Which were the main causes of the Great Depression?
The Great Depression was experienced from the year 1929 to 1941 (Eichengreen 1). This period was characterized by an economic downturn that is considered the longest global economic crisis in history. The depression’s origin was the United States after the collapse of the stock market. The economic slowdown was more severe in the United States than in other countries. America’s GDP fell by 15% while the global GDP fell by only 1% clearly indicating that American economy was suffering more than other economies (Eichengreen 2-7). Economic globalization was high in the 1920s where nations had focused on eliminating trade barriers to enable free trade with other countries. As a result, economic conditions in one country had implications in other countries. The Great Depression made the American government to implement far reaching measures aimed at recovering the economy. It had impacts on both the rich and the low income earners. The rich suffered from decreasing demand that translated into low profits in businesses. The people’s purchasing power was low leading to a fall of prices. The poor who were also the providers of labor suffered from lack of employment. The government suffered from the reduction in income taxes that compromised the ability to offer services to the citizens. Industrial based cities were hard hit due to their over reliance on manufacturing. There are many factors that contributed to the great depression. However, there are main ones that led to the depression.
The stock market crash that occurred in on October the year 1929 is considered the main cause of the Great Depression. The crash occurred on the 29th of October “black Tuesday” causing panic in the stock market. Stock holders in America’s stock market lost around $40 billion making many people to lose confidence in the market (Eichengreen 12-15). The troubled market had compromised the ability of businesses to raise capital to fiancé operations. Bonds were widely used by American entities to finance operations and the collapse of the market forced businesses to look for other methods of financing operations. There were many public companies that wanted to raise capital through issuing shares to the public. The market collapse made it hard for large enterprises to raise capital from the public through issuing of shares. As a result, productivity at business level reduced substantially. The stock market started registering some improvements in the 1930 but the American economy had already entered into the Great Depression.
The failure of the banking sector was another major factor that caused the Great Depression. The collapse of some banks made people lose confidence in the banking sector. It made people lose their savings thus compromising their purchasing power. The banks that had the capacity to withstand the economic crisis were unwilling to give loans with an aim of minimizing risks. The purchasing power of Americans therefore reduced substantially due to the reducing level of the money in circulation. The collapse of some banks threatened the survival of other banks since the customers lost confidence in the financial institutions. There were massive withdrawals of deposits that compromised the liquidity of banks. As a result, most banks could not sustain their operations leading to scaling down of activities. Financial institutions play a crucial role in the economy by providing capital to businesses. The collapse of the financial sector therefore compromised business operations.
Reduction of the people’s purchasing power contributed to Great Depression. The Great Depression was characterized by a reduction in people’s purchasing power that exerted a downward pressure on demand. The profitability of companies is pegged on the market’s purchasing power. Businesses thrive when people’s purchasing power is high. Lower purchasing power makes businesses to reduce the level of production to react to the lower demand. Failure to reduce production exposes manufacturers to huge losses emanating from excess production. Some products can go bad if not delivered to the customers on a timely basis. Other costs relate to inventory management such as warehousing and security costs increase in case of excess production. Businesses also react to a reduction in purchasing power by reducing prices to increase affordability of products. A depression leads to huge losses for producers regardless of measures implemented to reduce the impacts of declining demand. Businesses that reduced the scope of production during the great depression reduced their staffing level since the demand for labor in operations had decreased substantially. The reducing profit margins also compelled organizations to either reduce the staffing level or cut compensation. The American labor sector was unionized during the depression that made it difficult for employers to reduce the wage rate. 1920s were characterized by an increasing gap between the rich and the poor. The rich owned businesses and employed the poor to support production activities. Wages remained low despite the business owners generating immense profits.
