The global economy has had various recessions over the years. During such times, the economy of great countries having the recession can be used to explain how the world economy can at times decline. One such example is a time referred to as the great depression. During the 20th century, the economy of the United States collapsed. This great depression is used by economists to describe how the economy of the whole world can decline in a period. The decline of the US economy and why it continued for so long is attributed to various factors. Having been an occurrence that had long been forgotten, economists are now using The Great Depression to develop various quantitative methods and theories used in economics. New insights are now being gotten from this research, ones who are in contrast to previously held explanations. This essay discusses the great depression, its main causes, and why it lasted for so long.
Various causes have been used to describe the Great Depression. According to Rauchway, the world in the face of this crisis was different to that which people back then were used to. Some of the questions asked after the depression were what caused this Great Economic Depression, why did it last for so long, and what can be done to avoid such an occurrence in future. Economics hardly agree on the various causes of this event, but an agreement has been reached that they key cause meltdown was a breakdown in the financial system.
Causes of the Great Depression
This Great Depression has been attributed to several causes including the crashing of the stock market, a weakly structured banking system, and the Smoot-Hawley Tariff. To deeply understand the root causes, two forces need to be understood: first those that reduced the economic activity, and then those that further turned the reduced economy into a disaster. The construction sector, then the agricultural one both had their influences in this Great Depression. Residential and nonresidential construction started declining in from 1925. In prior years, the construction industry had taken the economy by storm. This decline along with other influences led to the huge falling of the economy. Again, the decline that was experienced in the agricultural sector was connected to the Great Depression. Various farmers were being frustrated by the overall world market that had reduced and were heavy indebted. Since agriculture by then was an important part of the economy, its continued decline in that 20s decade had a huge effect on the overall fall of the economy.
The first cause of the Great Depression was the crashing of the Stock Market. This happened in the last week of October. Normally, the weakening of the stock market does not cause business declines. However, this crashing of the stock market in 1929 catalyzed the small economic decline that went all the way because of two reasons. First, the crash presented a massive amount of decline in the stock market and second, the crash resulted to growing uncertainties by the investors and the general population of where the economy was headed. An example of the shift in the stock market is presented by the stock index of the New York Times. Twenty-five industrial stocks had been being monitored since 1924. In 1924, the price per stock stood at 110. They climbed to 338 in January 1928, and finally to 452 in September of the same year. Most stocks at this time rose in value and buyers of the stock accumulated their wealth rapidly. This rapid accumulation of wealth brought the idea that the economy would keep doing well and time had come to have wealth. Due to this speculation the government through the federal reserve tried to stop the hiking of the stop prices by raising the discount rate. The discount rate is the rate at which the federal reserve lends to other financial institutions. The discount rate was raised to 6%. After this, stocks began taking a nose dive. First, a slow decline which became massive until on October 24, 13 million shares were traded. Financial and investment banks bought massively to prevent a complete meltdown which only slowed the eventuality of the collapse of the stock market. The actual crash of the stocks market was not the real problem; the problem came with the shattered idea that it was time for prosperity. During the boom of the stock prices, most people believed that the time was ripe for them to move to even higher standards of living. However, after the shattering of the stock market, a negative atmosphere was growing. The population was less optimistic about what the future held for them. Various purchases that depended on the consumer confidence, and whose purchase had occurred during the previous boom started declining fast.
Another cause of the Great Depression was the structure of the banking system. The banking system was weak hence, this had an effect on the overall economy. If the structure of the banking system had been strong, then the overall impact of the stock market would not have been that bad. The market would have regained its stability, and the people’s morale would have grown back. However, due to the weakness of the banking system that was seen in the later stages of the depression, the impact continued to be felt. The consequent failure of several banks presented this structural weakness of the financial banks. The first banks to collapse were those located in the South and Midwest. This did not bring the attention to the situation to the federal reserve or media. However, the collapse of the Bank of the United States located in New York brought the condition of the financial institutions to the public eye because of several reasons: by the amounts of deposits, this was the largest banks to collapse, its name had people believe that it had close connections to the government, and its strategic location in New York had people believing that their national financial system location was also headed this road. The federal reserve did not act at this point making things worse. The pressure of the dollar was also brought by several banking brands in Europe closing, and the leaving of the gold standard by Britain. After this, there was a huge wave of panics across the United States, with several banks suspending their operations. The final crisis was contributed by the banks’ weakened conditions, a new government coming up and uncertainties on how the crisis would be handled, and the general panic in the population.
Though not a major cause of the Great Depression, The Smoot-Hawley Tariff was another driver of the depression. This tariff was imposed on several goods, especially those from the agricultural sector. Various leaders and economists protested and asked the then president to veto the bill on a foundation that a raise of tariff lead to a reduction of imports since other countries would be unable to purchase foreign exchange of the US needed to buy their exports. It was also a major belief that an increase in tariffs would cause a retaliation by other countries to increase their tariffs. This would reduce the trade globally. Other countries soon increased their taxes as the US did reduce the trade. However, it should be noted that most of the damage done by this bill were psychological: citizens developed uncertainties reducing the optimism levels thus fewer investments were made.
Why the Great Depression Lasted for So Long
Despite the country having experienced several financial crises before the one of 1929, this one lasted more than the rest of the crises lasted. To some people, the depth of the fall of the economy is the main reason why there was a lag back up. They argue that the recession that came in during the depression made it impossible to rapidly revive the economy to its original status. That the recovery needed time. However, the two reasons can be used to explain why the Great Depression lasted for longer periods of time that other economic declines: The New Deal made by the government, and the Fiscal and Monetary Policies at the time.
Most economists during this time believe that the reason why the road to recovery was longer was that of the depression of private investment spending. The amount of the investment by the private sector was below per by previous standards. This is because of the government’s atmosphere created that discouraged investments. The new freedom given to the labor and social security was viewed as being an antagonist to businesses. This means that by investing more, investors would get less out of their investments. The US government by then saw investors as opposed to government intervention and driven by the disproportionate profits that they made. Wealthy people opposed the new tax legislation that was aimed at making the taxation structure more progressive while at the same tax making sure that no tax payment was avoided. The taxation on gifts and estate was also increased, the surtaxes of big corporations, and individuals. This surtax of big corporations would make sure that profits got by various corporations would be shared to shareholders instead of being held by the corporation. The New Deal policies were aimed at reaching an employment equilibrium by the government and restore full employment. This was done by putting a check on the trend by wages and prices that kept going down. Therefore, the investors were not given a reason to invest if the government would at the end of the day take away the profits.
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Another reason why the Great Depression lasted so long is the fiscal and monetary policy at the time. According to the Keynesian economists, the New Deal was not enough to drive the country out of the depression. That the government by spending in the economy plays the role of offsetting low amounts of expenditure in the private sector. During this time, there was a decrease in the level of private spending, which was more than the overall increase in the government expenditure. The government should have increased its spending. According to a Keynesian economist Cary Brown, the fiscal policy did not offer a good recovery map in this period simply because it was not tried. The government should have injected its spending to the economy of the country, and this would have led to a more rapid recovery of the economy.
In conclusion, the Great Depression was a period that saw the economy of the US shatter between 1928 and 1933. Various causes are attributed to this economic decline including the crashing if the stock market, the weakening of the US banking system, and The Smoot-Hawley Tariff. The combination of these main causes is what brought the economy to its knees. In comparison with other economic declines, the Great Depression lasted longer. This is attributed to several factors including the monetary and fiscal policy at the time, and the New Deal. This economic depression should be used as an example of how the economy can fall, and used to avoid such an occurrence ever happening again.