What were the main causes of the Great Depression?

The Great Depression is the term referred to the world economic crisis, which started in 1929 and lasted up to the beginning of the World War II. Having started in the United States, it soon spread over other well-developed countries. On October 24, 1929, there happened the biggest US stock market crash, the day has been called "Black Thursday" since that and it was the beginning of the Great Depression. The Great Depression was not caused by a single factor, though to define the main reasons of it there should be distinguished “the forces that brought a downturn in economic activity and those that turned a downturn into a disaster”. The 20s were the years of the market boom in the housing and agricultural sectors and the whole decade seemed to be the decade of prosperity. So, it was quite normal to foresee a down cycle. However, the down cycle turned into the economic collapse which could be explained by the fact that consumers did not trust the stock market and the credit restrictions were too harsh leading to money withdrawal from the national economy. Thus, a number of factors led to the economic catastrophe – the Great Depression. The following are to be mentioned among the reasons of the Depression: the money value was deflated; there was a great decline in trading which is considered to be crucial for the economy of any state as it means the flow of monetary funds through selling and purchasing. In addition, there should be mentioned the impact of the Smoot-Hawley Tariff Act according to which all the import transactions were heavily taxed and the high tariffs were imposed which brought about high tariffs and taxation on all importations. As a result, the trade was subsequently restrained. The above factors and some others reasons of the Great Depression will be examined in this essay. Besides, the question why it lasted so long will be brought up.

One of the major causes of the Great Depression was deflation. Deflation of debt happened when the banks lent more monetary funds than they actually had to lend. Upon the average, the amount of $9 used to be lent by the investment brokers for a sum of $ 1 that an investor had deposited prior to that. Upon the collapse of the economy the brokers turned to the banks to get their loans back but the loans were impossible to be repaid. This meant the investors were not able to return the money they had deposited in the banks. The banking system was thus torn completely. The debtors defaulted on their debts and the depositors had their money withdrawn from the bank accounts. The people rushed to the banks to remove their deposits. This phenomenon was got the name of the bank runs. In the period described the controls of the Federal Reserve the guarantees secured by the government turned out to be not enough to ensure the economic growth and development or prevent the economy from declining. As a result of the bank system collapse the economy sustained irreparable losses which counted not even in millions but in billions of dollars. The explanation of the described situation could be found in the fact that the people were not able to repay their debts because due to the unemployment boom they lost jobs, the value of dollar was constantly falling leading to huge inflation whereas the amounts of debts did not decrease. The Great Depression was crystallized in 1930. Within the ten months of 1930 there was a constant increase in bank runs, as a consequence 744 banks in the United States collapsed. The escalation of the crisis was triggered by the attempts of the banks to get the money back from the depositors. All the attempts failed because the debts could not be repaid because people did not have any money. Consequently, the banks actually refused to credit. As a result, the rate of the economic growth reached zero and the tendency was negative which meant that the economy was in the state of stall.

 
 

Another cause of the Great Depression was rooted in the international trade relations which the United States had established with another countries. Before World War I the US had lent large amounts of money to the allied countries. As it could be foreseen, the war had drained most of the financial resources of these countries. No wonder, the debtors were unable to pay back the money they had borrowed from the US banks. Besides, the allies demanded that Germany and Austria repair the losses incurred by the allies as the former were regarded the the main culprits in the war. But the German, Austrian and Hungarian debtors, similar to those in the USA, were unable to indemnify the losses incurred by the reason of and in the course of the war. The countries expected the government of the United States to acquit them of the debts, but the US government did not intend to forgive any single debt. The allies had been credited by the banks in order to ensure the repay of those loans which were due to the government of the United States. However, in 1929, the year when the Great Depression set in, the American economy grew weaker and the repayments stopped. During the same period, there was a decline in the international trade because excessively high tariffs were imposed by the United States, so the allies stopped trading with the USA. On the same note, the American government had placed high trade tariffs which made it nearly impossible for the allied countries to trade with the US. The allied nations, in their turn, were failing to fulfill their financial liabilities and could not repay the amounts loaned because they did not gain any profits from the foreign trade which worsened the situation considering the fact that such gains could guarantee their debt being compensated. The above factors led to the collapse of the American economy as in the 30s there was no pouring of money into the economy which resulted in stagnation of the economy and its subsequent collapse. Since the mid-20s the goods manufactured in the United States were no longer in demand in Europe because the economies of most European countries started to recover and there was recorded some economic growth. In some European countries the economic situation was still very difficult, so, the Americans goods were not affordable as such. Thus, the economic trade relations of the United States with foreign countries were very limited leading to the aggravation of the situation as the international commerce plays a crucial role in the economic prosperity of any state. The increase in tariffs was probably one of the factors that caused the decline in the agricultural production considering the fact that the farmers were unable to pay back the loans they had borrowed from the banks. Due to this, the banks were gradually going bankrupt causing the whole bank system to collapse.

