Great Depression, Essay Example

Great Depression was a severe economic period and crisis of low business activity, which occurred in the United States and many other countries. It roughly began with a stock-market crash, which occurred in October 1929 and it continued to most of the 1930s. In United States great depression occurred bet 1929 and 1933. During this period, the American economy disintegrated that the GDP declined from $104.4 billion, which was 46% to $56 billion. During the period, industrial production was declined y more than one half and gross investment were halted automatically. The part, which was affectedmostly in the economy, was employment sector. This is because many people lost their employment, as there was no unemployment insurance to cushion the blow. Those who remain employed worked few hours as their employers were working on reduced circumstances after many of the employers went out of business (Almunia 258).

Causes of Great Depression

Stock Market Crash

This was the first blow of the great depression, which broke the stock market in the last week of October 1929. It occurred on 29th October, which was a Tuesday that was later referred to as black Tuesday. This was a serious break because normal declines on the stock market do not cause inevitable declines in business. The broke caused uncertain declines and catastrophic magnitudes that would affect the economy in the future. The prices in the stock market became unstable and it rose to higher levels, which were difficult to afford. This made the government officials and investors feel uneasy on the rise of prices. On September 5th, Roger Babson who was investment advisor warned the people that a crash was coming. Stock prices began to decline in the month of September and the investors and government assumed it was normal business. The stock market began to stagger as a result of Babson’s warning, but it did not create a great sign of panic. This was the main cause of the great depression as the stockholders lost more than $40 billion dollars of their stock because there was no insurance cover on the stock. By the end of 1930, United States tried to recover but it was not enough to go back to where it was before. This forced the country to enter into a great depression.

Banking Crises

The collapse of the stock market came at an early stage of the great depression. The stock marke, which was affected, could have started regaining after the collapse, but it was prevented by banking crisis. Bank failures that occurred in early 1930s affected the economy of the country. The bank failures began in October 1930 in the banks, which were located in Midwest and South (Shaikh 45). The failures caused heavy losses, but it did not attract the interests of the national media because it was seen as similar to failures that occurred in 1920s. The next bank that failed was the Bank of United states in New York. This was the largest failure in terms of deposits s it had large deposits than the other banks. At this point, many economic historians agreed that Federal Reserve should have acted as the lender of the last resort to this ban when the bank failures started. As this was a financial crisis, it agreed that Bagehot’s rule should be followed. The rule states that lending should be free at high rates. Federal Reserve commented that the failing banks were badly managed and it should be removed from the system. The final panic in United States occurred in 1933. More than 5000 banks with $3 billion and above suspended their operations between 1930 and 1932. Another 4000 banks, which contain $3.5 billion, would be closed in 1933. President Roosevelt announced nationwide bank holiday in March 6, 1933.

Growing Inequality of Income

This cause of the great depression was not direct. Many of the economic historians focused on the bank collapse and stock market crisis as the main cause of depression. Growing inequality on the distribution of income paved way to the great depression. The percentage rate at which the national income was going to the rich rose from 14.5% to 18.5% between 1920 and 1929 respectively. The rich cut their spending when uncertainty caused by the bank failures and stocks crash occurred. If the income had been distributed equally in 1920s as per the progressive income taxation, the shock in 1930s would have been less destructive and devastating (Almunia 86). This is an indirect cause of the great depression as there was no correlation between the likelihood of the financial crisis and the rising inequality in the distribution of income.

Smooth-Hawley Tariff

This tariff has been listed as one of the major causes of the great depression. The tariff was passed in June 1930 with the hope that it would help to save the situation caused by the great depression. The action made the tariffs on various goods to be raised especially the agricultural products. Many people were giants this tariff especially the leaders of the profession. Many petitions were signed urging the president to drop the tariff. This is because high tariffs would international trade, which will automatically reduce the imports. However, as the imports are reduced, the investors will not get enough funds to buy the exports of US. This affected the economic status of the country as other countries like Great Britain responded by raising its tariffs in 1932. The studies by many researchers have proved that higher tariffs were a minor factor, which should not have been considered as an effort to control great depression.

Economic Distortions in the 1920s

This cause of the great depression was advocated by the Austrian school through its member known as Friedrich Hayek. The school emphasizes on the distortions as real estate boom and stock market. The school argued that the blame is on the Federal Reserve as it did not act on the development of distortions in 1920s which occurred as a result of easy money that followed. This was a clear indication of inflationary policy that did not show up in the commodity prices, but it showed up on prices of assets like real estate and stock (Shaikh 57). If the Federal Reserve had acted early, it would the occurrence of the inflationary policy in United States.

Reasons why great depression Lasted so long

Great depression lasted as it was the first time that the stock market crashed. Heavy losses were experienced as a result of the crash and it was not easy for the United States to correct the depression with immediate effect. The country had to devise some ways of recovering from the depression of which others were having negative effects to the country in the process of recovering. Some of the main reasons were the effects of the new deal and the fiscal and monitory policy.

Effects of the New Deal

One of the factors that caused the depression to last so long was private investment, which was in the new deal. As per the New Deal, private investment remained depressed because it was discouraged. The taxes on the private investors were raised rapidly. This was seen as a punishment to private investors who were said to have opposed the intervention of government on economic affairs. The government through President Roosevelt viewed the increase of taxes as an act to prevent the private investors from receiving a disproportionate amount of national income. This action made depression last so long because the economic development could pick up immediately. This is because the private investors were discouraged yet their contribution in the economy was more than 7% before the occurrence of the great depression. This made industrial production pick up slowly and there were not products to be exported such that the country could earn more foreign revenue.

The living standards in the US remain a big problem, as the employers who were the breadwinners of the public were discouraged. The private investors who were the owners of the banks took more time to return fully to the normal business they fear the rapid increase in taxes imposed by the government would reach a point that everything is claimed as a tax. In addition, they feared that another depression would occur immediately as they had no assurance that it will not occur again (Miron & Natalia 145). The New Deal policies like National Labor Relations Act 1935 and National Industrial Recovery Act 1933 were criticized. This was because they were going against the Sherman Antitrust Act. Their intention was to restore full employment through checking downward spiral of prices and wages. This was even at the cost of allowing the firms to collude by keeping the prices up, which were against the law.

Fiscal and Monetary Policy

The fiscal policy, which was employed in the New Deal was criticized by Keynesian economists. The policy was not strong enough to push the economy back to full employment though it was highly contested politically. Keynesians suggestions were for the government to spend by decreasing autonomous private spending such as consumption or investment. The fall in the private spending, which was $7.1 billion, was greater than the federal deficit or federal spending. This was between 1929 and 1938 when great depression occurred. Cary Brown who was the Keynesian economist concluded that the fiscal policy had been unsuccessful recovery device.

Works Cited

Almunia, Miguel, et al. “From great depression to great credit crisis: similarities, differences and lessons.” Economic policy 25.62 (2010): 219-265.

Miron, Jeffrey A., and Natalia Rigol. Bank Failures and Output During the Great Depression. No. w19418. National Bureau of Economic Research, 2013.

Shaikh, Anwar. “The first great depression of the 21st century.” Socialist Register 47.47 (2011).