The Causes of the Great Depression in the 1920s - Essay Example

1920s Research Essay Introduction Historians world over contend that the 1920s was a luxurious decade that had severe economic ramifications to the world economies. The likes of John Maynard Keynes, Friedrich Hayek and Murray Rothbard all of who have investigated the causes of the great depression, the worst global economic crisis, attribute the crisis to the financial activities in the decade. The financial booms that began in the mid-1920s contributed to the crush of the stock market in the United States thereby instigating the financial crisis (Mishkin 921). Such portray the weakness in the policies developed by governments in the decade most of which created a conducive environment for the crisis to thrive. Because of the stock market crash, buying on margin, and people living beyond their means after a decade of luxury and wealth in the 1920s America, almost overnight, entered the great depression, which was a time of devastating poverty for the majority of the nation as the discussion below portrays. Ironically, among the causes of the great depression was overproduction in the 1920s. Farmers and industries in the United States for example produced more that the country could consume. Instead of such desirable production patterns increasing the country’s food security, they contributed to the worst economic crisis that exposed the population to abject poverty for years. This portrayed the inability of the government to make effective policies to safeguard the future of the country. Apparently, the world was reviving after the devastating First World War with the successive peace and stability contributing to the segmentation of regions. This resulted in a scenario where countries had to rely on their internal economies owing to the lack of international trade. The scenario coupled with the lack of effective policies to cushion the populace from the prevailing economic trends thus resulted in a massive decline in the cost of products in the country. as the policy of demand and supply portrays, in case of an increased supply the demand is likely to decline thereby resulting in the decrease in the prices of products in the American market economy in the late 1920s (Eichengreen 172). As the people enjoyed price decreases, which had fallen by more than 40%, farmers continued incurring loses thereby instigating supplanting of workers as some companies opted to close down. This would later cause the greatest unemployment in the country thus the great depression. As John Maynard Keynes argues in his General Theory of Employment Interest and Money, the economy is a self-sustaining cycle with myriad industries all of which must operate in tandem (Mishkin 926). This implies that any undesirable economic feature in a sector affects the operations of the other thereby affecting the entire economy. The manifestation of the great depression proved this explanation as the effects of failing industries and the market immediately halted the country’s economy before spreading to other parts of the country. American government among many other governments throughout the world failed to recognize the intertwined nature of the economy. The recession that began in the form of declining cost of commodities in the market was a great news to many in the countries. However, the ramifications of such reduced prices were yet to begin. Among the effects was overproduction, which as explained above was ironical since overproduction should have depicted a developing economy. Companies were overproducing products but wages remained low with some companies even opting to minimize the number of their employees. Apparently, the capitalist investors failed to recognize the relationship between better wages and the development of market for their products. The masses continued to earn peanuts and could not therefore afford the products that were increasingly becoming cheaper. As a result, the products continued to become cheaper while yet the people could not afford them thereby causing loses to the companies, which eventually resorted to retrenching their employees in order to safeguard their profits. Such a scenario portrays the government’s lack of preparedness and laxity in cushioning the people from the eminent economic crisis in the 1920s. The government, one of the greatest spenders in any economy refused to purchase products from the market thereby contributing to the currency crisis in the country. Government expenditure could have cushioned the companies from incurring some of the losses they incurred. The refusal by the government to purchase products as it sought to save therefore sparked the worst economic crisis that caused abject poverty of people throughout the world. Another greater cause of luxury in the country especially to the rich was the uneven distribution of resources. The widening gap between the rich and the poor thus worsened the economic crisis in the subsequent decade. The fact that the government failed to minimize the widening gap between the rich and the poor portrayed its contribution to the crisis besides portraying the American government’s inability to manage the economy at the time. As discussed earlier, the economy is a cycle a feature that implies that the relationship existing among the industries contributes to the state of the economy of any country. in a bid to increase their profitability, the capitalist investors increased the rate of production while retaining the meager wages of their workers. By 1928, industrial production in the United States had increased