Causes and Effects of the Great Depression

Causes and Effects of the Great Depression

The Great Depression was a dark period in the history of the United States, affecting all the socio-economic sectors of the Americans’ lifestyle. It suppressed greatly the economic status of the United States. The new deal of President Roosevelt has been accredited for saving the U.S out of the economic turmoil it found itself into. This aimed at provision of relief as well as employment opportunities, which helped to initiate economic recovery although it was not completely achieved until nineteen forty one as ammunition industries prepared for the Second World War (Burg 103).  The causative factors of the Great Depression are still a debatable issue for historians and economists. For many people however, the period is attributed to the stock market crash of 1929. However, there lack a consensus about the causes of the economic crisis which worsened into a depression.  May be some of the most important questions to ask while analyzing the causes of the great depression includes questioning on the reason why the citizens were overconfident in the stock market prior to the great depression, how the consumption psychology structured the causes and impacts of the crash, the patterns of investment in the stock market in 1920s, the main investors and Hoover’s reference of an economic crisis as a depression. This paper shall analyses the probable causes of the Great Depression and its impact.

Herbert Hoover

In 1928, Herbert Hoover was elected into office as the president of the US and the citizens remained optimistic and confident in the American economy. They foresaw a national prosperity as Hoover declared that the nation was finally winning the battle against poverty than in any other time of history (Irwin 11). This fueled the optimist of the American citizens as the economy continued to prosper. One way to fight poverty was to invest in the stock market. Prior to 1929, the stock market had increasing prices and a bull market existed. Investing in the market was as a result of rising dividends, personal savings, banks loans, firms’ overproduction, non-regulated stock market and the consumption psychology. The crash was initiated as a fluctuating market, which was dismissed by analysts hoping that the market would stabilize by itself.  All these false hopes were being fueled by Hoover’s general view of the issue (Rothbard 188).

Wealth Distribution

During the nineteen twenties, production was high and a record profit was reached by businesses. This caused inequality in wealth distribution as the rich continued to amass wealth. Spending was cut off and businesses continued their production. Purchasing declined even in foreign nations as Europeans were in a depression. There was a disparity in the distribution of wealth.  More cash was with the wealthy persons and industrialists and this meant that the poor would also have a share since they would be employed in the firms initiated by the rich. However, these wealthy individuals could have laid the cash idle without investing or could have employed use of machines in their firms, which replaced the poor workers (Fleisig 58).

The Stock Market

Several factors resulted to the great depression both domestically and internationally. One of the cited factors involves the nineteen twenty nine crash in the stock market. Following the crash stockholders incurred great losses where over forty thousand billion dollars was lost. The stock market started to recover the losses but this proved futile and the U.S entered a historical period referred to as the great depression. The crash might have enabled citizens to enhance their liquidity preference thus, hoarding money which means that they needed their assets to be in the form of money (Fleisig 101). Besides, the stock market was filled with unregulated over-speculations, which facilitated many citizens to have a share in the stocks market. Although they lacked the cash so, they purchased the stocks on credit, an aspect referred to as margin buying. This resulted into more loans meant to purchase highly prized stocks and their investment was lost when a crash occurred. The lenders could also not be paid and ended up losing their money.

In 1928, the stock market was doing well and in September of the following year, it grasped a record rise of 381. This time, Irving Fisher an economist at Yale University pointed out that America was in the path of a stable elevated plateau of success. Unfortunately, a downward trend started and on 24, October panic selling started as 12.8 million shares were traded. The Black Tuesday of October 29, 1929 marked the downfall of the market which was manifest (Burg 41). By July the following year, close to 41.22 million dollars had perished. The people who has purchased on margin or credit did not have the finances to clear the debts and the depression was at hand. The banks had a real estate as well as in the stock market investment but could not recover the money belonging to the depositors. Panic stricken people cued to claim their dues but were only devastated since the banks had no money. Deflation ensued since the circulating money declined drastically while money became a valuable asset owned by just a few. Workers lost jobs and closure of businesses ensued. Investment in real estate deteriorated since the buildings cost much less (Bernanke 70).

 

Banks Foreclosing

In addition, bank closings resulted to the citizens losing their savings and a chaotic situation erupted. Bank failure is attributed as one of the causes since more than nine thousand bank failed during the nineteen thirties. The bank deposits became uninsured and this resulted to citizens losing their savings. The banks that survived were too scared to offer loans since the economic situations were uncertain (Temin 34).

Overproduction

The earlier signs of occurrence of an economic crisis were manifest in time agricultural sector as farmers produced more as a result of technological innovations in agriculture. Higher productions were followed by a decline in prices as the supply and demand chain destabilized (Rothermund 38). Instead, farmers even continued to produce more as prices dropped, forcing them to become loan defaulters that led to banks’ closure. The situation worsened by the Dustbowl which even devastated the farmers more.

