What Is the Great Depression - Essay Example

Great Depression Name & ID Course Name & Code Instructor’s Name 11th January 2010 Introduction The phrase Great Depression refers to the global economic crisis that occurred on October 29, 1929, when the Wall Street stock market crashed1. At the time of Great Depression, minimal investments were possible while the level of production decreased resulting in drastic increase in unemployment. Most of the monies and banks in United States of America had been invested in the stock market, the panic associated with economic recession forced many businesses/banks to close their doors thus taking with them customer’s money, which they had invested in the organisation2. When the economic situations in US worsened many countries, especially those within Europe and Asia pulled back their investments resulting in devastation. Even though, governments introduced different strategies that include policies and relief programs after the stock market crash, it was after the Second World War that US economy began to recover translating in other economies recovering. Thus, the aim of this paper is to discuss and analyse the causes, effects and strategies that were employed to solve the Great Depression3. Causes of Great Depression Great Depression was the worst economic scenario that started in United States of American and virtually to most of the industrialised countries. The depression that lasted appropriately one decade began in late 19294. Numerous factors contributed in bringing about the depression but the main causes for the Great Depression was extensive stock market speculation and great unequal distribution of wealth throughout the 1920s – roaring twenties5. The distribution of wealth between sectors was unfair especially money was distributed disparately between the rich and middle-class, between U.S. and Europe, and between agriculture and industry within the United States. This resulted in an economy that was not stable. Thus, combination of excessive speculation and stock market resulted in American economy to capsize6. Another major contributor is the approach of federal government that contributed to the growing disparity between the middle-class and the rich. Legislations that were based in the 1920s favoured development of business and thus made few people wealthy who invested in these businesses. An example of such legislation is the Revenue Act of 1926 that reduced inheritance taxes and federal income drastically7. Additionally, the Supreme Court played a major impact in expanding disparity between the socioeconomic classes. For example, in the case Adkins vs. Children’s Hospital, the court was biased because it ruled minimum-wage legislation unconstitutionally. These federal directives resulted in more goods been supplied rather than the amount demanded by the economy, and the price for the rich and poor was the same. Thus, the oversupply of goods and services (even though most individuals wanted these goods, they were beyond their reach in terms of value) resulted in the introduction of purchasing goods on credit. This concept of buying today and paying later was quickly embraced by the society and that within some few years many goods were bought on instalment credit. The outstanding instalment credit grew tremendously, and this approach created artificial demand for goods that individuals could not ordinarily afford. Hence, with time purchases decreased since many people had what they wanted and needed and thus few sales were made while the wages and salaries went to paying back past purchases8. Misdistribution of wealth between industries also contributed to the depression. Some industries were growing (for example, automotive industry) while others were declining (for example, agriculture). Generally, industries and corporations that were successful in the 1920s were associated with radio industry or automotive industry9. The construction industry developed because of the need for roads, hotels were constructed while many industries required radios for communications. The federal government had encouraged people to purchase more land and improve on production strategies resulting in surplus, which meant that the farm prices and food prices tumbled10. Reduction in purchasing power of the consumers across the board was evident doubled up with the stock market crush that many people feared of further economic woes and thus individuals across different socioeconomic classes stopped purchasing goods. This meant that goods that were been produced decreased resulting in reduction in the workforce11. Many people lost their jobs, and then they were not able to pay for their purchases that they had initially bought in terms of instalments, and hence their goods were repossessed. Moreover, while unemployment rose, more people decreased their spending, which contributed to less goods purchased12. Additionally, policies that were passed especially by United States of America prevented effective trade between US and Europe. For example, the US federal government passed a legislation commonly known as the Smoot-Hawley Tariff that was aimed at protecting American companies. This resulted in increase of tax imports thereby resulting in less trade especially between America and foreign countries, and it resulted to numerous economic retaliations13. Consequences of Great Depression The effects of Great Depression were numerous spanning from unemployment to political instabilities. Unemployment worsened because of lack of alternate job sources and most people dependent on primary sector industries; a sector that was adversely hit by associated prices. This resulted in many people turning to mining and farming. Even though the Great Depression ended at different periods, the unemployment ratio had skyrocketed affecting generations that followed. To alleviate the unemployment suffering, many governments introduce diverse relief programs. Moreover, the effects of unemployment were increased because of severe deflation and over-indebtedness. Numerous business assets were sold in distress while other businesses liquidated their businesses. This resulted in prices of businesses assets falling and many business organisations filed for bankruptcy, and this fanned unemployment rates. Many family members resulted in looking for jobs that paid by kind. This affected production and reduction of output was evident, the trade decreased resulting in a scenario that employment opportunities were bleak. Many ordinary families became pessimist resulting in hoarding of available money. Numerous economic complications resulted in decrease in interest rate and caused a sudden rise in deflation that contributed to the crash in the money market. Even though the Federal Reserve passed banking regulations while the government provided guarantees, these strategies never eased the complications experienced. Due to bank failures, many people and organisations lost their investments in large monetary value resulting in increase of outstanding debts. Homes values depreciated while countries such as Russia experienced the impact of depression since the entire economic scenario created a vicious cycle that spiralled downward14. The common person was adversely victimised by decrease in international trade doubled up with the overall economic activity. Many farmers that dependent on cash crops were hit hard because there were no buyers who could purchase their produce. Moreover, the collapse of the export trade contributed to the farmers difficulties because they defaulted on their loans. This resulted in a scenario that the job opportunities were not hard of while many people looked for alternate resource and sometimes this resource was paying little or nothing at all15. The money then drop in terms of quantum and evaluation, and thus the monetary inflation resulted in economic recession. On the other end, the farmers and labour unions were had pressed because they were supposed to meet the bipartisan deregulation and meet the raised taxes. The reduction in aggregate expenditure contributed towards high unemployment and decline