Among the factors which caused the Great Depression in the USA and other countries in the late 20s were the problems that arose at the Federal Reserve. The following factors are said to have caused a dramatic decline in the economy of the US which late turned into the Great Depression. Firstly, in 1928 the funds rates of the Federal Reserve were increased by the Federal Reserve. These rates did not stop growing even when the economic downfall set in in 1929. Secondly, the stock market collapsed having left the investors with the only option to turn to the currency market the latter being secured by the Federal Reserve gold. As a result, the dollar was made to run because the investors’ demands were a larger amount of dollar traded for gold. Thirdly, to maintain the value of the national currency the rates of the interests were increased. Due to this, there was not enough money in circulation which resulted in many business ventures going bankrupt. Finally, following the bank run, the investors did not gain confidence in the Federal Reserve. Making the things worse, the Federal Reserve did not improve the situation with the money turnover having managed only to depress it.

The fall of the Stock Market is regarded as the major factor which caused the economy of the United States to collapse leading to Great Depression worldwide. However, the decrease in production in many leading sectors of the economy also contributed to the phenomenon of the Great Depression.

Among other factors one can mention the draught. The Mississippi valley suffered greatly from the draught, a great number of farms lost the crops. The consequences were so dramatic that the farmers failed to pay back their debts or cover the rent for the land. Besides, it was difficult for them to pay taxes. To save the situation, a lot of farmers had to sell their farming businesses to be able to cover the damages and pay the debt.

Why did the Great Depression last so long?

The Great Depression must have lasted for such a long period due to the fact that numerous economic crisis never ceased to worsen the situation making it impossible for the economy to recover. There were made many attempts to answer the question why the Depression lasted so long. According to the psychological point of view, the main reason why it took so much time to recover from the Depression was the fear of people. The people continued saving, they did not trust the banks and withdrew the currency from their accounts. As a result, the banks started to lend less and made the interest rates higher. This was made to secure the requirements of their reserve. To oppose the above point of view, the behavioral economists maintain that in the times of the Great Depression and during the years after it the people lived below from hand to mouth. They could not afford to buy many durable and non-durable products due to which the demands for such products fell. It resulted in deflation.

As it was mentioned before, the major causes of the Great Depression resulted from the policy of the government. If the capitalist economy had continued its natural course of development, the Great Depression would not have been a worldwide collapse but a natural recession. Many businesses were expecting the government to interfere and provide assistance, but the way the government tackled the problem of the agricultural sector was a mistake.

What is more, the government found itself in the middle of the trade war just when World War I finished. It led to “high tariffs, quotas, licensing requirements, currency restrictions and other restraints on international trade, along with domestic trade restraints and subsidy and price support programs”. Besides, the blame could be put on the Federal Reserve which failed to act according to the gold standard. Similar to the situation in London in the early 30’s, to exchange it for the currency all the gold was called in in the United States. Unfortunately, the gold was not used properly as promised by the Fed, But Instead of being used, as the Fed promised to do, the gold was kept and taken out from the world’s system.

It is impossible to state that the Great Depression was caused by a single event or even a couple of them. The phenomenon of the Great Depression can be understood if all forces in total are taken into consideration. Certain factors caused the disaster, but there were factors which led to its aggravation. In the 20s the stock prices seemed to be rising, many investments were turned into fortunes. Though, they had to become stable and decrease in time. However, the government policies worsened the situation having combined the capital and the business in the period of the decline in the economic activity. It is possible that it was necessary at some point to raise the discount rate to decrease the excess credit, following that the discount rates had to be lowered, though they were not. The international tariffs had to be lowered as well by the government, which could result in depressing the foreign policies due to which the price of whet decreased.

Order now

Related essays