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The Great Depression occurred in the 1930’s and it still remains an important occurrence in American economy and history to date. This happened to be the worst form of economic depression to be experienced ever in the history of America attributed majorly to loss of confidence in the American economy. There was massive hardship throughout the land for millions of people as well as collapse of a large percentage of banks, businesses and even farms. The Roaring 20’s preceded the Great Depression and it was the time of the discovery of the stock market and Americans became pioneers as they took a competitive advantage through investment of much of their wealth in stock. Prior to the crash of the stock market, most of the US citizens were busy investing in the stock market with high speculations of making quick profits (Walton and Rockoff 380).
Prosperity was being experienced in America due to emergence of new industries and new methods of production due to its great supply of raw materials for production of steel, glass, chemicals and machinery that boosted production of consumer goods. This resulted to high rate of employment, increase in loans from banks and flourishing of the stock market. The presence of a harsh economic downturn for several years was attributed to the high rate of unemployment and the Gross Domestic Product (GDP) really fall. The cause of depression goes back to the 1920’s, when the demand for products was high and this led to overproduction of goods that surpassed its demand in the market (Parker 7). In effect, there was slowdown in most of the production sectors including agriculture. Millions of people lost their jobs
The Causes of the Great Depression
The causes of the Great Depression were a combination of domestic and global economic conditions. The impact of this depression was felt all over the world, for instance, the rise of extremism in Germany, led to the New Deal in America what considered to be the major contributing factor to the World War II. The major cause includes: the stock market crash of 1929, bank failures, reduction in purchasing across the board, drought and American economic policy with Europe.
The Stock Market Crash of 1929: Most of the Americans had invested a lot of their resources in the stock market as it was the easy way of making profits in the 1920’s. People could buy as much shares and stock as long as they pay for at least 10% of the total amount. This was facilitated by the ever rising price of shares in the stock market, thus attracting wealthy investors. During the occurrence of the great depression many investors lost more than ten times the amount of money they had invested in the stock market. The collapse of the stock market was terrible as it inflicted fear in people as they all rush to take their investment from the stock market (Walton and Rockoff 397). The stock market crash made stockbrokers to loss over $40 billion dollars in just two months time.
Failure of Banks: In 1930’s, banks did not insure the deposits of their customers and the moment a bank collapse, many people lost their savings. The one’s that survived the depression stopped advancing loans to customers, since they were uncertain of the economic situations and this led to increasingly less expenditures. As a result, the supply became more than demand of products in the market. Most of the banks in America were not able to survive the depression and this led to their collapse. As the stock market collapsed, people rushed to banks to collect their money and instead of keeping them with banks, they opted to keep them in their homesteads. More than 9,000 banks were affected. To make matters worse, banks rushed to hold properties of loan defaulters, but they faced problems in auctioning them, since people opted not to purchase them due to increase in financial insecurity. They ended up with more assets but without cash.
The American Economic Policy with Europe: this time saw the American government creating policies that will offer protection to its home companies since businesses were failing. In effect, the Smoot-Hawley Tariff was created during the depression. This saw increase taxation on imports thus low trade between America and other foreign countries, which responded in a retaliatory move (Parker 8). Further, the crash wiped out people’s investments thus shaking the public. The difficulty in advancing loans due to inflation and lack of investors made banks to incur major losses. Moreover, the absence of deposit insurance led to contagion spread of panics to sound financial institutions.
The crash of the stock market and uncertainty in the economy made people of all classes to eschew from purchasing items. This led to wastage and major losses to companies that had invested a lot of their resources in those products. The effect of this was reduction in production, massive unemployment as companies could not support huge workforce. Items, which were bought through installments, were repossessed as people who had lost their jobs were unable to keep on paying for them leading to increased inventory. The higher rate of unemployment which was above 25% made it hard for the economic situation to be alleviated (Walton and Rockoff 432). Mississippi valley was hit by a long time drought which was extreme to the extent that people were not able to pay taxes or even their debt. Some even attempted to sell their property hoping it will help them, but it was not helpful to them.
Why did the Great Depression last so long?
The Great Depression took a considerably longer time than previous forms of depression that had once hit America and the world at large. To begin with, the American government cut the supply of money by nearly a third. This move really chocked the recovery process given that many banks that were suffering liquidity problems were not able to stand the depression and in return they just went under. Although the initial aim was to weed out some banks, the act affected the recovery process thus making it take a considerable longer time than expected. The government mismanaged the economic situation leading to the great depression. Secondly, the president in his attempt of halting the recession after the stock market crash ensured that prices of products are high yet wages of workers are low (Walton and Rockoff 397).
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The creation of the New Deal, which however backfired leading to more years of unemployment, low wages and high prices of products for a period of about three years. The New Deal aimed at maintaining public works, healthy wages and full employment through effective production controls based on Keynesian theory. However, it was affected by mismanagement, politics and wastage in the government run initiatives. In a nut shell, the Great Depression was a combination of economic factors which could either be changed or avoided incase one of these was changed (Parker 3).
The excessive tightening of the money in supply by the Federal Reserve Board did not succeed in saving the economy given that it accelerated and lengthened the depression. The monetary policy forms the major cause of the Great Depression since monetary expansion could have countered recession and in return depression could have been avoided in the world. A structural change in the real economy resulted to the great decline of agricultural prices as well as incomes, which according to President Hoover was a greater productivity. As companies cut down on its workforce, demand for agricultural produce also diminished and this drove prices much lower. As such, the value of assets decreased as people’s income was low. This decline in farm income made the New Deal ineffective in saving the economy from the depression crisis (Walton and Rockoff 453).
In the 1920’s, buying on credit was the problem. Many people did not take the future into consideration due to the great economic boom. People chose to live luxuriously on credit and this was facilitated by installment buying on most of the products. During the crisis, lenders repossessed items in case the borrowers skipped some payments and millions of Americans were affected. Additionally, people feared making new purchases so that they may clear their debt first and this led to a drop in the consumer spending. In effect, nations were unable to repay their debts as well as farmers and businesses due to lower prices of products and also assets. Uneven distribution of income and wealth: To begin with, in times when the economy of America was booming, not all citizens of the country were participating in the boom given that about 60% of American citizens were living below the poverty line (Walton and Rockoff 429). Hence, the wealthy continued to prosper while the poor became poorer due to unequal wealth distribution.
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In conclusion, the Great Depression is an attribute of the stock market crash in October, 1929 that led to closing of banks and factories, higher rate of unemployment, plummeting of the stock values, shattering the public confidence and wiping out of stockholders. Restrictions on new loans arose from the ever rising debt and this meant more bankruptcies, lower prices, scarce credit and less borrowing. In addition, the uneven distribution of income and wealth, failures of banks, government’s interventions and low income of farmers contributed to the lengthening of the 1930 Great Depression.