The causes of the Great Depression
This economic disaster was not caused by one factor but a number of related factors. Historians and economists have compiled a large list of the agents of The Great Depression, but most of them agree on the following as the main causes.
The stock market crash of 1929
In the 1920’s, the United States Stock market was the subject of rapid expansion that peaked in 1929. During this period, “wild speculation and weak regulatory frameworks were the characteristics of the bourse” (Gunderson, 16). By 1929, unemployment had risen due to decreasing production leaving much of the stock with inflated values. This caused the market to collapse aided in part by a struggling agricultural sector, the proliferation of the national debt, and low wages. In addition, many banks had excess loans that could not be liquidated.
On October 1929, after a month of rapidly falling stocks prices, the collapse of the US stock market began. This culminated in a panic gripping the masses of investors who proceeded to trade more than 12.894 million shares on October 24th, 1929 also known as Black Thursday. Investors and large banks tried to remedy the situation by purchasing large amounts of stock easing the economy out of free fall. However, the same returned again the next day eventually leading to Black Tuesday on October 28th when 16million plus shares were traded. On this day, thousands of investors were completely wiped out, and billions of dollars lost. The events of 1929 were just the beginning of a series of events that combined later to compound into the Great Depression. By 1933, almost a third of America’s workforce was out of their jobs, and nearly half of America’s banks had failed.
The reduction in spending across the board
After the stock market had crashed resulting in panic and economic frustration, the people’s confidence in their economy waned. This caused them to reduce expenditure by ceasing almost all forms of purchasing. This sharp reduction in purchases negatively affected the production companies that already had liquidity problems forcing them to either reduce costs by cutting jobs or completely close down.
The resulting unemployment led to people’s assets they had bought on payment plans getting repossessed as they could not pay for them due to unemployment (Hall and Ferguson, 75). This resulted in banks and other lenders accumulating inflated inventories that also negatively affected their already cash-strapped balance sheets. The result was that a quarter of the US working class lost employment.
The widespread banks failures
In the early 1920’s, the United States had a well-developed banking system in terms of operational reach. The average banking system catered for most of the country’s rural and urban regions. Nebraska, for example, had over 1.3 million people back then. As a thriving but relatively rural area, the region still enjoyed the privilege of a bank for every 1000-1500 people. Though most of the banking activity in those days was poorly regulated, it provided the main services every bank was supposed to – depository and interest rate controlled loans.
As the economic hardship seeped through society and infiltrated into the rural areas, farmers had less money to spend. This meant even less money to save a situation that rendered banks redundant and even useless. Without their deposits, financial institutions were unable to operate and eventually forces to close down. In the early 1920’, they failed at a rate of 60 to 75 per year, but the number grew ten-fold to 744 in first two-thirds of 1930 alone. On total, it is estimated that almost 9000 banks failed during The Great Depression (Knoop, 253). With the closures, many people lost their life savings aggravating an already dire financial situation.
International trade and economic policies
As a result of the increased economic growth experienced in the early 1920’s, European and Latin America countries increased their borrowing from United States. However, foreign lending to these countries fell sharply in the 1928-1929 period due to higher interest rates and a booming stock market’s influence. This affected many borrower countries especially those in Europe, which was only just recovering from the devastation of World War One. Some of the economies actually almost collapsed just before The Great Depression affected the US.
An already dire situation was aggravated with the US enactment of the Smoot-Hawley tariff. This was meant to protect the US agricultural production by creating an unfavorable market for European agricultural imports through prohibitively high taxation. However, this backfired when Europe and Latin American countries adopted protectionist countermeasures resulting in almost no international trade between the major trade partners in the world. This worsened the situation by affecting major global producers, causing major balance-of-payment problems and major contractionary issues in Africa, Asia, and Latin America.
Major drought in the US
While not considered a major cause of The Great Depression, the great drought that affected the Mississippi Valley in 1930 contributed greatly – at least from a US perspective. Most of the people back then relied on their land and its products for both sustenance and monetary gain. Agricultural activity was suddenly affected over a larger area by drought resulting in millions being unable to pay loans at their lending firms and banks. In addition, this major source of primary raw materials was suddenly unable to provide the large industrial raw material needs of the US at a time when unfavorable international trade policy was the norm, namely the Smoot-Hawley tariff. In addition, tax revenues for the government’s spending reduced greatly. Banks repossessed farms from defaulting farmers while other opted to sell theirs at a loss. They moved to cities further worsening the already dire unemployment situation.
Why The Great Depression lasted so long
The Great Depression has come under great scholarly interest recently as economists and scholars seek to find out the reason such a bad economic situation persisted even as the governments of US and European countries input restorative efforts. The main culprits appear to be government policies that hindered fair competition.
The forces of demand and supply should have reduced wages, lowered business costs and increased employment and output. However, the National Industry Recovery Act (NIRA) prevented this from occurring. As a policy passed in 1933 to aid the process of restoring national prosperity by giving industry players the opportunity to collude, this policy sanctioned other activities that would have triggered antitrust practices(Bernanke, 73). These included minimum price formation and formation of restriction on expansion within the industry. The only trade-off the government put in place for this arrangement was these cartels share their large profits with workers creating employment through large wage increases.
Many industry players passed off fair prices under the NIRA leading to increased wages and prices. However, not all industries were able to agree on the prices as per the NIRA codes making growth in their areas stunted. Any economic development was pulled down by this situation of uneven policy implementation leading to some areas experiencing price and wage increases while others remained stagnant.
A short period later, NIRA was declared unconstitutional leading to the National Labor Restrictions Act. This greatly empowered the labor unions’ bargaining power as the driving force of the economy – its labor force – took on a more proactive stance. This body implemented policy that saw an increase in wages up to the 1938-39 recessions. In a different context, the National Labor Restrictions Act was able to introduce changes by the late 1930’s that saw the number of hours workers could work increased. That growth in the labor and wage structure was sustained to the late 1940’s when the National Labor Restrictions Act was replaced by the Taft-Hartley Act. Growth in the economy’s major factors, wages, and labor-force, continued to fuel national economic recovery until the US was finally out of The Great Depression.
Bernanke, Ben. “The Gold Standard, Deflation and Financial Crisis in the Great Depression: An international comparison.” Essays on the Great Depression. Princeton: Princeton UP, 2000. 73. Print.
Gunderson, Cory G. “The Roaring Twenties.” The Great Depression. Edina: ABDO Pub, 2010. 16. Print.
Hall, Thomas E, and J D. Ferguson. “Sowing the seeds of disaster.” The Great Depression: An International Disaster of Perverse Economic Policies. Ann Arbor: U of Michigan P, 1998. 75. Print.
Knoop, Todd A. “Business Cycles in the United States.” Recessions and Depressions: Understanding Business Cycles. Santa Barbara: Praeger, 2010. 253. Print.