Capitalism and the Great Depression of the 1930s - Assignment Example

The Great Depression of 1930s The Great Depression of 1930s The great depression is remembered as an economic downturn,which occurred globally as from October 1929 and was witnessed through 1930s. The depression started in the United States of America and within a short time spread to Europe and other countries worldwide. Almost all countries worldwide affected with industrialized, countries relying on raw materials devastated by its effects for they could no longer get the necessary supply. The economic crisis led to fall in international trade with each notion trying to secure itself. Massive unemployment and decline personal income occurred due to job logoffs and retrenchments. Various companies reduced their labour force while others fully shut down leading to massive loss of employment. The economic depression led to loss of business and closing down of many businesses, which led to decline in tax revenues. Many organizations and individuals were also unable to pay their taxes, which made things worse. Prices of goods and services also declined, and profits not witnessed. Crop production fell with most farms affected by drought, which saw the fall in crop prices. The hardships witnessed and non-remittance of taxes forced people out of their homes creating a situation of homelessness. Situation of unemployment and homelessness seriously affected the poor in the society. The economic activities in many countries were markedly affected with many sectors facing problems. Construction industry in many countries slowed and even stopped owing to materials and labor force needed. Farming in a rural setting was also affected by drought and financial inability. Farmers were not able to pay off debt accrued from production expenses due to poor production and fall in crop prices. Among the sectors affected is the mining and logging sectors, which faced drastic, negative effects due to decline in demand for its products, most were forced to cut down on their activities with others closing up, which further affected unemployment. The ending of the great depression was witnessed by different countries at different times, but it was with the advent of WWII. There is believe that government spending in the war stimulated the economies of various nations. The war required production of various products to be used in the war and agricultural goods to be consumed. The sourcing of labor to participate in the war aided in solving the unemployment problem. Women and men who did not participate in the war also got the opportunity to work in the local industries (Maddison, 2007). Different countries also put up measures to curb the effects of depression. Countries set up programs to elevate its people from the effects of depression. During this period, some countries faced political problems, which weakened their democracy yielding to leaders believing in dictatorial power Adolf Hitler. A number of issues are seen to have been the causes of the great depression (Maddison, 2007). United States were fairing on well with a lot of optimism and prosperity economically before Tuesday the 29th October 1929, when the stock market crashed and caused despair in the nation. This is seen to have marked the beginning of the great depression. The stock prices began to fall drastically without showing signs of recovery, which made people panic. Out of panic and fright, people rushed to sell their stock and shares to no avail since no one was buying. There was massive fear since many people and businesses had invested stock market, which had seemed to be a viable investment. Many banks involved in this problem for they had invested in the stock market. When the stock market crashed, many banks put in a crisis, and they thus forced to close. When banks started closing, people panicked and made efforts to withdraw their money in the fear of losing them. Those who were unable to withdraw their money in time became bankrupt for their where no way they could recover their savings upon the close of banks. This because bank savings were uninsured making customers simply loses their money. With the economic uncertainty and concern for survival, many banks got unwilling to offer new loans, which worsened the situation and cut down on expenditure. The stock market crash and the economic uncertainty made people cut down on the making of purchases. The low purchases led to the reduction in work force required in industries. Hayek Fredrich states that these events happened spontaneously because of human actions. Businesses cut down on the number of hours and wages with some lying off their workers. Other businesses were unable to keep with the demands of the time and closed down leaving their workers jobless. People were unable to meet the terms of the goods bought on installments, which were reposed (Heilbroner & Milberg, 2009). Other people defaulted paying up their loans and their property and homes attached leaving them bankrupt and homeless. These made people cut their spending and avoid purchasing of luxurious properties. The economic crisis hit largely on the local companies, which made the government seek to protect its local companies. The falling trend of business made United States design an American economic policy with Europe, which came to contribute to depression. To this effect, US government created the Smooth-Hawley Tariff in 1930 with the aim of protecting local companies. Through it, imports were taxed highly, which led to reduced trading between America and foreign countries. The reduced trade came with economic effects for the revenues and business profits reduced drastically. Unlike in previous economic