The Cause of the Great Depression - Essay Example

Name Affiliate Institution The great depression THE GREAT DEPRESSION The great depression occurred between the years 1929-1933. It began in the United States of America. It was after the fall in the securities exchange market as the prices of the stock fell dramatically causing speculation in the market and eventually liquidation of the stock. The banking industry was too affected as the interest rates became too low that people preferred to hoard their money rather than save or invest. It followed that long queues were witnessed in the banks as people came to withdraw their money. This affected negatively to the banking and thus accelerating the downfall of the industry. Most banks were bankrupt and started reclaiming their loans. Many people were unable to repay their debts. Some were thrown out of the houses they mortgaged due to inability to pay the mortgages or rent. The US government, which had financed most countries in the world, having been badly hit in order to try and control their economy, had to ask their debtors to pay up the loans they had. This made the crisis spread throughout the world. The United Kingdom was attempting to recuperate after the First World War. It had to pay its soldiers and stabilize it economy as it was extremely fragile. Germany had borrowed hugely from the United States of America to control its economy in the First World War. It had edged out France after it failed to pay up its installments. Germany also depended on US for its export market. Most of the industrial goods found a ready market in the US. The United States created trade barriers in order to try protecting its industries. THE CAUSES OF THE GREAT DEPRESSION The Crash of the Stock Market in 1929 The securities exchange market had experienced a steady upward trend that made more people venture in the market. They ended up selling all their assets in order to invest in stocks. Some even borrowed from banks at high interests with expectation s of high returns. Others even took loans to finance more investment and used the stocks as the collateral. The stock market became a bee hive of activities in the years before the depression. In the months of September and October, some firms started posting low profits thus reducing their share prices. It reached its peak on the black Monday the 28th of October by a drop of 13% in share prices. On the black Tuesday, the prices of the stocks went even lower. This made people begin to fear that the spread would affect the entire stock market. They began to convert their stocks into liquid cash. The little recovery experienced in the early 1930s did not make a significance impact since the confidence had been lost. Failure of the banks Bank deposits were not insured by then, so a bank failure implied that all depositors lost money (total savings in their bank accounts), and could not receive compensation. The US banking system went bankrupt which led to the crumple of the economy. The savers withdrew their money from the banks. The collapse of the banking reduced lending and hence a fall in investment. A cut in consumer spending was experienced leading to a disastrous economy. The cut in spending then led to a reduction in production thus a fall in prices to try increase the consumption rate. More trouble was created such as: .more people were reluctant to spend tier money as they preferred to hoard cash (Creating the paradox of thrift according to Keynes) .increased unemployment due to increased real wage as workers did not want nominal wage cuts. .it augmented the difficulty of settling debts borrowed in 1920s. Drought There was a drought that hit Mississippi. Agriculture was mainly relied on to be coming from this place. It became hard for the country to produce food enough for its population. They had to come up with other ways to ensure its citizens were to be well fed. Unemployment and the Negative Multiplier effect When the banks went bankrupt, people withdrew their money from the banks. Consumers had to cut their spending in order to remain at per with the situation. Industries had to reduce the output as more products remained in the stores. The reduction in output rendered more people to be laid off in order to maintain a profitable production hence creating a negative multiplier effect. In the 1930s as the economy begun to recover, unemployment got a little relief. Unemployment caused a reduction in spending. Global downturn Europe and UK had borrowed large amounts from America to help recover after the First World War. This made the US be closely bonded to the rest of the world economically. As the US experienced a slump in their economy, it started recalling its loans. As a matter of fact, the depression spread to the rest of the world and the Europe was unable to repay, with the introduction of tariffs restricted trade and accelerated the recession. Buying on margin The financial market was fastened by investors who bought stock on the margin. It is an attempt to buy stock on lent money and the stock itself as collateral. This system worked on the upward trend only, but as the decline begun the financial institutions asked the indebted investors, to repay or add the collateral as the stock had lost value. Most people were under pressure to liquidate their stock. As more people sold their stock the prices dropped gradually. Poor monetary policies The persistence on the gold standard was a wrong move many nations were determined to keep the golden standard and in this effort they ended up in massive debts. Though, the efforts were for good intentions they yielded negatively to the economy. Maintaining the golden standard, was not as easy as it seems because as the countries had under gone, the world war their economy was extremely fragile. Some other countries like Germany was in trouble after it signed the treaty with France. It thus had to loan hugely to maintain its standard. The only country that was remarkably stable to loan it was the United States of America. However it also had to maintain its golden standard. Wrongful monetary policies Some countries resulted to poor monetary tools to try maintaining their economy. The classical economists urge that when a country is in a depression increase, in money supply, would help rejuvenate the economy and bring it to full employment. After Germany fell in the trap, it applied this policy by printing more money so that its citizens could have money for transactionary purposes. However, the effort only led the country into hyperinflation. Money had to be spent the moment it was received. Many people especial those who were on permanent salaries suffered immensely as the payment they received was barely enough for their upkeep. Banks, on the other hand, also suffered as people who had borrowed before the depression, could not afford repaying the loan and those who did only paid little. It