The 1930s were a significant decade in the economic and political history of the United States. This was a period of significant social and cultural changes instigated by the worst economic crises ever witnessed in the American history. This economic crisis later came to be known as the great depression. The great depression refers to the period of global economic depression that lasted from 1929 to 1939.Between the onset of the decline and 1932, the Dow Jones Averages had lost approximately 89 % of its market value.The overall unemployment rate rose to the highest levels, and the banks failed in unprecedented ways.
Causes of the great depression
The cause of the great depression was a combination of factors that varied from domestic to worldwide conditions. The top five causes of the great depression as indicated by historians and economists were; stock market crash of 1929, bank failures, and reduction in purchasing across the board, American economic policy with Europe and drought conditions (Kelly, Top 5 Causes of the Great Depression).
- Stock Market Crash of 1929
It all became clear on 29th October 1929 that the start of the great depression had begun. Within hours, the stock market lost all the gains for the whole year. The Dow Jones Industrial Average reduced from the previous day close of 260.64, opening at 252.6 it fell to 212.34, closing a bit up at 230.6, an 11 % loss (Amadeo, Black Tuesday). The stock market indices that represent the U.S. economy in terms of its industry, transportation and utilities are called Dow Jones Averages. They are calculated by taking the sum of the stock prices of the companies in each index, then the total is divided by the number of companies (Amadeo).on that same day, shares worth 16.4 million were sold exceeding the record of 12.9 million shares, which were traded on Black Thursday (Amadeo, Black Tuesday). Black Thursday signaled the beginning of stock market crash in the U.S. history (Amadeo, Black Thursday).two months after the original crush in October, stockholders had lost more than 40 billion dollars. Although the stock market started to recover on the losses, by the end of 1930, the market couldn’t take any more, and America entered into the great depression.
The failure of the Federal Reserve to support the banks led to the reduction of cash and failure of banks in massive scales (Dallas and Dallas). In the course of 1930, over 9,000 banks failed. Bank deposits were uninsured and, therefore, as banks failed people lost their savings. The surviving banks, concerned for their own survival and being unsure of the economic situation, stopped giving out new loans. This led to less and less expenditures (Kelly).
- American Economic Policy with Europe
When the businesses began to fail, the government introduced the Smoot-Hawley Tariff in 1930 in an effort to protect the American companies. It is this Smoot-Hawley Tariff act of June 1930 that raised the US tariffs to historic levels in order to protect the American industries which at that time were facing fierce competition. This competition was from the European counterparts who had sharply increased their production after World War II. This was also in line with the one of the Herbart Hoovers campaign pledge to protect the American farmer. He therefore raised tariff levels to the record high on the imported agricultural products (Kelly, What is the Smoot-Hawley Tariff?). This act led to the decline of the American imports from the Europe. The figures show that, from 1929 high of 1,334 million dollars, the imports reduced to just 390 million dollars in 1932.In addition, the U.S. exports to Europe fell from 2,341 million dollars to 784 million dollars. At the end, this act just caused and fostered distrust among nations leading to less cooperation in either the political or economic realms which in turn aggravated the great depression impact on the America (Kelly, What is the Smoot-Hawley Tariff?).
This was not a direct cause of the great depression, but it played a crucial role in the matter. The drought that occurred in the Mississippi valley in 1930 was in such a magnitude that people involved couldn’t even pay the taxes or other debts owed to the banks and they had to sell their farms with no savings in return (Kelly, Top 5 Causes of the Great Depression).
Other explanations of the causes of the great depression include
- The Death of Benjamin Strong
Benjamin strong was the governor of the New York Federal Reserve Bank from October 1914 until his death in 1928. During his tenure, he had an strong interest in international affairs and promoted more effective cooperation among the world’s central banks (Benjamin Strong Jr.).The death of Benjamin Strong on October 16, 1928 led to the end of the golden era in America.
“In my opinion, his death marked the beginning of the united states’ treacherous journey into the Great Depression. Ben’s successors failed miserably. They didn’t comprehend the Federal Reserve’s critical role in the maintaining the health of the banking system. When a light recession struck the economy in 1929, the new leaders of the Fed made a deadly decision. In 1929, the banking system desperately needed an infusion of cash from the Federal Reserve. Instead of putting money into the system, the federal reserve drained it out.” (Dallas and Dallas 251-252).
This reduction of cash in the banks caused them to fail on a massive scale. In few weeks, national bank runs were back but the Federal Reserve failed to help them. This resulted to banking crises that threw United States and eventually the whole world into the deepest recession in history (Dallas and Dallas).this resulted to banks failing, factories being closed and people losing their jobs.
Why the Depression Lasted For So Long
With the start of the great depression, there were so many losses for companies and institutions that they started to introduce their survival policies. These policies in return led to the reduction of consumer spending and therefore aggravated the process of depression. The issues that led to the prolonging of the great depression can be summed up as below;
Throughout 1930, consumer spending in America started to decline which meant businesses had to reduce the jobs and the pay for the jobs that remained. This led to massive unemployment. In addition, the drought in most of the Americas reduced the jobs in the agricultural sector. This led to the decline of the consumer spending and reduction in the living standards of the people.
The government intervention in creating an influence of price controls and public finance caused more harm than good. Most economists agreed that price ceilings created shortages of consumers’ goods and that price floors resulted into unmarketable surpluses without benefiting anyone (Hülsmann). The growth of the state increased the cost of production and taxation of capital induced capitalists consumed the wealth of investors and citizens. When the law of demand and supply was hindered, and unemployment ceased to be a temporary issue.
The self-regulation of the market was also strongly interfered with by the labor unions which were acting under the protection and support of the government (Hülsmann). This led to the abuse of the property rights of the capitalists as well as the human rights of the workers and prospective workers when the unions pushed for wages way above the market rates. This made it impossible to hire all those who would have found employment and overall unemployment rate increased. With this, it can be summed that the government intervention in the solving of the great depression didn’t just reduce the effects but on the contrary they prolonged the duration of the depression.
Policies like Smoot-Hawley Tariff Act which authorized the highest taxes in history of America on imports of agricultural products and manufactured items, led to decline in the import export business which consequently deteriorated the business with the west. This led to the downfall and amplification of the depression all over the world.
- Technological Advancement
Emil Lederer, argued that the unemployment was as a result of fast technological progress. He argued that the growth was so fast that technological advancement was so fast that the market participants were somehow intrinsically impossible. He argues that these changes replaced the costly human labor with cheaper machinery at such speeds that entrepreneurs could not keep pace with. This eventually led to massive unemployment and consumer spending which prolonged the depression (Hülsmann).
- Failure of Revitalizing Private Sector
The government’s failure to develop the private sector led to reduced employment opportunities which continued the recession era. The new deals greatest failure lay in its inability to produce revitalization in private investment that would have impacted on greater production and more jobs (Higgs).The most part of the New Deal relied on private confidence to invest. President Roosevelt undermined the business confidence and trust. By 1935, Roosevelt was less worried about business backlash and had confidence in the prospects for economic recovery (Brownlee).The men around Roosevelt were skeptical of the business ability to act in the national interest. This led to further investor mistrust on the government and discouraged investments. If the government had initiated the programs to create more employment, then the living standards of the citizens would have improved and consequently the consumer spending would have improved. This would have led to the market stabilization and end of the depression