The western industrialized world experienced one of the most severe economic downturns ever between the year 1929 and 1939. The depression originated from the United States and spread globally due to the US economic correlation with other economies of the world. The world experienced high unemployment rates, deflation, and low production. The banks failed; the stock market crashed, leaving most government ineffective. Economists find it hard to establish contributing factors to the global poverty and despair. No particular element can be pinpointed as the sole trigger of the depression. The paper addresses the causes of the Great Depression and how it came to an end.
The 1929 Market stock Crash
According to Livingston, October 29, 1929, is considered the day that marked the beginning of the Great Depression (34). Historians and economic researchers nicknamed it the “Black Tuesday,” where the stock market started collapsing. The shares on the stock exchange fell by an estimated 40 billion dollars in a single day, meaning that 40 billion dollars in credit money disappeared. The disappearance caused massive losses and severely affected confidence to more than 20 million people in the United States (Smiley).
Before the Depression, banks had large reserves leading to lowered interest rates to the customers. The cheap source of capital invited manufacturers and other investors to buy new equipment and employ more workers. The expanded production caused upswings in the economic cycle. Consequently, the heavy borrowing caused a decrease in bank reserves leading to rapid increase in interest rates. Subsequently, the banks discouraged investors that slowed the economic growth.
In the 1930s, over 9,000 banks closed down their operations. As they went into bankruptcy, the demand for withdrawal increased. The banks called all their loans before their due dates but continued to experience long queues of people withdrawing their savings. The deposits were not insured, and while the institutions crashed, the depositors lost their savings. The surviving banks were not willing to offer new loans due to uncertainty in the economic situation. The failure of the banking system exacerbated the situation due to little expenditure leading to rock off in the economy (Smiley).
Reduction in Purchasing Across the Board
The Keynesian theory attempts to explain the causes of the economic downturn in 1929. The theory states that the United States had an overproduction of commodities and there was inadequate money to buy them. Large amounts were tied to the gold reserves, but there was limited supply of the metal. The country faced a shortage of money, therefore falling in effective demand for service and other products in the market (Livingston 35). A chain reaction occurred due to deflation; enterprises went into bankruptcy, unemployment, fall of consumer goods, proactive duties on imports and a significant drop in standards of living.
The crashing of the stock market and further fears of hard economic times, the people slowed down item purchasing. Reduced items purchased forced companies to lay off many employees. Losing of jobs meant that people were unable to afford life necessities, paying utility fees and many had their property repossessed. The escalating unemployment rate meant reduced spending that could assist in alleviating and improving the economy (Smiley).
American Economic Policy in Europe
In 1930, the United States government introduced the Smoot-Hawley tariffs with a protectionist objective. The high taxes on import aimed at protecting American corporation from imports. Consequently, fewer goods from foreign nations found their way into the American market. Americans were to spend their money on domestically produced goods and resolve the unemployment issue. The Congress disregarded the international trade principle where the state does need to stop imports without blocking the exports (Livingston 36). The strict tariffs encouraged retaliatory economic restrictions against the United States, initiating a bitter trade war.
The United States experienced severe drought in Oklahoma and Mississippi. The Mississippi Valley experienced high magnitude dust storms that significantly changed the agriculture and the US. The farmers were unable to harvest their produce due to prolonged dry weather in the 1930s, and citizens could not afford pay taxes. The citizens had to sell their assets including their land for no profits to clear debts. The economists described the event as Dust Bowl, where millions sold their farms and left for the city in search of employment (Bordo and James 129).
Road to Economic Recovery
State intervention led by President Franklin Delano Roosevelt guided the country to recovery. In the first 100 days in office, the Congress passed major laws to improve the economy. The President erected policies that could promote economic growth. Some interventions failed by weakening the dollar while others improved the situation. The Roosevelt administration introduced the Social Security System and minimum wage for the employees in 1935 (Smiley). Roosevelt aimed at recovery programs through job creation, decrease agricultural produce to raise prices up and assist homeowners to stay in their homes and pay mortgage.
Bordo, Michael, and Harold James. “The Great Depression Analogy.” Financial History Review, vol. 17, no. 2, 2010, pp. 127-140.
Livingston, James. “Their Great Depression and Ours.” Challenge, vol. 52, no. 3, 2009, pp. 34-51.
Smiley, Gene. “Great Depression.” The Library of Economics and Liberty, 2008, http://www.econlib.org/library/Enc/GreatDepression.html. Accessed 30 Oct. 2020.