in trade. Moreover, private investors were afraid of the business environment and thus were not able to invest enough to help in raising production levels or contribute towards reversing the recession. The Great Depression affected different government and countries worldwide since international commerce drastically declined: sharp reduction in profits, tax revenues and personal incomes. The Depression affected both raw producing countries and industrialised countries in that it contributed to decrease n world trade because each country passed legislations that tried to protect their own products and industries through raising taxes on imports. While governments reduced their governmental spending, it also contributed in decrease of consumer demand. Others countries were affected more because the type of governments were changed16. For example, in Germany because of economic conditions resulted in coming to power of Adolf Hitler; the German government was affected because debts associated with World War I17. On the other hand, Japan invaded China, they developed industries, and mines in Manchuria, Japan had thought that this would relieve he depression18. Additionally, the Great Depression contributed to political effects. For example, reaction to the Great Depression in Japan and Germany resulted in rise to power of militarist governments that adopted strategies and policies that contributed towards World War II. Generally, many investors lost investments while stores, banks and factories were closed leaving many people penniless, jobless, and homeless19. Solutions t Great Depression The leadership of President Hoover, American citizens and the country itself was ripe for change. This means that the leadership that was required was aimed at reviving federal government into the economy, and thus such leader was the Democratic candidate Franklin Delano Roosevelt. To solve the issues of Great Depression, President Roosevelt introduced the New Deal, which provided foundation to restore the country’s self-confidence, establish social program measures, help to support the economy, and played a major role in ensuring that all citizens are supported. The major issue that the president took into consideration was the banking crisis. This made the congress to pass the resolutions through passing 15 pieces of legislation that were paramount in the banking industry. Moreover, the government formulated welfare programs and jobs that were funded by the federal20. President Roosevelt approach was perceived by the wealthy and many people as against their views and thus his presidential support began to decline21. Thus, he proposed numerous legislations that introduced unemployment insurance and federal pensions, employers were not allowed to meddle with unions, and increased taxation of the wealthy and used the tax to support the poor. President Roosevelt then restructured the Supreme Court and expanded the executive power. Generally, the New Deal benefited most Americans and the American landscape itself e.g. controlling of erosion, construction of numerous dams, planted trees, build scenic highways and curbed dust bowl22. In the case of Germany, the victory by Nazi’s in 1933 was a major solution to the Great Depression. The aim of Nazi program was to decrease on unemployment and this was achieved partially. Implementation of the plan was conditioned by an omnipotent government. The economy that was embraced was that of stiff capitalism but also was embraced differently by different economic industries. The defence industry contributed towards the recovery of Germany. This was essential vector in that it helped to recreate a strong Germany in which at the same time gave people work23. On the other hand, Great Britain approached the issue differently. Great Britain was able to navigate through the Great Depression easily because of three elements that played a major role. One of the three elements is the abandonment of gold standard in 1931, the second element is the devaluation of the pound while the third element is the adoption of higher tariffs. This means that when Great Britain abandoned the gold standard, she provided herself with a competitive advantage compared to those countries that did not abandon the gold standard. Moreover, introduction of new tariff legislations ensured that the domestic industries were protected while the 30% devaluation of the pound ensured that Great Britain had a competitive edge because the British products were cheaper relative to the rest of the world24. In the case of France, they reacted different to the Great Depression compared to other industrialised countries. The economy of France was stable until 1932, and was not able to devaluate the franc until 1936 while they abandoned the gold standard in 193725. Thus, in the 1930s, the French product and industries were uncompetitive since they did not embrace the same actions has those of Great Britain, United States of America and Germany. Embracing these strategies ensured that France recovered from Great Depression. Japan on the other hand was not adversely affected by the Great Depression because they had planned economy and had earlier understood the importance of devaluation of the yen. This means that in the case of Japan, the effects of Great Depression were mitigated and reduced from the start26. It is believed that the World War II played a major role in decreasing or reducing the effects and becoming a contributing solution to Great Depression. The war made many governments to spend on production both military requirements and food. Increase in output requires many people to work, thus employment opportunities increased, and hence people could spend, paying for the services and products that they wanted. This greatly improved the economic position of the country and thus began to stop the effects and causes of Great Depression. Even though war is associated with destruction, many industries benefited through the government spending on preparing and actual participation in the war27. Conclusion Many countries are required to provide for their citizens and ensure that they get employment opportunities, ensure that the basic requirements are cared for, and the economy should be growing. These requirements have been fulfilled continuously through different strategies but economic recession was seen in 1929, a recession that is commonly referred to Great Depression. The Great Depression refers to the economic crisis that started after the market crash that occurred in 1929 in the United States of American that later spread to other nations. The Great Depression is associated with numerous factors that caused it. Unequal distribution of wealth and extensive speculation of stock market contributed towards Great Depression. Moreover, legislations that were passed favoured social class and certain industries. Purchasing of goods and services on credit resulted in reduction of purchasing power, the policies that were passed in United States of America affected international trade, and this resulted in decrease of products market. The Great Depression resulted in unemployment, many organisations filed for bankruptcy, decrease in interest rates, rise in deflation, the common consumer was victimised by decrease in international trade, the private sectors were afraid in investing, and decrease in organisation profits and revenues, and the economic situation resulted in political changes, a factor that contributed towards World War II. This Great Depression issue was solved through introduction of changes in leadership of United States of America through electing President Roosevelt. President Roosevelt introduced the New Deal and partly played a major role in improving position of common people. Moreover, other strategies include abandonment of gold standard, devaluation of major currencies, planning of economies, and introduction of welfare programs. Additionally, World War II played a paramount role since output was increased and thus job opportunities were available, hence the end of Great Depression. 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