The Great Economic Depression - Term Paper Example

? The Great Economic Depression The Great Depression of the 1930’s remains the most imperative economic event in the history of the United States. Through the 1920’s, the proliferation of new industries and new production methods resulted to flourishing prosperity in the U.S. As such, the country was able to effectively use its vast supply of raw material to produce a wide range of products. Basing on the speculation of quick profit, many citizens invested in the stock market. Nonetheless, this great prosperity waned in 1929 following gripping fear by the people that the economic boom was coming to an end (Bernanke 12). Indeed, the stock market crashed, the economy eventually collapsed and the U.S was marred by a long spell of economic depression. This paper analyzes the major causes of the Great Depression, and the reasons why it lasted so long. The Great Economic Depression Introduction The Great depression of the 1930 is one of the darkest moments in the economic history of the United States. It was characterized by a crash of the stock market, collapse of the economy, which eventually escalated into a prolonged period of economic depression. The Great Depression caused enormous of hardships to millions of people and resulted to the collapse of a large fraction of the country’s banks, farms and businesses. Besides many other long-term causes which developed prior to the depression such as bank failures, decline in spending and the drought conditions, the stock market crash of October 1929 is perceived as the immediate cause of the Great Depression. The crash of the stock market The crash of the stock market in October 1929 has been believed to be the major spark that marked the onset of the Great Depression. Initially, the stock market thrived through the 1920’s. The more it grew, the more people invested their money into it. Nonetheless, on Tuesday October 29, 1929, otherwise known as the Black Tuesday, the stock market crashed (Bernanke 16). Within two month after the crash of the stock market, stockholders had lost over $40 billion. Bernanke (56) notes that, by the time the crash was complete in 1932, the stock market had lost close to 90 percent of its value despite the attempts by the stock market to regain its value by the end of the 1930’s, the U.S was wallowing in Great Depression. Bank failures The other major factor that contributed to the onset of Great Depression is the bank failures. Prior to the depression, many banks, especially in the rural areas had overextended their loans to farmers, most of who could not repay. Conversely, most big banks had overextended their credit to foreign countries in the aftermath of the First World War. As times became tougher, most of the banks halted their lending and many debtors defaulted on their outstanding loans. Consequently, many banks went bankrupt. Be that as it may, more than 9000 banks in the United States had collapsed by the end of the 1930’s (McConnell, Brue and Flynn 28). As a result many people lost their savings as most of the bank deposits were uninsured. As the Great Depression continued to hit even harder, more and more banks were forced out of business due to bankruptcy. In addition, the few surviving banks were worried and became more concerned with their ability to continue running. As a result, most of them became reluctant to offer new loans. This aggravated the situation as it led to less expenditure. Thus, the increased closing of banks and the panics by the surviving banks almost completely shut down the banking system of the United States. Decline in spending Scores of economists have attributed the onset of the Great Depression to a decline in spending. This is based on huge decline in output and prices during the Great Depression. An adverse demand shock leads to a reduction in aggregate demand for goods and services at a given price. As a result of the stock market crash and increased fears regarding the future economic problems, many people stopped purchasing goods and services. This in turn led to a reduction in production. This consequently led to a reduction in the labor force. Thus, more and more people lost their jobs and unemployment rates soared. Most people in the United States became unable to keep up with paying for commodities they had initially purchased and as a result, most of these commodities were repossessed(McConnell, Brue and Flynn 36). Consequently, many business recorded tremendous increase and accumulation of their inventory. When things got out of hand and many businesses began to fail, the government stepped in by creating an American economic policy limiting trading activities with Europe through the Smoot-Hawley Tariff in 1930. This was geared towards protecting the American companies through charging high tax for imports and therefore reducing trading activities between the United States and foreign countries. This policy aggravated the Great Depression even more. Drought conditions The onset of the Great Depression has also been largely attributed to the drought conditions especially in the Mississippi Valley. As a result of this drought, many farmers lost their crops. Consequently, the 1920’s period was characterized by lack of prosperity among farmers. It was marked by tremendous falls in the prices of farm products. Between 1920 and 1921 for instance, the prices of farm produce fell about 40 percent and remained significantly lower through the 1920s (Bernanke 76). Things became so bad that some farmers opted to burn corn as fuel rather than selling it. This was more devastating as most of them were affected so much that they could not even pay their taxes and mortgages on land. In addition, most farmers were unable to repay their bank debts and other debts. Consequently, most of them resorted to selling their farms so as to get out of the debts. Why the great depression lasted so long The question as to why the Great Depression lasted so long has aroused diverse views from a wide range of economists. According to Kindleberger (36), the favorable economic fundamentals during the New Deal, increased productivity after 1933, stability in prices, reduced interest rates and increased liquidity within a short while after the collapse of the stock market collapse indicated that the recovery from the depression was on track. Nonetheless, the Great Depression endured longer that it was anticipated. Many have pinned blame for the prolonged Great Depression on various factors including President Hoover’s failed approaches to curb the depression as well as President Roosevelt’s reduced fiscal stimulus. Many economists contend that President Hoover failed to successfully respond to the unfolding Great Depression because he was a conservative who did not believe in government intervention in the free market. With the soaring unemployment rates, Hoover successfully persuaded businesses to maintain their wages high so as to maintain purchasing power (Kindleberger 39). As a result, a wide range of cartels were mounted so as to protect the existing businesses and strengthen the labor unions. These include the infamous Smoot-Hawley tariff. In addition, during the first few years of the depression, Hoover prompted the federal government to run huge deficits. Towards the end of his term, he attempted to avert this by raising taxes so as to balance the budget. Thus, many have contended that these approaches undertaken by President Hoover failed to improve the economy as they impeded the reallocation of labor and other resourced required to rectify the Great Depression. In addition, many economists have often blamed the National Industrial Recovery Act of 1933 as the major force behind preventing normal forces of supply and demand and eventually perpetuating the Great Depression (Kindleberger 46). The main goal of this legislation was to restore prosperity. Following its enactment, many industries were given the opportunity to explicitly collude. This includes sanctioning many arrangements that would previously have been perceived as antitrust activity. For instance, the act allowed for the formation of minimum prices as well as restriction of capacity within an industry. In addition, cartels were granted under the National Industrial Recovery Act in return for industries sharing their monopoly profits with workers through increased wages. As a result, many industries passed codes of fair competition under the National Industrial Recovery Act. This led to an increase in industry prices as well as wages. Many have however contended that the National Industrial Recovery Act was a very destructive policy(McConnell, Brue and Flynn 128). This is attributed to the fact that it led to artificial increase of wages and prices. Overpriced labour led to reduced job opportunities. Similarly, overpriced goods and services led to real poverty. Conversely, the codes of fair competition were only beneficial to specific industries and imposed detrimental effects on several others. For instance, the prices and wages in the agricultural sector were adversely affected. Despite the ruling of the National Industrial Recovery Act as unconstitutional, its policies persisted for a long time. Eventually, the National Labour Relations Act was enacted. This was also aimed at increasing the union bargaining power so as to ensure further increase of wages. This witnessed substantial increase of wages. Conclusion Thus, it is apparent that the Great Depression is one of the major devastating occurrences in the economic history of the United States. The onset of the depression was largely attributed to the crash in the stock market, bank failures, decline in spending, as well as the drought conditions which adversely affected farming activities. Of great concern is the fact that the Great Depression endured for so long. This has been largely attributed to the filed approaches and policies undertaken by both President Hoover and his successor, President Roosevelt. Suggested areas for further research To date, there still exist varied contentions as to what exactly was the root cause of the Great Depression. Whereas some scholars attribute the Great Depression to the crash of the stock market in the late 1929, others contend that it was as a result of bank failure. As such, there is need for more research so as to establish the exact cause of the Great Depression. Also, more research in needed to analyze the extent of the effects of the Great Depression. Indeed, the great depression lead to widespread sufferings. However, more quantitative research to extensively examine the magnitude of these effects is needed. Works Cited Bernanke, B.S.(2000). Essays on the Great Depression. New Jersey: Princeton University Press. Kindleberger, C. (2006). The World in Depression 1929-1939. Rev. ed. Berkeley: University of California. McConnell, C., Brue, S., & Flynn, S. (2008). Economics. (18 ed.). New York: McGraw- Hill/Irwin. Read More