THE GREAT DEPRESSION
During the early 1920s, every American was full of hope about the good times that would come. The worrying signs of the menace the economy was heading to were not detected. The Great Depression intensified between 1929 and 1933. The effects of the economic event were very severe and the numbers expressed the severity in the country. Due to the collapse of the economy, the country’s GDP fell by 30%, unemployment rose to more than 20%, profits, tax revenues and prices dropped, hunger and fear added up to the sheer misery and terror. It was a tragedy and it marked the beginning of the government’s involvement in economics. Economic professionals have paid attention to the issue and they have invested in understanding the causes of the depression and the main reasons as to why depression lasted for years as it did. In their endeavor today, they have been cautious to fully understand this and other detailed information about to protect today’s and tomorrow’s economy from such a blow.
MAIN CAUSES OF THE GREAT DEPRESSION
Understanding the cause for the Great Depression equips the current citizens who are affected by the economy to analyze and understand the significance of daily economic numbers. The economy was very promising as it will be noted but its collapse that was minimally foreseen came racing.
In October 1929, the stock market crash was a main blow that caused the fall of the economy. This break caused an acceleration of the mild downturn due to its catastrophic magnitude of the decline in addition to the uncertainty that erupted on the possible future of the economy. In 1929, the value of common stoke rose rapidly and investors were making a lot of money. Many believed that this was the country’s economic prosperity. It got to a point when buying a common stock was impossible. This resulted to a worry developing among government officials and investors. The discount rented to bank by the Federal Reserve was thus raised in response to this as a response though the stock prices kept rising after some time. An investment advisor had just warned of a crash and it was followed by decline of prices. On the Black Thursday, a record 13 million shares were bought creating a lot of panic. Banks responded massive organized buying but the panic resumed on Black Monday and Tuesday. By November, the stock prices had dropped to half of what they were in August. Getting to the 1930s, the loss of wealth did not match the psychological trauma experienced (Walton & Rockoff 2009). The optimism once owned by the American citizens was no more and the consumers’ confidence on obtaining the durables declined completely.
Another reason for the Great Depression occurrence was due to failures by the banks. The structure of the banks was very weak. Though banks in the South and Midwest had recorded failure, the most significant failure was the failure on December 11 by the Bank of the United States in New York. This was because of its name which influenced the people’s perception and the amount of deposit which was highest at that time. The banks received no backing from the government. Gold use among the banks further deepened the mess that was being experienced. The banking panic accelerated in 1930 and 1932. More than 5,000 banks with up to $US 3 billion deposits suspended their operations. 4,000 banks further closed in 1933 with more than $US 3.5 billion (Nishi 2001). Remaining banks unsure of their future were not willing to offer loans. The expenditures thus dropped. The country’s banking system almost died.
The Smoot-Hawley tariff passed in June 1930 goes into the books as one of the causes of the Great Depression. Its primary intention was to protect American companies. It thus imposed high taxation on imports thereby reducing trade between America and other parts of the world. The goods targeted were mainly agricultural. The tariff received opposition from up to 1000 economists. Though the tariff did boost employment in the country, the opposition and the criticism it faced resulted to a psychological negative effect on the citizens. Pessimism amongst consumers received a boost about the economy and the investors were doubtful about the future and their desire to invest dampened whereas it vanished to others. The United States was not mainly affected by this because it did not venture in trade as much as it does today. During this period, other countries increased their tariffs as well in an attempt to support their individual economies.
The reasons as to why the Great Depression lasted for so long
From the United State’s history, many financial climbing blocks had faced the faced the country multiple times before this Great Depression. However, when this happened, they really struggled and it took a much longer time to solve the issue than expected. Some of the reasoning behind this has been shared in the discussion below. In this case it should be noted that the depression was very deep, it was massive and the recovery was slow.
One reason by economists Joseph Schumpeter (1939) and Robert Higgs (1997) point a finger to the politics at the time claiming that it blocked and discouraged private investment. The New Deal more specifically received the pointing fingers. The business persons felt that they were not favored by the social security and the freedom that were offered to labor, it discouraged them. The increased taxation tariffs and how they were collected and later distributed to the entire country affected the business community. The New Industrial Recovery Act of 1933 and the National Labor Relations Act of 1935 in the New Deal policies help in understanding this (Nishi 2001). Their major intention targeted at restoring employment for many citizens via the consideration of downward spiral of prices and wages without considering collusion of the costs by the firms. The administration on its part argued that this would allow for employment equilibrium. They were preventing persistent employment. These wage demands caused the persistence of the Great Depression.
Going by the Keynesian theory, it argues that the policies employed were not strategic enough to counter-attack the depression. The theory is of the view that, government spending aim was to offset any possible decrease of consumption, investment and any other spending by the private sector. However, the administration did not provide this. On the contrary, it limited private spending. Between 1929 and 1938, the private investment expenditure dropped with up to $US 7.1 billion which was directly notably higher than the federal deficit (Walton & Rockoff 2009). Economists would identify this as a worrying point to note. That is the reason the theory argues that the fiscal policy failed because it was not attempted let alone implementation.
The monetary policy also comes about in the interplay of this long lasting menace. The Federal Reserve failed at increasing the money supply steadily and rapidly when there was great need for that. Monetarists are of the view that the Federal Reserve should have come to the rescue of the banks when they need the cash flow. At a time when the banks had lend out so much money that they collapsed; it was at this time that the monetary policy ought to have stepped in and prevent the collapse. The depression would have ended sooner.
With various economic analyses done over the last years about the Great Depression, United States understands happenings that would result to such an event from occurring. There is possibility that such would occur again if measures are not done promptly to keep off all the negative effects it has to humanity. As philosophers would argue, prevention is better than cure. However, though, understanding the actions that would have to be taken should it occur again is essentially possible. Finally, the main causes of The Great Depression were mainly the crash of the stock market in the “Black” days mostly, the bank crisis and the Smoot-Hawley tariff imposed. The duration of the depression may have been reduced if the fiscal and monetary policy had been paid attention to in addition to the investment politics of the time.
Nishi, Dennis. The Great Depression. San Diego, Calif.: Green haven Press, 2001. Print.
Walton, Gary M., and Hugh Rockoff. History of the American Economy. New York: CENGAGE Learning, 2009. Print.