Great Depression was a global economic downturn which lasted for about 10 years, starting from the year of 1929. It was the greatest and the most severe depression ever been experienced in the whole world. The causes of the Great Depression are still a big debate, more so to the economists since up to date, no one has been able to come up with a solid list of factors that led to the economic downturn. Although the downturn started in the United States of America, it led to the total decline in the country’s output which consequently led to the rise in the unemployment rate. This trend continued and with time its effects transferred to the other parts of the world. The cause of global depression cannot be tied to one factor, but economists believe that it was brought forth by a combination of various domestic and worldwide factors. The effects of global depression were felt across the world and are believed to have been the cause of the rise of extremism in Germany and the New Deal in the United States of America. Some of the economic factors that took place are: a great drop in demand and credit, deflation in assets, and disruption in trade.
Great Depression is believed to have been started by a fall in aggregate demand of the products manufactured in the United States. This in turn led to the decline in production and manufacturing of goods. People started to spend lesser money than they used to. This scenario made merchants to record a high rise in the inventories. A major point to note is that the people spending was not uniformly distributed over the period of depression. This situation in America later transferred to other parts of the world via a combination of many factors.
The United States policy on limiting the operations of the stock markets
The time from 1920 to 1930 was a fairly flourishing decade with the wholesale prices remaining at constant levels until 1924 and 1927. Stock market was one of the areas that had a high flow of money with stock prices rising by over 400% from the year of 1921 to 1929. To counter the rise of stock prices the government of the United States of America decided to raise the interest rates in the year of 1928. In return, the raised interest rates were a big blow to the automobile and construction industries causing them to slow their production levels. In the early 1929, the investors could not be able to anticipate the future prices of the stocks and many investors suffered losses due to the continued decline in prices. This made many investors to lose their confidence in the stock market which caused so many people to leave the market. The Great Crash of 1929 is an event that will always be remembered in the history of America. This is when the stock prices declined by about 33%.
The fall in stock prices caused many people to lose their trust in the monetary system of the United States, a factor that led to a decline in the purchase of durable goods and business services. This was a big blow to the total demand of goods and services in the United States. According to economists, the sudden decline in stock prices increased the uncertainty levels among the consumers making them shy away from buying durable goods. Despite the fact that people had cut most of their purchases, shopping for essential commodities had to continue in spite of the rising prices. This in return made more people poorer. Firms or businesses also started shying away from purchasing other business products and also employing new people. From the year of 1929 up to 1930, the decline in spending fell drastically. According to the American economists, the event of stock crash contributed largely to the Great Depression which affected the United States greatly and spread to the other regions of the world.
To many economists, the preservation of the gold standards by the state government is another major factor that caused the Great Depression of 1929. The gold standards were the scenario where each country had set its currency in terms of gold and worked to ensure that the standards remained fixed. It is believed that the Federal Reserve reduced the money supply in order to preserve the gold standards. Due to the people fears of declining stocks prices, the government was concerned about the rising fear of the stability of the United States currency among the people, which would in turn affect the banking rates across the country. To avoid increase in these fears and banking panics, the American government had to gain control by expanding the Federal Reserve (Eichengreen).
Banking panics and monetary contractions are believed to have greatly contributed to the state of Great Depression. Banking panics occurs in the situations that people of a certain country lose their confidence in the bank’s solvency. The banking panics gripped the United States’ economy in the beginning of 1930 which was a big blow to the economy. If the state of banking panics continued, the American dollar would have suffered a blow in terms of devaluation since foreign investors would have transferred their investments to another country that was not probably experiencing the economic instability. Economists argue that if it were not for the gold standards, the economic depression would not transfer to other regions of the world. The gold standards caused trade imbalances, which in turn led to international gold flows. In the middle of the 1920 decade, many people from all over the world had special interest in the American stocks since it was so promising compared to the stock markets of other countries like Great Britain. This led to the increase in gold flows from other countries that traded on the stock market.
When the United States started to experience the economic depression, there was a rapid increase in gold transfer from other countries. This was due to the fact that, due to contracting of the US economy, many foreign countries were interested in American goods and hence were buying more while America because of decline in income was not able to afford purchasing foreign goods and services. In the event of trying to put the scenario under control, most countries decided to increase the interest rates. This was the only move by other foreign countries in order to control the worldwide gold standards. This had to be done in order to match the current situation in the United States of America. This had a negative effect on the output of the individual countries which nearly became the same as that of the United States.
Difference in wealth and income among the American citizens – one of causes of Great Depression
An economist Waddill Catchings stated that the American economy in the 1920’s was producing more capacity than it was able to consume. This was because the citizens did not have enough money to buy the commodities produced there. This shows how wealth disparities among the citizens contributed to the great depression. In 1920 the rate of wage increase was lower compared to how the production increased. This implies that the production firms were making a lot of profit which was channeled to the stock market bubble rather than into consumer purchases. The United States economy would only have continued to grow if only the companies continued to expand. Due to the fact that the Federal Reserve Board kept the discounts low, this encouraged the investors, who invested in America excessively. By 1929, there were more companies which led to more production that the citizens were unable to purchase. This implies that overinvestment condition coupled with low wages and low income by citizens was a major factor in the in-stabilization of the American economy.
The only thing the government could have done is to increase the purchasing power of its citizens by increasing the supply of money, to maintain the production industry base, and cause a re-inflation in prices and wages which would in turn cause an increase in consumer spending.
It is also worth noting that the demand of housing services in America started in the late 1925 but continued to decrease as the years progressed until the year of 1929. This fall in demand of housing services can be attributed to the decrease in population. Some of the factors that had caused the decrease in population were: formation of few families due to prevailing economic conditions, massive deaths that occurred during World War 2, the flu that attacked United States in 1918 – which claimed many lives, and the secularism in the 1920’s which followed the stock crashes.
According to a British economist, Maynard Keynes, the self correction processes could not clearly solve the economic crisis associated with the Great Depression. In explaining the Great Depression he outlines that all the cause of economic recession is due to savings. In economics perspectives, the savings causes a fall in interest rates which would lead to a rise in investment rates but the demand would still remain the same. Keynes explains that the only reason why investments can increase is if there is some hope that the investors expect high returns. This implies by America showing low consumption rates of the produced goods, investors predicted that the trend would continue, a condition which is not favorable to them even though the rates are low. According to Keynes, this is the situation that occurred in the United States at a higher degree where people were likely to become bankrupt, the situations which are not friendly to investors. Investors always look for promising situations, no one would invest in a failing economy, an economy which would not consume his or her firm’s production.
How government is responsible to controll the economic condition in the country
Economic stability of any given country is an essential factor for a country to function smoothly. The government must work on encouraging foreign investors, protect local companies, and protect the people from being exploited through being charged very high prices. It should ensure that enough job openings have been created to curb unemployment condition. The government is correct in bailing the American auto industries. This is because the auto industry holds the economy through the employment of many people and generation of high tax returns. Auto industry involves designing and manufacturing of vehicles which the target group desires. For the auto industries to run properly and produce high competitive products, they must have a huge capital base in terms of assets, technology, and labor. A good example is the GM which loses $1 million per month, if the government fails to intervene and inject some capital on it, the company will be closed few months down the line causing many people to lose their jobs, which would be a problem to the American economy.