Economics The Great Depression.
Name:
Tutor:
Course:
Date:
Economics: The Great Depression.
The Great Depression, a period of great economic distress lasting between 1929 and 1942, was the result of many factors. Seen as ‘the greatest economic disaster in modern times’ (Smith 7), it was characterized by extensive negative effects in the lives of many people in the industrialized nations of the world. The United States was particularly hard hit having attained a ‘world power’ status after World War 1 ended. Businesses were booming and the commercial status of this and other industrialized countries was rapidly on the rise.
Causes of the Great Depression.
The first cause of this detrimental economic period was the stock market boom. In the 1920’s, much of the business going on the stock exchanges was almost purely speculative. People kept investing in stock rather blindly believing that it would make them rich very quickly due to the perception that the prices would always keep going up. This on its own was very risky, but was compounded by even more serious practice of buying stocks on margin. Here, speculators borrowed money and bought stocks believing they could sell it later and make a tidy margin without using their own money. The problem most did not realize was that the stocks prices were artificially high, especially between 1925 and 1929 in the New York Stock Exchange. This culminated into a major crash on October 24th 1929, a day referred to as ‘black Thursday’. Baldwin shows how this was made international by the US Federal Reserve’s attempt to curb runaway stock prices using tighter monetary policy (p. 33), something which led to other countries adopting the same due to their commitment to the gold standard.
The second major cause of the Great Depression was a widespread bank failure. It is estimated that through the 1930’s, at least 9000 banks failed and collapsed since most of their deposits were uninsured and with their collapse, people simple lost their savings. Many banks had undertaken expansion on a reckless scale in the 1920’s, leaving them very much exposed when the depression hit, Examples such as Caldwell and Company as well as the Bank of the United States in New York City best show this. Some scholars, namely Schwartz and Friedman, have even suggested that the death of the death of the New York Federal Reserve Benjamin Strong could have been the cause of the depression based upon the effects this had on the price of bank deposits and the restriction of payments. However, this was disputed and shown to not be the case as the economy had been far less stable than had been previously thought meaning the bank deposits had little or no effect.
Underneath the apparent big business boom that precipitated the Great Depression, farming as an important national and international sector was on the opposite side of the success spectrum. Farmers were generally not enjoying the prevailing boom as they produced a lot of produce whose prices did little if anything to change this. It is estimated that farm prices fell by as much as 40 percent during this period, something which forced many off their farms as their returns were incapable of servicing loans owed to banks, themselves eager to get back their money as the depression cornered them too. Bernanke demonstrates this sad relationship between farmers and banks where he states that ‘at the beginning of 1933, owners of 45 percent of US farm, holding 52 percent of the value of farm mortgage debt, were delinquent in payments (Hart p. 138). This was further protracted by the drought conditions that affected the region, most famously in the Mississippi valley in 1930.
As businesses began failing, the government set up protective policies to cover their industries from the effects of the depression. The Smoot-Hawley tariff of 1930 is one such policy whose work was primarily to protect American companies from the erosive effects of imports. They charged a high import tax for imports thus lowering trade between United States and her allies, especially Europe. But this came with retaliatory activity since these trade partners too lost revenue due to the policies. The United States enacted the Smoot-Hawley tariff to protect its companies well knowing that its reliance on international trade was quite small. This was not the case for some of its trade partners, whose income from international trade activity constituted a large portion of their budgetary sources. This tariff bumped the rates from 29.5 percent to 50 percent in the period between 1931 and 1935 meaning many countries could not absorb this. However, with the retaliatory activity orchestrated by the effected countries, especially European ones, American exports suffered a bad blow falling from 5.2 billion to 1.7 billion in dollar terms. This coupled with the adjoining fall in prices meant the major agricultural commodities the United States traded were directly related to a large percentage of farming citizens who in turn had no option but to default in bank loans and further aggravate the looming depression.