situations where farmers were able to be insulated by availability of food, the great depression was different. During this period, the Mississippi valley faced tough conditions of both draught and dust storms, which contributed to the worsening of the effects of the depression. The year of overgrazing and the draught effects caused the disappearance of grass cover exposing the top soil. The soil was picked by high winds from dust storms, which destroyed farm crops leaving farmers with nothing. Upon default in loan repayment, financial institutions foreclosed farms, the sole farmer’s asset leaving them bankrupt, homeless and unemployed. The great depression attracted opinions and discussions from various scholars and philosophers. Monetarist like Milton Friedman beliefs that the great depression caused by monetary contraction both in the U.S and worldwide, he is of the idea that it was caused by poor policy making by American Federal Reserve System and the continued crisis in the banking system (Hellbruner, 2000). The Federal Reserve having noticed that there was an economic problem in the looming did not act and allowed the money supply to shrink further. It also watched helplessly as the banks fought a losing battle and towards the collapse of many banks. Friedman argues that the economic downturn right from the stock market crash could have been just like any other recession (Hellbruner, 2000). He thinks that the Federal Reserve should have chipped in and aided the banks by providing emergency lending to cushion them from the crisis, but it just assumed. He believes that it could have ensured that there is sufficient money in circulation and adequate liquidity. Friedrich Hoyek also blames the Federal Reserve for the great depression and its effects. He argues that the Federal Reserve caused the expansion of money supply to the individual and businesses, which was not appropriate for the economy of the country. He says that these led to the unsustainable credit-driven boom, which forged untrue belief that there was financial security yet there was none. Individuals and business receive loans to invest not bearing in mind the risks involved. The stock market crash of 1929 came when many investments in the stock met using borrowed money. The loss of money through either the fall of stock market or the collapse of banks aggravated the great depression. Governments of various countries put in place measures to deal with effects of the great depression and put the economic conditions of the country back to track. Some governments did put in place policies and strategies, which could save the situation. Capitalism was used in some countries to retrace the economic steps. Capitalism is an economic system that emphasizes private ownership of the means of production or a privately controlled economy (Friedan, 2006). The system belief in a society, which operates under a free market with companies aiming at making profits, business enterprises operate to make money with a view of maximizing wealth of their owners and shareholders. It strives in competition in a free market with market factors like crisis, production and marketing determined by competition. It is premised when a market economy with limited regulation framework and some legislation meant to define and enforce basic rules of free market. The governments chips in to provide some public goods and services in support. Karl Marx sees capitalism as a phase in human history with developing social and economic system. Capitalism with limited control, rules and regulations, is a system, which can easily be disturbed and lead to crisis. According to Marx, the crisis period is market by great changes in a society and more clearly defined struggle between various classes (Frieden, 2006). It states that capitalism crisis develops when there is excessive production and the workers who are in critical in production marginalized. When workers see that there are marginalized they can decide to interact production thus creating market disturbance. Capitalism is also unstable because it only strives in the highs. As Karl Max states, “what comes up must come down”, is indicative of instability in the capitalists system. Capitalist society does not go with stepwise incremental growth. The rapid, unchecked growth is not easily controlled thus putting it stability becomes difficult. Capitalism is also unstable as it moves through different phases of growth and depression leading to unregulated nature of capitalism implying the absence of coordination demand and production; hence overproduction or under consumption can occur (Frieden, 2006). Hayek Fredrich believes in capitalism comes in because of human action and not design as viewed initially. It is conclusive that the great depression had drastic effects, which ought to have been controlled. Important check mechanisms should have been put in place to avert such eventualities (Friedan, 2006). Capitalism as an economic system a disadvantageous for its uncontrolled nature where individuals operates unchecked, capitalism thus, is not ideal for growing economies. Reference Frieden, Jeffrey (2006). Global Capitalism New York: W.W. Norton [Frieden]. Glyn, Andrew (2006). Capitalism Unleashed Finance, Globalization and Welfare. Oxford University Press [Glyn]. Heilbroner, Robert and Milberg, William (2009) The Making of Economic Society 12th edition. Upper Saddle River: Prentice Hall. [Hereafter ‘Heilbroner and Milberg’]. Heilbroner, Robert L. (2000). The Worldly Philosophers 7th edition. London: Penguin. [Hereafter, ‘Philosophers’]. Maddison, Angus (2007). The World Economy 2nd edition, Paris OECD, or first edition if not available. [Hereafter ‘Maddison’]. Read More