The Great Crash and the Onset of the Great Depression - Example

Table of Contents Particulars Page No 1.0 Introduction 02 2.0 The Great Depression 1929 03 3.0 Major Causes of the Great Depression 1929 03 3.1 The Stock Market Crash of 1929 04 3.2 Failure of Banking System 05 3.3 The Gold Standard 05 3.4 International Lending and Trade 06 3.5 World War I 06 3.6 Drought Conditions 06 4.0 Longevity of the Great Depression 07 5.0 Conclusion 08 6.0 References 09 1.0 Introduction The Great Depression was a world economic depression which began in most places in 1929 and was considered to be ended in the early 1933. However, many economists still believe that The Great Depression had a long lasting impact until 1945 and had strongly affected the entire world including developed countries such as USA, UK, Canada, Germany and France. This report looks to make an attempt to identify the major reasons behind The Great Depression along with an answer to when the depression finally ended with reasons of its long term continuation. Finally a conclusion is provided to ensure that the readers are equipped with both theoretical and practical understanding of the entire topic under study. 2.0 The Great Depression The Great Depression was the most serious economic depression in the decade preceding the World War II. The timing of the depression varied across nations but in most of the countries it triggered in about 1929 and lasted till late 1930’s or early 1940s. The Great Depression is regarded as the most longest, widespread and deepest depression of the 20th century and is a classical example of how far could the world economy decline. The depression as per most of the economist originated in the United States with the fall in stock prices which began around September 4, 1929 with a severe stock market crash on October 29, 1929 (Known as Black Tuesday) and then spread across the globe. The Great Depression had significant devastating effect in almost all developed, developing and under developed countries all across the globe. Personal Income, Tax Revenue, Profits and Prices all declined significantly with international trade plunged by ½ to 2/3. Unemployment rose heavily to about 33% in many countries with 25% in United States. Countries all across the world faced a major set-back with particularly countries dependent on heavy industry. Facing plummeting demand with few alternate sources of jobs, economies which dependent largely of primary sector industries such as cash cropping, mining and logging suffered the most. 3.0 Major Causes of The Great Depression 1929 Different economist have pointed out different causes or reasons for such a great depression as there was no one particular reason for such a depression but indeed was a cluster of factors or causes which lead to The Great Depression of 1929. There were multiple causes for the first downturn in 1929 which includes both structural weaknesses and specific events which turned into a major depression. Let us have a look at the major reasons or causes for The Great Depression of 1929. 3.1The Stock Market Crash of 1929 The Bull market crash of 1929 was one the most contributing factor which triggered the Great Depression. American’s had spend enough money which they actually did not posses or for which they had any no credit sources. As a result of the same people looked towards stock market business and started investing in worthless shares with an intent to pay back the money which they had borrowed from money lenders. Mean while American economy went into a an ordinary recession in the early 1929 and consumer spending began to decline and unsold goods being piled up. At the same time, stock price continued to rise and by the fall of that year reached level which could not be justified. On October 24,1929 the stock market bubble finally burst and huge investors began to dump or sale stocks an masse. A record of 12.9 million shares traded on that day which is regarded as the “Black Thursday” and five days later “Black Tuesday” some 16 million shares were traded. As a result million of shares ended up worthless and investors who had brought shares on margin were completely wiped off. Due to such a huge market crash, the economy witnessed a major downturn in spending and investment which led factories and other businesses to slow down their production and construction and they began firing their workers and employees as a cost reduction tool. The buying power of consumer declined significantly and Americans were forced to buy credits which fell into huge debts which led to complete economic decline and huge depression (Romer ,1990) . 3.2 Failure of Banking System Most of the economist would sideshow the stock market crash as the significant factor for the cause of the Great Depression as the real mess was made by banks with their ridiculous loans. Federal Reserve is America’s critical banking system who were already warned against the looming stock speculation and asked to raise interest rates to slow down borrowings which would eventually lead to lower investment in stock markets. However the Federal Bank denied the opportunity of raising interest and continued their policy of lending easy loans. As a result most of the American population lost their jobs and could not afford to pay back the loans which they had taken during the stock market boom. This resulted in bankruptcy by some 9000 banks during the 1930s. When the bank failed so did the account holder’s deposits in their respective banks. The remaining bank had problems in holding on their customer’s deposits as customers