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Great depression affected the whole world catastrophically and is certainly the most severe depression ever experienced among industrialized western countries. Many economists and historians cite the crashing of stock market as the first and foremost reason for the Great Depression. However, the dispute among the economists is still continued on the exact causes for the Great Depression. The listing of causes may vary from economist to economist depending on the Keynesian view or Monetarist view, but one thing which is agreed upon by all the economists is that Great Depression is the result of combination of many factors, both monetary and economic.
The Great Depression was started in US in the year, 1929 when the stock market was crashed and lasted till 1939 when US stepped into World War II Throughout the year 1929 – 1939, US economy has gone through many severe disasters that exacerbated the society colossally and it’s after effects were continued for several years (Nelson, n.d.).
Great Depression causes over a timeline (1929-1942):
None can name the single root cause of Great Depression because it is widely accepted that numerous factors were cited as responsible for this economic downturn. However, one of the main causes of this economic downturn (prior to 1929) was a combination of unbalanced allocation of income and the widespread stock market conjecture in the late 1920s. Money was used to be disseminated disproportionately between rich and the poor, between agriculture and the industry and US and Europe. The stock market was synthetically kept high leading to huge market crashes and unsound economy. This unequal distribution of wealth along with market crashes led to huge economic dip in America. Apart from this, some of the prominent causes of Great Depression, starting from 1929 are listed as follows:
· Stock Market Crash (1929):
In 1929, when Herbert Hoover became the president of US, the Great Depression hit the America badly leading the society towards economic downturn for almost a decade. The economists mistakenly consider stock market crash and Great Depression to be similar because stock market crashed prior to Great Depression on October 24, often called as Black Monday and on October 29, called as Black Tuesday.
In actual, stock market crash was just one of the reasons responsible for Great Depression. In that crash, investors lost around $40 billion ($16 billion in a month), an exorbitant number! By 1930, stock market was able to recuperate its few losses but that were not adequate and unfortunately America entered into appalling stage of recession, called as Great Depression.
· Bank Failures (1930):
By 1930, almost 9000-11000 banks were shut. This was due to the failure of banks. The bank deposits were uninsured and due to the failure people lost their savings. The few still surviving banks stopped lending loans as they were unsure of their own stability and of economic conditions. This resulted in reduction of purchasing power of people leading to high unemployment rate.
· Reduction in demand and supply (1930):
The stock market crash and bank failures led to reduced purchasing power of people due to which inventory began to accrue, people stopped purchasing items so as to hoard money, liquidity preferences increased, etc. This all contributed towards reduced supply of items in the market, industries and factories which were either shut or stopped working, production was closed, etc. due to which unemployment increased.
· Increment in unemployment (1930):
Due to factories and industries being closed, people were fired from their jobs which increased the unemployment colossally. 6000 people started selling apples on the New York’s streets at 5cents per piece. As people were losing their jobs, they were unable to pay for the items obtained on installment basis and their items were retrieved. Gross National product (GNP) fell by 9.4%. The unemployment rate rose above 25% which meant, of course, even less spending that can help assuage the economic situation.
Several grocery stores get raid and their items get stolen. Many foreign workers especially Mexican has to face the fury of Americans as they perceive them to be stealing their jobs (Kelly, 2010).
· Smoot-Hawley Tariff (1930):
To defend the American companies, the government signed the Smoot-Hawley Tariff Act in June 1930. According to this Act, tariffs were increased to a tax of 50% on the imported goods in the US. The real intention behind this was to increase the prices and wages but history shows that it further aggravated the depression because due to this Act, the trade was sharply decreased within the US as the US government in the pursuit of trying to protect their own industries, increased tariffs on imports that led to restricting the trade between the countries.
According to economists, it was the wrong decision to initiate this Act at this phase when the economy was in the roar of downturn. About 1000 economists signed an appeal begging the government not enact it and 60 other countries passed penalizing tariffs in reaction to this.
· Laissez-faire Policy (1932):
The depression continued to deteriorate the US economy. The rebellions and discontent spread throughout the country, GNP continued to fall, this time it fell by 13.4%, stocks had lost 80% of their 1930 values, as the Government continued its non-interventionist, laissez-faire policy (Amatecon, 2007).
Consequences of Great Depression:
The consequences that arise as a result of the above declared causes curved the US economy into a large-scale economic slump. As a result, the Great Depression became the worldwide business downturn of 1930 as it affected almost all the countries of the world.
International commerce declined quickly. The countries increased the tariffs on the imports to shield their own economies and industries due to which international trade declined sharply. The tax revenues, personal incomes and earnings started declining. This affected both, the countries that exported raw materials and industrialized countries. Government decreased their spending which led to decreased consumer demand resulting in decreased supply and increased unemployment. The construction came to a standstill in nations. The nations changed their heads and the type of administration. Germany was in the weakest condition because of the massive arrears the country was hampered by following WWI. The depression effects in Germany led to the rise to the authority of Adolf Hitler. Japanese invaded China and setup their mines and industries in Manchuria. China was of the opinion that this economic growth will reduce the depression.
The depression had intense political effects as well. In Germany and Japan, as a result of depression militarist powers arose who implemented forceful foreign policies that led to the WW-II. The government intrusion in the US and the Britain ultimately resulted in the creation of welfare systems. Many investors lost their money and several were wiped out, losing everything. Banks, stores, industries and multinational companies came to an end leaving about 15million people jobless and impoverished. People came to depend on government and charities for money and food. All in all the Great Depression brought about a huge disaster and worldwide economic crises leaving the world immersed into terrible recession (Dinkins, 2002).
The period of 1933-1939 proved to be fruitful for US economy. The president was replaced by Franklin Roosevelt. The government intervened and raised tax rates for highest earners in the country from 25% to 63% so as to ensure the fair division of wealth within the country. A new deal was signed to control unemployment by work-creation schemes such as painting of the post offices and street cleaning. GNP started increasing, unemployment was decreased, tax rates were further increased to 79%, and retirement benefits were paid to senior citizens. The production raised by monstrous 50%, thus eradicating the depression completely from the economy. However, the move was little too late (Croft, 2010).
Now economies should consider the recessions and depressions as the part and parcel of the life because even after applying all the cures and preventive measures we are still living in a period of recession. The implications for Great Depression demonstrate that it is obligatory and advisable to take timely decisions so as to completely get rid of such downward swings in business cycles. Although economists believe that it is not possible to completely eradicate the economic downturns from an economy because what goes around comes around, but government can take preventive measures so as to control such recessionary periods. In this way the effects of depression can be abridged so that society can be saved from being engulfed into the excessive stages of depression.