Introduction
The period of Great Depression was characterized by extreme hardships and life changing adversities faced by the people in the United States as well as the whole world. May people suffered from poor living conditions, low incomes, unemployment, and mental anguish. In fact, many people were not able to find any job during the entire period and found it hard to accept financial and material aid from the government. All groups, races, and ages of people experienced the devastating effects of the Global Recession. Business owners and African Americans were two groups particularly affected by the Great Depression. This paper investigates the main causes of the Great Depression and the reasons that made it last so long.
Factors that caused the Great Depression
The Great Depression experienced in the U.S. and some parts of the world came as a result of a combination of domestic and global conditions. However, there is no consensus upon the list of its causes. The negatives effects of the Great Depression were enormous and felt by Americans as well as the whole world. Not only did it lead to New Deal in the U.S., but more significantly, the depression also contributed directly to political unrest in Germany culminating into the Second World War.
The first plausible cause for the Great Depression was attributed to the stock market crash of 1929 and the subsequent financial crisis. Many hold the belief that the major stock market crash that took place on Black Tuesday 29, 1929 is a synonym for the Great Depression. Although almost none realized at the time, the tightening of the economic before the Depression had already began before the stock market crash, when the economy started to slow considerably (McElvaine 1). The problem started with investors buying stock that they thought their prices would quickly rise in value, and investors sold their stock once the price went as high as they thought. The problem was further aggravated by availability of easy credit in the form of margin buying. Investors only had to put 5 percent of the cost in cash, allowing stockbrokers to loan money they did not have. Two months after the crash, investors in the stock market had already lost over $40 billion dollars (McElvaine 1). Despite regaining considerably by the end of 1930, it did not help much and America truly plunged in to the Great Depression (McElvaine 1).
Another probable cause of the Great Depression was bank failures. There is no doubt that the supply of money can have profound effects on the economy of a country. In the late 1920s and early 1930s, the supply of money grew faster than the demand for money, making prices to rise and consequently causing inflation (McElvaine 1). Banks loaned stockbrokers money in the form of marginal buying, while using the savings people had deposited in the bank to finance these loans. To worsen the problem, savings were not insured and thus banks simply failed people because they could not receive their savings. Surviving banks, not sure of the economic landscape and concerned with their own survival reconsidered their willingness to create new loans. This heightened the situation of low supply of money leading to diminishing spending. The crash accelerated the downward spiral of the economy by reducing the supply of paper wealth the investors held and altering the previous euphoric outlook of lenders into one of pessimism, resulting into them becoming more cautious in their investment and spending.
Advancement in technology contributed to the conditions that produced the Great Depression in three aspects. First, new technology brought much of the momentum for the unprecedented prosperity of the 1920s (McElvaine 1). The development of new essential products that large number of people can be persuaded to buy is in most case a driving force in periods of economic prosperity. The introduction of the internet and personal computers in the 1920s encouraged investment in new plants and provided employment to large number of people. This was the same with the automobile industry that experience enormous expansion of the market for cars and rapid development of associated industries such as petroleum, steel production, road construction, and leisure activities. Along with these developments came a variety of new household appliances, such as radio, which formed a status “necessity” for the middle-class provided an enormous stimulus to the economy (McElvaine 1). The apparent lack of new products in the late 1920s placed a drag on the economy while earlier innovations saturated the market. Continued advances in technology to produce already existing products led to increased unemployment and reducing demand, both because of the unemployment itself and because of increased productivity without corresponding increase in wages, which reduced the share of national income going to potential consumers.
While not a direct cause of the Great Depression, uneven distribution of income contributed to the Depression. While the industrial production increased by more than 50 percent, workers in most industries did not receive a corresponding increase in salary. Consequently, the demand could not meet the supply of goods coming into the market. In simpler terms, mass production necessitates mass consumption. The inequality in distribution of income was a major problem as 99 percent of the population received a 9 percent increase in their incomes, while the remaining 1 percent saw their income increase by 75 percent (McElvaine 1). The first huddle in achieving mass consumption was persuading people to buy what they had not even known they wanted. On the other hand, effective demand required money as well as motivation to buy. Achieving this requires an economy to move towards a less concentrated distribution of income. The problem was further aggravated by the lack of mechanism aimed at redistributing income equally in order to stimulate demand. Advertising encouraged many people to plunge in heavy debt burdens, which made the eventual fall harder.
Reasons that made the Great Depression last so long?
Many theories have been advanced to offer an explanation why the Great Depression lasted so long. However, much of the efforts to unearth this tragedy have been directed to put the blame on some of the policies introduced by the Roosevelt administration. The government policies introduce by the Roosevelt administration mainly for the recovery plan were to blame for the Great Depression, including The National Industrial Recovery Act (NIRA). This act conveniently repressed antitrust acts thereby allowing industries to collude and increase prices provided they increase wages for workers. The NIRA allowed investors to raise wages much above the underlying growth of productivity (Smiley 105). The code of “fair competition” created by each industry spelled the conduct of producers, designed to eliminate “excessive competition” could have prolonged the Depression.
The New Deal failed in most of its basic mission of improving the economy. By 1930, the unemployment was at 8.9% and failed to drop to a single digit until the war “employed” millions as soldiers (Smiley 103). The New Deal led to artificial increase in wages and prices, but this only helped those who had jobs, but the over-priced labor led to few jobs. The increase in commodity prices led to real poverty, as Americans literally starved to death as crops were destroyed to maintain high prices. Additionally, the “Codes of Fair Competition” introduced by Roosevelt administration only benefited industries and jobs, but imposed huge damages through severe economic inefficiencies on the less-privileged class. The policies introduced by Roosevelt administration led to a “capital strike” as the few affluent people sat out of the economy during the 1930s (Smiley 35).
Another factor that prolonged the Great Depression was that the investors felt extraordinary uncertainty about the future of the property rights regime between 1935 and 1941. Historical evidence and poll data confirms that in the periods just before World War II, most investors expected significant reduction of property rights ranging up to complete economic dictatorship (Smiley 73). This might have forced many investors to stop investing thereby reducing the amount of money circulating in the economy. Another reason was the behavior of investors in the stock market that attest a string way that their confidence in the long-term outlook took a beating that corresponds exactly with the Second New Deal.
Under the administration of Roosevelt and ardent New Dealers who supported him, private investors were reluctant to risk their funds in the amounts typical of the late 1920s.
Works Cited:
McElvaine, Robert S. "Causes of the Great Depression." Encyclopedia of the Great Depression. Ed. Robert S. McElvaine. Vol.1. New York: Macmillan Reference USA, 2004. 151-156. Gale Virtual Reference Library. Web. 17 May 2013.
Smiley, Gene. Rethinking the Great Depression. Lanham, Maryland: Ivan R. Dee, 2002. Print.
