The Great Depression is remembered as the severest economic decline in the history, and it affected the world. The United States was one of the countries that were significantly affected by the depression. The crisis began in 1929 and lasted for about ten years, and although a broad array of factors led to the depression, primary causes were the unequal income distribution of wealth during the 1920s and extensive stock market speculation. The other factors that caused the issues include bank failures, reduction in purchasing power of consumers, and foreign economic policy. In the United States, the depression took longer than others because of prevailing high unemployment, ineffective policies, and desire by banks to consolidate wealth. As such, the Great Depression was caused by a combination of local and international conditions and lasted longer because the prevailing economic situations were unsuitable for recovery.
Causes of the Great Depression
The unequal income distribution during the 1920s caused the depression as most of the income was held by few individuals leaving the rest with less income to spend. Carabelli and Mario claim that the 1920s marked a period of economic prosperity, and the national income of the United States (U.S.) rose from 74.3 billion in 1923 to 89 billion dollars in 1929 (Carabelli and Mario 107-115). Even though the income rose during the period, the amount was not distributed uniformly among Americans. Henry Ford represents a classic example of the unequal income distribution. While an average personal income was 750 dollars, Ford had a personal income equivalent to 14 million dollars in 1929 (Carabelli and Mario 122). During the depression, manufacturing jobs increased, as such, the productions cost declined, wages rose slowly, prices for manufactured goods remained constant and, in this way, leaving bulk of profits for the corporate to enjoy. The situation did not aid the economy as most people had little money to spend.
The stock market crash experienced in 1929 another prime cause of the Great Depression: the stock market investment speculations failed to yield profits leading to the crisis. Carabelli and Mario acknowledge that during the 1920s, the stock market had expanded exponentially to a historic high threshold (127). With the stock market rising at unprecedented rates, investors believed that investing in the stock market the best way of making money. By the end of 1929, millions in stock price had been financed via loans that were to be repaid with proceeds from the ever-increasing share prices. However, the stock prices began to fall towards the end of 1929, and many investors and shareholders panicked and rushed to liquidate their stock holdings further aggravating the matter (Carabelli and Mario 132). The fall in stock prices, by 33 percent, signaled the onset of the Great Depression. Consequently, consumers and businesses experienced shocks that instigated a reduction in consumer spending and investment. The reduced spending and investment affected the economy through reduced industrial growth and massive job losses.
The banking panic experienced between 1930 and 1932 caused contributed to the Great Depression. The drastic fall in stock market prices prompted people to withdraw their savings. Samuelson posits that by 1933, banks that had existed since 1930 had failed due to massive loses they had incurred (37). The failure of banks forced Roosevelt’s administration to declare four days grace periods in which banks were expected to demonstrate and prove their solvency to government officers. It was established that bank failures were occasioned by a reduction in consumer spending and investments as there were few bank to advance funds (Samuelson 39). The banks had no money because people opted not to save in banks. Instead, people stored their money at home. During the depression, even the surviving banks, unsure of the economic environment, refused to offer new loans to clients. The refusal to offer new loans coupled with money hoarding led to a reduced expenditure further hurting the economy and fueling the depression.
Tariffs and a reduction in international lending strained trade between America and other foreign countries, which contributed to the depression. According to Samuelson, the United States’ economy was expanding towards the late 1920s, and international lending by the U.S. government fell due to relatively high interest rates (40). The decline in international lending created a contraction effect on countries like Germany, Argentina and Brazil that had experienced their own economic downtime prior to the Great Depression. Meanwhile, the United States’ agricultural sector was struggling due to overproduction and competition from European nations. In response, the Government created a Smoot-Hawley Tariff in 1930 to safeguard American companies’ interests (Samuelson 42). The tariff imposed high tax on imported goods reducing trade between the United States and its partners, thus negatively impacting the economy.
Why the Great Depression Took Long to Resolve
The difficult economic conditions occasioned by high unemployment rates made it difficult for recovery making the Great Depression to last long. Crafts and Peter report that by 1933, unemployment rate had risen in the United States from 3 to 25 percent, and the high rate led to the reduction in the gross domestic product from 103 to 55 billion dollars (Crafts and Peter 290). The high prevalence of unemployment also reduced the disposable income significantly, further curtailing spending and investments. Crafts and Peter agree that unemployment is detrimental to an economy because it leads to reduced production, which substantially reduces the gross domestic product (295). The businesses then scale down their productions due to a struggling economy characterized by reduced spending. In the case of depression, the government took a long time to implement sound policies to address the tough economic conditions caused by unemployment and these policies’ effects were not felt instantly.
The depression was prolonged because economic recovery policies failed to achieve their goals. According to Anderson, National Industrial Recovery Act (NIRA) is an example of economic policy enacted in 1933 through Roosevelt’s New Deal proposal to help in economic recovery (143). However, the provisions of the legislation created harmful business monopolies with regard to wages. The monopolies were created as various companies passed the code of competition set by NIRA leading to an increase in wages in sectors controlled by the firms. On the other hand, prices and wages remained low in other sectors that did not pass the code. For example, the agricultural sector, which comprised the bulk of workers, did not pass the code thus wages in this industry remained low. Because labor wages rose in some sectors and not in others, NIRA led to extensive unrests. The labor unrests rendered the economic recovery process difficult because manufacturing and production stopped in key sectors of the economy further escalating the depression.
The Emergency Banking Act enacted in 1933 prolonged the depression. The legislation gave powers to the secretary of Treasury to confiscate gold coins and bullion from individuals and corporations. The confiscation could protect the United States currency system (Crafts and Peter 290). Consequently, the confiscated gold was used as a reserve material by government banks. These banks then decided to consolidate wealth in form of gold in the hands of a few people who could trade gold for money. Consequently, the new credit contraction implemented by banks only allowed for a few people to borrow money. Hence, the stifled growth of businesses affected economic recovery because a majority of Americans were unable to borrow funds from banks as they could not trade gold for loans.
The Great Depression was a global economic slump that led to massive job losses and hindered the growth of businesses in the United States and other countries around the world. The crisis was primarily caused by a stock market crash prompting people to withdraw and hoard cash after stock prices had fallen. The unequal distribution of income among Americans also contributed to the crisis in the country because of the reduction in disposable income for many citizens. Banks also failed and incurred losses prompting depositors to withdraw their savings. Meanwhile, the economic tariffs implemented by the government against other countries inconvenienced American companies due to overproduction in the agricultural sector. Particularly, the Great Depression lasted longer because of the unfavorable economic conditions that existed at the time. The unemployment rate was high and the policies initiated to control competition failed. The bank also sought to consolidate wealth in the hands of a few Americas. These situations made it difficult for quick economic recovery further prolonging the depression.
Anderson, William. “Risk and the National Industrial Recovery Act: An Empirical Evaluation.” Public Choice, vol. 103, no. 1/2, 2000, pp. 139–161.
Carabelli, Anna, and Cedrini, Mario. “Keynes, the Great Depression, and International Economic Relations.” History of Economic Ideas, vol. 22, no. 3, 2014, pp. 105–135.
Crafts, Nicholas, and Fearon, Peter. “Lessons from the 1930s Great Depression.” Oxford Review of Economic Policy, vol. 26, no. 3, 2010, pp. 285–317.
Samuelson, Robert. “Revisiting the Great Depression.” The Wilson Quarterly, vol. 36, no. 1, 2012, pp. 36–43.