by close to 50% a feature that should have portrayed an economic growth (Madsen 102). Despite the increase in the rate of production, the wages of the works remained constant thereby portraying the attitude of indifference the investors exhibited. Among the factors that had resulted in the increase in the rate of production were cheap cost of labor and the decreasing cost of farm produce in the market. As such, the workers deserved a better pay in order to improve the liquidity of the economy thereby resulting in the growth of the market. Instead of increasing the wages, the investors sought to limit the salaries they paid and reduce the number of their workers since they argued that the market was diminishing. Such factors thus conspired against the rich as they successfully halted the economy by curtailing any form of economic activity in the country. Among the effects of the minimal wages the workers earned was their inability to afford the products in the market despite the reduced cost of farm produce and industrial products. This contributed to the recession as both the farmers and the industrialists sought to entice more consumers. Unknown to them, the consumers lacked money to purchase the products even if they wanted to, the increase in the rate of unemployment coupled with low wages for the few who still had jobs decreased the capacity of the market thus enhancing the market. Such factors would later make it difficult for countries to recover from the crisis (Davis 45). As the state of the economy worsened, the amount of produces and products from the industries diminished thereby resulting in an equally hushed inflation as the supply reduced. Inflation coupled with the lack of money since most people were unemployed made it impossible for some countries to recover from the crisis. The stock market crash in the United States was the greatest cause of the global economic crisis. The financial activities at the Dow Jones resulted in the loss of more than thirty billion dollars within a period of six months. The rapid loss of a huge sum had severe ramifications benefiting only one percent of the country’s population while causing actual financial losses to the remaining ninety nine percent of the country’s population. Speculation is a strategy that has influenced the activities in global stock markets. Investors purchase stocks they believe will appreciate within the shortest time while selling those they feel are likely to slump. The precarious nature of the economy of the market in the decade especially the year in which the crush occurred was unpredictable (Madsen 851). The increase in industrial production despite the abject lack of market was a motivation to most investors who believed that the companies would soon make profits. This heightened speculation on such companies thereby resulting in a rush for such stock. Additionally, the policy of buying on margin further worsened the situation. The policies required investors to raise five percent of the cost of stocks in the market while financial institutions including banks raised the remaining ninety-five percent. The money in most banks was uninsured and belonged to the people (Eichengreen 89). This implied that if the investors incurred lose, bank customers who had invested their money with the banks would incur direct loses. This fear materialized when companies continued incurring loses owing to the slim market. This resulted in a financial disaster and a wide public uproar as the people realized that they had lost their savings owing to the precarious financial activities the banks had engaged in without prior insurance. In a summary, the luxury that the United States among many other countries enjoyed in the 1920s was a precursor to the worst global economic crisis. The decade was characterized with increased production by both farmers and industries a feature that most people mistook for industrial and economic growth. As the prices of products continued to decrease in one of the worst global recession, the people enjoyed with a few investors, approximately one percent of the American population incurring loses while the rest of the population most of who worked as laborers in the industries enjoying the declining cost of products in the market. The one percent of the American population who incurred losses in the industries on the other hand made their money in the stock market where they enjoyed relaxed financial policies with the banks financing their risky investments (Davis 77). Before the end of the decade, the economy began experiencing the negative effects of the luxury and unplanned overproduction that the government had for once thought was a sign of economic prosperity especially coming soon after the war. The declining recession coupled with increasing, rates of employment were to become the causes of the worst economic crisis that most countries took more than a decade to survive. Works cited Davis, Joseph. S. The World Between the Wars, 1919–39: An Economists View. Upper Saddle River, NJ: Prentice-Hall, 1974. Print. Eichengreen, Barry. Golden fetters: The gold standard and the Great Depression, 1919–1939. Huntington, N.Y: Novinka Books, 1992. Print. http://www.slideshare.net/kansaskitchen/5-main-causes-of-the-great-depression Madsen, Jakob B. "Trade Barriers and the Collapse of World Trade during the Great Depression", Southern Economic Journal, Southern Economic Journal 2001, 67(4), 848 868. Internet resource. Mishkin, Fredric "The Household Balance and the Great Depression". Journal of Economic History 38 (4): 918–37, December 1978. Print. Read More