is said that a man took a loan from the bank to purchase twelve cows, but when the repayment time for the loan transpired, he only sold one of the cows and the money was enough to settle the debt! However the policies were also used in recover. . According to Barry E. and Jeffrey S. “Exchange Rates and Economic recovery in the 1930s,”journal of economic history 45(4):925-946(December 1985) they try to evaluate the contributions of devaluation of the currency and monetary expansion on economic recovery after the depression. The effects of depression in Germany The great depression begun in the US after the crumple of the securities exchange market in 1929 and spread to other sectors. Germany had borrowed substantially from the US government to finance its expenditure during the world war through the Dawes Plan to help Germany stabilize its currency. Unemployment was witness as it rendered six million people out of work. This was close to 40% of the working population. The white collar employees also lost jobs, in fact unemployment was high in the professional group and the white collar employees. This was a result of the collapse of the industries that kept the economy on its feet. The trade tariffs implemented by the US made Germany industrial product unable to reach the American market. American being the largest purchaser of the exports meant that Germany industries had to cut their export and hence production. Many companies were forced to close down or shrink and thus loss of jobs to the employees. As Irene Guenther puts it, there was blunt chauvinism against female employees who were employed on a full time basis. They were reminded of their role as house wives and mothers. Men were to support the family as the job market became scarce. Some women gladly accepted while others fought on for their space in the market. Men were also reportedreported having been laid off in large numbers. The whole population was in trouble of unemployment and for those who were employed they were underpaid except for casual laborers who had to bargain daily their wages. Food shortage was experienced throughout as millions were unable to obtain it. The most people who suffered were children as most died due to malnutrition and hunger related diseases. Food production had gone low as a result of the inaccessibility to capital. The little money received would be rationed as to keep families surviving. Those who had it could sell to others at a very high price such that it became difficult to purchase. This was as a result of hyperinflation which the country faced. The insufficient food witnessed made the country face deficiency diseases. Many people lost their lives due to malnutrition and hunger related diseases. Those who suffered most were the children Political change was a factor as President Hindenburg supported the chancellor Heinrich Bruning, whose main objective was to deal with the budget deficit rather than unemployment. In his was to tackle he went for increase in a tax increase. This only accelerated unemployment thus Adolf Hitler was the beneficiary of the outcome. The Nazi party rose in its shares, in Weimar government, from barely 12 to 107. The government in an effort to keep the exports competitive it came up with policies such as laying off workers in order to reduce production expenses, and wage cuts, in addition to the tax increase, and reduction in government expenditure. These policies were also to check inflation. With the implementation of these policies, the chancellor became unpopular and even referred to as the hunger chancellor. Poverty levels increased drastically. Most people had lost their jobs; others had no shelter; food and other basic needs. .There was a reduction in population as some people conducted suicides. These were the most desperate in the community and had no hope of surviving. Rebellions were witnessed in Berlin as groups struggled to seize power from Weimar. Such uprisings include: -A nationalist group referred to as “black Reichswehr in Berlin -The Nazis who were fascists in Munich attempted a putsch -Communists overthrew the Saxony and Thuringia governments they also took over Rhine land and declared it to be independent. The capture of Ruhr meant that Germany lost its feet. Ruhr was a rich land both agriculturally and in terms of natural resources. The treaty signed between Germany and France, was tempered with as Germany had been unable to pay up the installments as agreed, instead after the first year it came asking for more time for it to repay. The French did not listen, and so they went for the land. Germany now had to import raw materials for its industries and food for its population. It also lost money received from other countries that used to pay freight charges. It impacted negatively on its balance of payments. The exports shrunk rapidly, and the economy was rendered to ruins. The private sector crashed during this period. It was due to the lack of access to credit which could help expand and the economic slowdown that had hit the countries. Inflation was another bottleneck that had hit the sector. Some of the industries that were privately owned ended up to be closing down as they were unable to produce viably. Due to the importation of raw materials, most of the money had to be spent and remarkably little left to pay for operational costs. Rise of trade unions. As more people were laid off, they opted to join labor unions, which would fight for their rights. The labor union had to protect the laborers from being laid off and experiencing the wage cuts. The country had opted for wage cuts to enable it to sustain labors during the depression. The workers union grew strong and stronger every day as more people feared to be laid off. They even protested on the streets. The government was forced to print extra money to pay them. This move only worsened the currency instead of helping it out. Reduction in industrial output as well as agricultural products was witnessed. It was observed that with little money in circulation and the rapidly growing inflation as more firms closed down, the output reduced gradually. The reduction meant little or no foreign exchange in the country as none was available for export References Bernanke, B. S. (June 1983) “Nonmonetary Effects of the financial crisis in the propagation of the great depression.” American Economic Review 73257-276 Bernanke, B. & Harold, J. (1991) “The Gold Standard, Deflation, and Financial Crises In The Great Depression: An International Comparison.” In Financial Markets And Financial Crises Edited By R. Glenn Hubbard. Chicago: University Of Chicago Press for NBER 33-68 Cameron, R. (1993). A Concise Economic History of the World. New York: oxford university press Díaz Alejandro, C. F.(1984) “Latin America in the 1930s.” In Latin American in the 1930s: The Harold, J. (1986). 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