of unemployment, made people spends less of their savings making it difficult to improve the economic situation (Kirkwood & John 811).

The American Economic Policy with Europe was another cause of Great Depression.  As the situation became worse a great push for the government to act rose. Tariff Act 1930 was passed which was to impose near-record tax rates on a large amount of imported goods. This Act was to protect U.S businesses from competitors who came from other nations. As the result, majority of the U.S trading partners imposed taxes on the goods made in United State causing a fall in world trade by almost two-thirds. A new course of action was taken by the U.S president and the Congress to pass a new legislation to allow negotiation to lower tariffs between the U.S and other nations.

Lastly, economic downturn was worsened by the damage to environment. The drought which lasted for a whole year together with poor farming methods led to a vast region called Dust Bowl. Dust storms evaded towns, killed crops and livestock, made people sick and caused massive damages (Greene &Alison. 28). Many people were forced to migrate to other regions causing the economy downturn.

Effects of the Great Depression

The economic growth declined with 50 percent during the Depression period. However, as years progressed, the New Deal raised GDP growth for several years then depression showed up again in 1938. This was after government withdrew on the New Deal spending. Another effect was felt in politics which resulted to people voting for Franklin Roosevelt since he had promised that Depression could have been ended through government spending. There was high debt created through government spending which has made politicians be too reliant on spending, cutting taxes and other types of fiscal policy. There was a drastic drop of agricultural products due to Dust Bowl which destroyed farming. Many farmers in Midwest became homeless; rise of shanty towns; decline in wages; there was also an increase in the number of kids who were sent to orphanages while older ones left their families to look for jobs (Greene& Alison. 26).

Unemployment was another effect of the Great Depression since research shows that almost 15 million people were idlers (Kirkwood & John, 811). However, the New Deal programs by the government reduced the unemployment rate that had engraved U.S. Many banks failed making depositors to have a huge loss. Good banks also were forced out of business as people desperately took their money out of these banks since their money was used to invest in stock market which was at risk. Additionally, the stock market lost greatly due to lack of confidence in it.  Trade was also affected as countries created barriers to trade in order to protect their local industries. Deflation was another result of the Great Depression. Prices were very low which was of great help to consumers with less income. On the other hand, farmers, homeowners and businesses suffered a lot since mortgage payments were still high and they end up becoming migrants in search of jobs.

The Great Depression was challenging to the U.S. economy and after so much struggle to get things right the problem ended at the end of World War 11.  The World War 11 institutionalized fall in the standards of living of the Great Depression via wage and price control.  Consecutively, there was broad rationing of various products. Freer markets, lower taxes, balanced budgets, lower rates of unemployment were an indication that the Great Depression was over (Chong-Yah, et.al, 165).

Solutions

The Great Depression affected the U.S economy and its trading partners to a greater extent. As the situation worsened, President Roosevelt called in both experts and theorists to brainstorm towards solutions to the Great Depression. There were many reforms that were established in the process of solving the State`s problems. The Emergency Banking Bill helped in stabilizing the banking sector. Glass- Steagall Act made sure the bank deposits were protected by federal insurance.  Programs such as Civil Conservation Corps made young people work in forests as well as in national parks and much of their earnings helped their families. More and more men were employed to construct roads, bridges, parks thus improving the public property. The National Industrial Recovery Act regulated worked hours and banned child labor. There was also money delivered to states in order to create various programs that could have helped in work relief. Farmers were paid to minimize their crops and also they were offered with loans. This was accomplished though the Agricultural Adjustment Act. These Acts were of great help to the U.S. in solving the problem of the Great Depression and slowly the problem was no more.

Preventing a depression

Most of advanced economies are the major victims of recession. The question remains of what ought to be done in order to prevent depressions from re-occurring.  Firstly, it is important to understand that austerity actions have recessionary impacts on the output. Countries that are in a position to give a short-term stimulus need to do so in order to postpone their austerity efforts. These advanced economies should form a medium-term program to maintain competitiveness and jobs through investments in a quality education, infrastructure and job training. These are among the many tools that can be used by economies to enable their workers to compete in global world. Debt burdens can be made sustainable via organized restructuring, reducing these debts and converting debts into equity (Kirkwood, John, 812). A seminal study of US monetary history pointed out that if the Federal reserve had provided emergency lending to struggling banks or had increased the quantity of money, the Great depression would have been prevented (Friedman & Schwartz 1867).

Conclusion

Great Depression was caused by the clash of the stock market, bank failures, inability to purchase of goods and services, environmental damage and the American Economic Policy with the Europe. Although there might be other causes, these five are considered as the major causes to this economic downturn. The U.S economy was greatly affected by the depression and the effects also affected other developed countries such as the Europe. There was high rate of unemployment; many banks collapsed; trade with other countries was also affected; farmers migrated to look for work since agriculture was also challenged. As a solution to mitigate the situation, several Acts were made which included Agricultural Adjustment Act, Emergency Banking Bill, and National Industrial Recovery Act among others. However as the saying goes that prevention is better than cure, it is important for economies to come up with ways to prevent such kind of depression from appearing again.  Such measures may include reducing debts, investing in job trainings, and quality education among many others.

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  1. Backhouse, Roger E. “Economic Power and the Financial Machine: Competing Conceptions of Market Failure in the Great   Depression.” History of Political Economy, vol. 47, 2015 Supplement 1, pp. 99-126.
  2. Chong-Yah, Lim and Sng Hui-Ying. “The Great Depression, the Great Recession and the Next Crisis.” World   Economics, vol. 12, no. 3, 2011, pp. 163-190.
  3. Collis Greene, Alison. “The Real Depression.” Christian Century, vol. 133, no. 5, 02 Mar. 2016, pp. 26.
  4. Friedman, & Schwartz, A. “A Monetary History of the United States.”1963, pp. 1867–1960. Princeton: Princeton University Press.
  5. Kirkwood, John B. “The Great Depression.” Journal of Money, Credit & Banking (Ohio State University Press), vol. 4, no. 4, Nov. 1972, pp. 811-837.
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