The drought that hit the Mississippi Valley in the year 1930 to a great extent contributed to the Great depression. Most people in the Mississippi valley depended on agricultural activities during the depression. Industrial based regions had felt had already felt the impacts of the depression that had caused mass unemployment. The agricultural sector was the only hope for people that could not secure jobs in the industrial based cities. The draught led to huge losses as the region could hardly sustain production activities. As a result, farming enterprises reduced their staffing level leading to massive unemployment in the Mississippi valley. Some farmers sold their lands to enable them meet basic needs as the farming business was hardly sustaining them. The region’s agricultural sector was providing raw materials for other industries and its collapse hindered operations in these industries relying on the agricultural sector for inputs. The draught led to food shortage that pushed the food prices high. The high food prices increased the cost of living in an economy that was characterized by low purchasing power. As a result, people spend most of their income on food compromising their ability to meet other needs.
The American economic policy to a great extent contributed to the intensification of the Great Depression. The American government found it necessary to protect the local industries with an aim of saving them from persistent losses. The country’s participation in the international commerce was having negative impacts on the local industries since superior European goods were reducing the competitiveness of the local products. The government introduced the Smoot-Hawley Tariff that involved increasing the tariff on imports with an aim of making them less attractive in the American market (Walton and Rockoff 181). The move constrained the ability of America to engage in international commerce. Some European countries that were performing better economically that the United States. These countries developed hostility towards the US after the implementation of the Smoot-Hawley Tariff. In fact, major European economies implemented high tariffs on American products in retaliation to America’s Smoot-Hawley Tariff. This hostility was damaging to the American economy considering that the US was a home to many multinational companies that relied heavily on trading with the European economic powers. The constrained relationships interfered with the supply chains of some American companies. Globalization had led to the establishment of many multinational companies in the United States whose supply chains had extended to Europe and other parts of the world. Cold relationships between America and European powers damaged the profitability of American multinational corporations that increased the severity of the Great Depression.
Why did the Great Depression last so long?
The great depression remains the world’s longest economic downturn. The some factors that made the depression last long. The increasing role of the government in shaping the economy is one of the main factors that made the depression last for long. The government implemented measures aimed at recovering the economy that did not help in improving the people’s purchasing power. By the year 1933, the financial sector had stabilized leading to an increase in liquidity. However, the recovery of the financial sector did not increase the purchasing power of individuals. The National Industrial Recovery Act that was passed in the year 1933 was aimed at ensuring the economic growth had impacted on the workers positively (Walton and Rockoff 439-440). The act restricted competition where monopolies were created in different industries. These monopolies made high profits that enabled them to increase the wage rate thus promoting the purchasing power of the workers. Despite the formation of monopolies and increasing the wage rate, the purchasing power of the citizen remained low since many people were unemployed.
Restrictions on the international trade made the great depression to persist. The American government instituted tough tariffs that made it difficult for the American to trade with other countries. The tariffs imposed by the American government discouraged competition that in turn hindered efficiency and innovation. Sustainable economic development is only realized when businesses are allowed to compete without restrictions. Competition leads to innovation that emanate from businesses trying to outdo each other in different industries. Putting restrictions on imports reduced the level of competition between American businesses and those from other parts of the world. Allowing competition would have improved innovation and creativity among the American business persons that would in turn lead to a sustainable economic development thus alleviating the economic distress.
The Second World War is another factor that prolonged the Great Depression. Men were involved in the fighting causing a labor shortage in industries. Companies had to invest in training to improve the productivity of female employees in the work environment. The war disrupted economic activities in Europe that led to economic strains. It also caused hostility among leading global economies such as Japan, Russia, United Kingdom, United State, France, and Italy. Although the war to some extent fueled depression, some activities in the war accelerated economic growth. The rearmament programs implemented by different governments reduced the unemployment level to a great extent. The entry of America in the war in the year 1941 reduced the rate of unemployment to below 10 %
Eichengreen, Barry. “Viewpoint: Understanding the Great depression.” Canadian Journal of Economics 37.1 (2004): 1-27.
Walton G and Rockoff H. The history of the American economy. Califonia: Mike Schenk, 2012. Print