‘Low wages were a major cause of poverty during the great depression’ as Jennings points out in her study on poverty in America (p.95). This was especially rife among factory workers during this period characterized by a major industrial expansion. Ford Motor Company as well as a few other large entities could afford to stay in production, albeit a slowed one, while paying decent salaries to their workers. This was not the case for many others especially when cheaper labor in the form of immigrants and African Americans from the south came up north offering factory owners cheaper labor. The inability of their employers to pay them decent wages, coupled with the general overproduction rife then meant companies produced what potential buyers could not purchase. This introduced massive losses to the companies with some even closing down while bank loans went unpaid and people were left to languish in poverty.
Why the Great Depression lasted so long.
As discussed above the economic condition slumped between 1929 and 1942 leading to vast array of problems for countries and their citizens. In addition, a radical shift from traditional economics to Keynesianism was witnessed as well as people’s perception on the ‘role of government’ (Bernstein p. xv). But a general consensus was reached as concerns the reason why this depression lasted so long. It has been demonstrated how a mixture of perverse fiscal policy, government control and regulation as well as rampant unemployment were the main causes of the extended stagnation witnessed.
During his reign, president Hoover led the United States through a reckless period of overspending, over taxing and increasing national debt as well as chocking off trade. This during a time the depression proved to be perilous and downright detrimental to his government as well as the economy as his opponent in the 1932 election Franklin Roosevelt speculated. The worse mistake of the Hoover administration was the Smoot-Hawley tariff of June 1930. It set the stage for worse effects left by its predecessor – the Fordney-McCumber tariff of 1922 that had harmed the agricultural sector, a major industry of the country then. The resulting virtual closure of borders to foreign trade ignited a vicious international trade war that very well crippled the basis of United States citizenship’s breadwinning industry –agriculture. This coupled with the drought that left Mississippi bearing the name ‘dustbowl’ extended a depression that could very well have dissipated in a much shorter time.
To aggravate the already dire situation, Hoover government set policies that overtaxed an already poverty stricken American citizen desperately trying to service loans to impatient banks. The Congress passed and President Hoover ignorantly signed the Revenue Act of 1932 that saw some income tax brackets double their remittances. The topmost bracket doubled shifting from 24 percent to 63 percent! In addition, exemptions were lowered and earned income credit done away with. Corporate and estate taxes were raised, gasoline and automotive taxes were imposed and postal tax hiked quite sharply.
Franklin Roosevelt also contributed to the long duration of the depression in a rather ironic fashion seeing how critical he was of his predecessor’s administration. His new policies, affably named the ‘New Deal’, were designed to improve the economic condition of the country by spending 10 billion dollars while the nation’s revenues only amounted to 3 billion dollars (Reed). This pointed to increasing national debt but he decided to increase taxes on the still struggling American people. The Agricultural Adjustment Act (AAA)’s act of destroying large agricultural produce and commodities, as well the National Industrial Recovery Act (NIRA)’s arm twisting of companies into national cartels also pinpoint other administrative flaws causing the Great Depression’s extended period. This is because all these undermined the citizen’s ability to try and improve their earning power.
Works cited.
Bernanke, Bernard. “Nonnmonetary effects of the financial crisis.” Essays on the Great Depression. Los Angeles: Princeton University Press, 2009. 53. Print.
Bernstein, Michael. “Introduction.” The Great Depression: Delayed Recovery and Economic Change in America, 1929-1939. Los Angeles: Cambridge University Press, 1989. 4. Print.
Jennings, James. “What are the major explanations of the great depression?.” Understanding the nature of poverty in urban America. Boston: Greenwood Publishing Group, 1994. 95. Print.
Smoith, Robert. “Student reading pages.” The Great Depression Spotlight on America Series. Hendersonville: Teacher Created Resources, 2006. 7. Print.
Temin, Peter. “The Midas touch.” Lessons from the great depression Volume 1 of The Lionel Robbins Lectures. Massachusets: MIT Press, 1989. 49. Print.