on a large scale withdrew their savings leaving the banks empty (Richardson, 2006). The bank as a result of the same stopped providing new loans to businesses and individuals which led to sharp decline in consumer spending and caused other business to fail as well. 3.3 The Gold Standard Economists are the view that The Federal Reserve allowed huge declines in the American money supply to preserve the Gold Standard. Under The Gold Standard system, each country could set a value of its currency in terms of gold and take monetary actions to defend the fixed price. Once the US economy began to contract, the tendency of gold to flow out of other countries and towards US intensified. Deflation rose to a considerable extend reducing the demand of American products and central bank though out the world raised interest rates which resulted in decline in output and prices in countries all across the globe to match the downturn in US. This reduced the banks collateral and made them more vulnerable to runs. 3.4 International Lending and Trade The US foreign lending witnessed a fall in 1928 and 1929 as a result of rising interest rates and booming share market. This reduction in foreign lending led to further credit contractions and decline in outputs in the borrower countries. Further the enactment of Smooth Hawley Tariff which raised the import tariffs on above 20000 imported goods which reduced the American imports and exports by more than half and contributed significantly to the severity of the Great Depression. 3.5 World War I With the onset of First World War in 1914, nobody expected that it could last for such 4 long years and involved so many countries, technology, live and money. America during the war joined as top beneficiary and money lender on post war reclamation. The European powers incurred huge debts in order to pay for the expenses of the war as American banks asked for their money during the huge recession period and which indeed lead to worldwide economic downturn as countries which suffered during the war were themselves not stable for meeting their economic needs could in no turn pay back their debts to American banks thus deepening its impact. 3.6 Drought Conditions The drought which occurred in the Mississippi Valley in 1930 may not be a direct factor which contributed towards the Great Depression however was so significance that many could not pay their debts and had to sell their farms for no profits. The drought made a major impact on the daily needs of life and brought about scarcity in terms of food supplies. There were many other small factors which equally contributed to the occurrence of the Great Depression such as huge unemployment (America witnessed over 25% unemployment rate), rising inflation, low purchasing power, wrong monetary and fiscal policies by the Federal Reserve etc. 4.0 Longevity of the Great Depression There has been a great myth of when actually did the depression end as the timing of the depression varied across nations but in most of the countries it triggered in about 1929 and lasted till late 1930’s or early 1940s. There were several factors or reasons behind such longevity of the Great Depression. One of the major reasons for such longevity of The Great Depression was economic imbalance, as inflation was at its zenith with low purchasing power and consumer spending and banks looking to consolidate their position than its investors. Further the top banks wanted to secure wealth in the hands of few individuals. Easy credit and debts allowed money to be churned in the booming stock market which witnessed a major crash and individuals failed to pay any debts and further withdraw their savings leading to complete bankruptcy of the banks itself. Furthermore the new policies as a recovery process slowed down the recovery. Some of the New Deal Policies certainly brought benefits to the economy in terms of social security and unemployment benefits along with stabilization of the financial system through deposit insurance and Securities Exchange Commission. However others violated its most basic principle by suppressing competition and prices in many sectors were set much above their normal level. The National Industrial Recovery Act further tossed aside the country’s antitrust acts and permitted industries to collusively raise prices. The NRIA covered over 500 industries where each industry looked to set up its own code of conduct as what producers could and could not do thus, losing its central control and the demand and supply factors along with equilibrium were over ruled with prime focus on booking profits which worsen the situation. Furthermore, the aftershocks of the Great Depression was hard to be handled by even the most developed economies and there were several recession during the period 1937 to 1939 which contributed further to its longevity. 5.0 Conclusion The report highlights the complete background of the Great Depression of 1929 along with contributing factors for its initiation such as the stock market crash, failure of the banking system, wrong move by the Federal Banks, rising unemployment etc. Furthermore the depression lasted long then its anticipation mainly on account of poor economic imbalances, severe aftershocks in terms of recession, poor new policies etc. 6.0 References Christina D. Romer, “The Great Crash and the Onset of the Great Depression,” Quarterly Journal of Economics 105(August 1990): 597-624. Richardson, Gary. 2006b. Quarterly Data on the Categories and Causes of Bank Distress during the Great Depression, NBER Working Paper w12715. Read More