The Great Depression

The Great Depression

Introduction

The Great Depression is known to have occurred because of one factor. Nonetheless, this severe and worst depression across the globe did not take place overnight. It occurred as a result of global and domestic conditions. Even though the depression was in some countries including Latin America and Japan moderate, it was longer and severe Western nations that are highly industrialized including Europe and the United States.

The effects of the Great Depression were vast globally and it led to drastic reduction in out, unemployment issues and acute global deflation creating financial panics.   Lionel inscribes: “About twenty five percent of the employed population and forty percent of all population, who were nonfarm-dependent, ran out of work” (3). This led to severe starvation and many people lost their farm products and their homes.

The author also continues to discuss that “total industrial production and real gross domestic product (GDP) in the United States dropped to 47 percent and 30 percent respectively, with a deflation of 33 percent” (4). As such, there seemed to be discussions on the cause of the event. Many historians and economists however have cited major causes including reduction in trade, deflation and Smooth-Hawtley Tariff Act.

The Stock Market Crash

According to Rockoff and Gary, the main cause of the Great Depression was “the break in the stock market during the last week in 1929” (425). With stock market growth over the 1920’s, many people borrowed a lot of cash from different financial institutions as way of purchasing stocks. Some were even forced to pay for worthless stocks. Therefore, when stock market crashed, they were not in a position to repay the cash they had borrowed thus, worsening the crisis on financial institutions.

Banking Crises

Financial institutions did not give guarantees to the clients. However, bank deposits were uninsured at the time. Rockoff and Gary claim that “the result was shrinkage in the amount of deposits and bank loans available” (429). Banking facilities were operational with just few regulations and lending cash to people who recklessly gambled in stocks. Many banks were poorly managed therefore, “were eliminated with an aim to make the banking system more efficient” (429).

Many banks went bankrupt through the 1930s causing panics that led to the closure of the whole banking system. The institutions more specifically micro banking ones in rural areas faced harder and more difficult times and lastly, they failed as existing banks were forced to lose trust as a result of prevailing economic situation and stopped offering new loans.

As such, many people lost their savings for the time the institutions failed and it at the same time led to reduced expenditure. Gary and Rockoff inscribe ‘‘Bank failures made people to convert deposits into cash, depriving the banks of reserves” (429). Additionally, larger financial institutions had made vast loans unwisely with foreign countries thus allowing the countries to repay their debts incurred earlier on during the First World War.

Many states, specifically, European nations did not pay their outstanding loans leading to bankruptcy of banks in the US and stopping further lending.

Inequity in income and long term unemployed people

During the 1990s, the growing income gap led to the Great Depression. Few Americans enjoyed a lot of wealth leaving the rest to the other population to live at or below poverty line. The majority group as a result became very poor to purchase products and settled for debts. Additionally, people from different classes discontinued purchase of goods leading to reduction in production levels.

Agricultural prices additionally were very low in the 1920s thus, making farmers not be in a position to spark production recovery. No person was willing to purchase the produced goods. This further led to reduced generation of income and workforce because people lost their jobs and unemployment rates increased by about 27 percent. According to Gary and Rockoff, even the wealthy had to “cut down their spending in the face of growing uncertainty caused by bank failures and the stock market crash” (430).

Farm Failures

Before the Great Depression, decline in the price of farm products had already begun. This was based on the fact that US farmers were producing a lot of goods beyond client demands. Lionel writes: “as a result, farmers experienced even harder times as many of them burned corn for fuel instead of selling it, leading to drastic drop in the economy” (14).

Factors that caused the Great Depression to prolong

Economic and employment activities were at stand still throughout 1930. This led to a paradigm move from classical economies to Keynesianism. Many reasons were therefore blamed for the situation. The depression first of all occurred as a result of a collapse of a system that was to be supported by the entire country. Gary and Rockoff inscribe: “People could easily invest in stock in the late twenties” (439). This changed when people started to pull out of stock market causing it to drop.

Additionally, people lost their cash following the crash of the stock market leading to moderate high class and no middle class. The economy as a result dropped because there was need for all classes in the development of the economy. Even so, there were still other factors that prolonged the Great Depression.

The new deal and Smooth-Hawley tariff Act

Smooth-Hawley traffic Act was seen as quite controversial and it was signed into law in mid-1930. After the crush of the stock market, the Federal Reserve insisted on cutting stock market exchange rates and propping up flawed establishments. The policy also raised US tariffs on more than 20,000 basic merchandise record levels. This was quite successful at the beginning.

Later on, it led to huge economic issue and there was reduced export trade and it was a reverse of its first goal of ensuring prices are maintained at boom level while promoting economic growth. Additionally, it failed on primary mission resulting to an adverse effect on the economy and even took years before it was built back to its booming level.

All taxes additionally including excise tax, inheritance taxes, personal income taxes, corporate income taxes and excess profit taxes increased. Every product and services in short including electricity, radios and telephone calls were subject to New Deal excise levy. This means that the New deal was largely financed by individuals surviving below the poverty level.

Overpricing of products also led to real poverty. The National Industrial Recovery Act also, as part of the New deal increased prices of goods and wages thus offering few job opportunities for desperate population. These policies in summary led to capital strike that would take a longer time to stabilize the economy that was already deteriorating. Conversely, the New Deal’s ‘code of fair competition’ was only beneficial to specific industries.

Industries that were not favored suffered a great deal via harsh economic inefficiencies that led to reduced investment rate in general. This also affected business and investor confidence because they are crucial for economic recovery. Gary and Rockoff however state that private investment was largely blamed on ‘’political climate and the New Deal did not promote investment ‘’ (439).

The Fiscal Policy

Fiscal policy employment in 1930 was unsuccessful economic model. Gary and Rockoff argue that “the policy could not move the economy back to the boom level” (440). This was based on the fact that it was not given a try. The Federal Reserve also failed to protect the monetary model with sufficient force. The authors further assert that Depression would not have reached the level it did ‘’if the Federal Reserve had increased monetary supply steadily and rapidly and instead allowing to plunge into the 1929-1932 Great Crash and in the recession within the depression’’ (441).

Bank lending was also another reason that prolonged the Great Depression. Financial institutions lent money often based on long term relationships with their clients. As a result, it took a relatively longer period for the surviving institutions ‘‘to establish new relationships with the borrower’’ (441).

Gary and Rockoff also belief that if the financial system was changed in early 1930s, “the lending could have been restored much sooner” (441).

Conclusion

Despite the fact that the fight on economy recovery has been won, it has been a tedious and long war to restore. The causes of the Great Depression were quite diverse but it was mainly caused by harsh economic weaknesses. While many wealthy individuals made huge profits, many lost their jobs, their sources of income. The group was forced to spend a lot of money more than what they were earning.

Farmers suffered a great deal and as a result, they had to live in huge debts while selling their lands at significantly low prices making no profits. The Great Depression also destroyed private investor confidence and businesses. In short, it had a long term effect on the economy that was felt long even after the Great Depression ended.

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Works Cited

Robbins, Lionel. The Great Depression. Auburn, Ala: Ludwig von Mises Institute, 2007. Print

Walton, Gary M, and Hugh Rockoff. History of the American Economy. Mason, Ohio:

South-Western/Cengage Learning, 2014. Print.