Causes of the Great Depression - Research Paper Example

Introduction The Great Depression – the worst economic slump ever in the US history – spread virtually to all industrialized countries of the world.While it is generally believed to have begun in late 1929, opinions differ. It is usually associated with the Black Tuesday Stock Market Crash in October 1929 but economists and historians believe that economic downturn had started in early 1929 (Croft Communications, 2009). The foundation for the Great Depression was laid much earlier according to Ohanian (2009). Causes of the Great Depression Too much competition in the American economy had started in the 1920s and it was believed that codes of fair competition would lead to superior economic outcomes. During the “roaring twenties” markets were allowed to operate without any government interference (Huppi, n.d.). However industries developed collusive trade groups that led to high industrial concentration and monopoly distortions during this period. The conservative economic polices such as low taxes, little regulation, lack of anti-trust enforcement could not stop the stock market crash that became inevitable. Unequal distribution of wealth The Depression that lasted for about a decade was a combination of unequal distribution of wealth through out the 1920s and the stock market speculation that took place in late 1920s (Gusmorino, 1996). Mal-distribution of wealth existed at many levels. Money was distributed unequally between agriculture and industry, between the rich and the poor and between the US and Europe. This unequal distribution of wealth led to an unstable economy. People started hoarding money. They started holding their assets in readily convertible forms – money. Wages grew more slowly than output per worker which means that corporate profits were rising. Dividends started rising and these were paid to the top 5% of the income earners which contributed to the unequal income (Amatecon, 2007). In the corporate sector just 200 companies controlled almost half the corporate wealth (Gusmorino). While the automotive industry was thriving, agriculture in the US was in bad shape. While For Motors reported assets worth $345million, food surplus caused the prices to drop by 72 percent. The federal government favored new industries opposed to agriculture which also contributed to unequal distribution of wealth. Stock market crash October 29, 1920 is referred to as Black Tuesday was the day that the stock market had crashed in the US. Over a two-day period the market lost 24% of its value (Croft Communications). In 1920 when the stock market had started soaring people borrowed money and started investing in stocks to take advantage of the boom. During this 9-year period stocks more than quadrupled in value which was fueled by rampant speculation. Company’s earnings were of little interest as long as the stock prices could bring huge profits to the speculators (Gusmorino). People could buy stocks without the money to purchase them which brought in many first-time traders in stocks. It was like buying a car on credit and this drove the markets to absurdly high levels. As stock market trading soared, by mid 1929, outstanding brokers’ loan was over $7bn. Interest on brokers; loans went up to as high as 20 percent. Suddenly the prices started to fall on October 21, 1929 and by the end of Tuesday, the market had crashed. Hence it was basically over-trading and an artificially created boom that led to the crash. Within two months of the crash stock brokers had lost more than $40bn. Even though losses started recovering by the end of 1930, it was not sufficient and American had entered the Great Depression as the economy had become unstable. Trade barriers In the 1920s, the US was trying to be the banker, manufacturer and food-producer to the world. At the same time, they were buying as little as possible from the world. To protect the American businesses, the United States maintained high trade barriers (Gusmorino). The result was then even Europe stopped buying from the US or even paying the interest in the loans from the US. Thus the international economy weakened which contributed to the Great Depression. When the foreign nations could not buy from the US, the exports from US dropped. Consequences of the Great Depression As the US economy became unstable, panic spread through out Europe. The central bank failed which threatened that the next to be affected would be Great Britain. The President of the US proposed a moratorium on all war debts and reparation. Reduction in purchasing When the stock market crashed and there were fears from all corners, people reduced their spending. The rich stopped indulging in luxury goods and reduced investments as well. Money circulation slackened in the process. The poor and the middle class stopped using the installments and credit for fear of losing their jibs and not being able to pay the interest (Gusmorino). This led to fall in industrial production by more than 9% which in turn led to job losses. People started defaulting on loans and interest payments. People had to return goods bought on credit as they could not pay the interest. Inventory started piling up at the manufacturers’ warehouses and the automobile and the radio industry suffered the most. Unemployment and poverty This led to fall in agriculture prices along with other primary products. Harvest had been good worldwide between 1925- and 1928 but the price of grain tumbled with the slump in the economy. This compounded the crisis because the farmers that had already been in debt due to investment in machinery, were further afflicted (Indianchild, n.d.). Unemployment increased which further aggravated the situation as unemployment led to hunger. The farmers refused to harvest because the prices had gone down to such an extent that it was not worth growing at those prices. On one side unemployment increased and on the other people lost their land because they could not maintain their payment schedules. The factory workers had to work twice as hard as they did before the Great Depressions. Unemployment was the highest in 1933 when it peaked at 25 percent (Croft Communications). Bank failures Over 9000 banks in the US went out of business through out the 1930s. The stock prices fell by 40% and 9 million savings accounts were wiped out (Indianchild, n.d.). Wages decreased by 60 percent as 8600 businesses were wiped out. As the bank deposits were uninsured people lost their savings when the banks failed or wound up (Kelly, 2009). The banks that were still operative were apprehensive of the economy and hence did not enter into new loan agreements. Thus expenditure reduced even on primary goods. Changes in the economic policy As businesses started failing, the government created the Smoot-Hawley Tariff in 1930 to protect the American companies (Kelly, 2009). This raised the US tariffs to historically high levels. This was originally intended to protect the domestic farmers from import substitutes. This Smoot-Hawley Tariff was supposed to reduce the negative consequences of the Great Depression but it caused more suffering. This led to a decline in international trade. It led to distrust among nations thereby leading to less cooperation in both the political and the economic sectors. Thus the seeds for the Great Depression were laid much before it was supposed to have taken place. It cannot happen overnight and the cause was the unequal distribution of wealth since the 1920s. Stock market boom that was created was artificial which ultimately crashed thereby leading to what came to be known as the Great Depression. The consequences were a chain effect as the government tried to raise tariffs to protect the local farmers and businesses, which impacted international economy. Unemployment increased even as banks failed and savings were lost. Poverty and hunger became common place and overall the situation was one of Great Depression. References Amatecon. (2007). Americas Great Depression - causes and cure. Retrieved online 11 November 2009 from http://www.amatecon.com/gd/gdcandc.html Croft Communications. (2009). The Great Depression Causes And Effects. Retrieved online 11 November 2009 from http://www.thegreatdepressioncauses.com/ Gusmorino, Paul A. (1996). Main Causes of the Great Depression. Retrieved online 11 November 2009 from http://www.gusmorino.com/pag3/greatdepression/index.html. Huppi. (n.d.). The Great Depression. Retrieved online 11 November 2009 from http://www.huppi.com/kangaroo/THE_GREAT_DEPRESSION.htm Indianchilad. (n.d.). SA Depression, The Great Depression information ( USA) . Retrieved online 11 November 2009 from http://www.indianchild.com/the_great_depression.htm Kelly, M. (2009). Top 5 Causes of the Great Depression. Retrieved online 11 November 2009 from http://americanhistory.about.com/od/greatdepression/tp/greatdepression.htm Ohanian, L. E. (2009). Herbert Hoover and the start of the Great Depression. Retrieved online 11 November 2009 from http://www.voxeu.org/index.php?q=node/4105 Read More