Overproduction in companies resulted to flooding the market that overwhelmed the people who purchased them. As the companies made their products they continued to lie idle in the market hence made more spending and less returns. Installment buying caused people to impulse buy without the money to repay. There was overproduction and consumption was low and profits turned into losses while debts increased. This kicked many firms out of operation. Overproduction could have resulted from poor management strategies, company holdings and false financial reports from companies so as to alleviate the stock price. The federal regulations regarding business enterprises were also favoring the huge corporations through the tax laws .meant to facilitate their expansion (Fleisig 61).

Smoot-Hawley Tariff

The economic situation began to deteriorate as the Smoot-Hawley Tariff was established in nineteen thirty to safeguard the U.S companies (Rothbard 241). Import taxes became unbearably high i.e. 50% on imports, which resulted to a decline in trade between the U.S and the foreign nations while economic retaliations were evident (Irwin 144).  This was timely during the onset of the great depression since increased tariffs led to rise in prices, which exacerbated the crisis. Enacting this tariff deteriorated the situation. With Hawley Smoot Tariff, Europe harbored resentment with the U.S and also retaliated with an even higher tariff. This greatly impeded the international trade. Therefore, with less purchases and more production from companies then clearly this would be problematic (Rothbard 241).

The Dust Bowl

Even worse, the Mississippi valley draught during the nineteen thirties was of high magnitude since many citizens could not afford to pay taxes and they had to sell their assets such as the farms to clear off the debts, with no profit incurred. This situation was described as a Dust Bowl since millions of acres were affected and people migrated in considerable numbers from rural to urban centers (Temin 7).

Inappropriate Policies

However, the great depression is seen to have started earlier in Europe with the U.S neglecting its effects on them. They therefore lessened their interaction with Europe and their policies neglected the possibility of entering into a depression themselves. These policies might have greatly contributed to the American’s Great Depression (Burg 187).

Following the First World War the US was the main creditor to foreign powers. As trade reduced, the debt was not paid and this greatly affected the financial stability of the U.S. All along, the Americans could not read the danger signs ahead of them and they therefore blindly invested in the stock markets (Temin 1).

Effects of the Great Depression

Consequently, the situation worsened as people made as minimal expenditures as they could. Moreover, purchases of items reduced due to the worsening economic times characterized by a crash in the stock market and economic uncertainty. Following this, production reduced hence a decline in the workforce. Workers became unemployed and they could not keep up with the rising standards of living. Items were purchased in installments and failure to adhere to the payment plan resulted into the repossession of these items and accumulation of inventory started. The rate of unemployment increased to close to twenty five percent and the economic situation could not been redeemed through spending (Rothbard 264).

The state of economy in America deteriorated and socio-economic problems arose one after another. Unemployment heightened as factories closed due to overproduction, causing people to lose their source of income. This caused a great poverty where living conditions deteriorated and over sixty percent of Americans were living in abject poverty.  Families in turn broke due to lack of cohesiveness as children dropped out of school. Citizens became homeless as they searched for employment opportunities. Organized protest groups were rising as a result of the worsening situation while those who became homeless built shanties with cardboard or tar paper identified as Hoovervilles (Rothbard 234).

American farms became desolate as farmers gave up on agriculture since they were getting no returns but instead they incurred heavy losses and this forced them to try to prevent banks foreclosures.  Protests emerged such as The Bonus Expeditionary Force comprising of First World War veterans, unpaid of their pensions as they peacefully demonstrated in Washington DC in 1932.  They put up tents only to be disbursed by the army. Fortunately, the period of the Great Depression elapsed at them time of the Second World War as employment opportunities were created to build ammunitions and for soldiers to participate in the war. Following the conclusion of the war, the U.S was left as the most powerful nation globally.

Conclusion

The Great Depression was a nightmare for every resident of the U.S and especially farmers who went into debt to purchase machinery and farms but could not afford to pay back. They incurred no profits since the prices of food went down. Besides, the great drought during 1931 put the last nail into the coffin and the situation went out of hand. A third of Americans were submerged in poverty as they laid the blame on bankers, businessmen and brokers. The stock market crash was however, not the direct cause of depression but other factors contributed to the economic catastrophe. All the same, the period is attributed to the transformation of the nation’s politics in that the citizens stopped being too optimistic with a new government. The foreign policy in the U.S also shifted as a result of the great depression (Rothermund 161).

 

Works Cited

Bernanke, Ben. Essays on the Great Depression. Princeton, New Jersey:  Princeton University      Press, 2004. Print.

Burg, David. The Great Depression. New York:  Infobase Publishing, 2005. Print.

Fleisig, Heywood. Long Term Capital Flows and The Great Depression: The Role Of The             United States, 1927-1933. New York: Ayer Publishing, 1975. Print.

Irwin, Douglas. Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton,       New Jersey: Princeton University Press, 2011. Print.

Rothbard, Murray. America’s Great Depression. Auburn, Alabama:  Ludwig von Mises Institute,             2000. Print.

Rothermund, Dietmar. The Global impact of the Great Depression, 1929-1939. New York:           Routledge, 1996. Print.

Temin, Peter. Lessons from the Great Depression. Massachusetts: Massachusetts Institute of         Technology Press, 1991. Print.

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