Great depression Causes Essay
Throughout the 1930 the USA suffered a severe economic depression known as Great Depression.
The Great Depression continues to be a challenge to the scholars as they still have not agreed on the exact causes of the crisis. The American depression seemed largely to be the product of number of causes. A decade of stagnation in agriculture, flattening sales in the automobile and housing markets, the piratical abuses on Wall Street, the woes of the anarchic banking system – these were surely problems enough.The downturn of 1929 had been caused by the massive bank failures and the stock market crash.
In the space of a few days in October 1929, values on the New York Stock Exchange abruptly collapsed, “wiping out the heady optimism of the “great bull market” of 1928–1929.” (Himmelberg, 4) The 1920’s was the time when the enterprises and factories were mostly purchased on credit. Moreover, people widely used mortgages and credit purchases of furniture, cars and other expensive products. This encouraged spending but on the other hand increased commercial and consumer debt. The price deflation that followed put people and companies that had debts in serious predicament, which led to reduction of spending and consequently of demand for new goods. The decrease in demand was a direct reason of the drop in production and failure of enterprises and factories.
The result was the mass dismissals and general unemployment rate increased over 25%. People without job could not afford covering their debts and banks that financed most of the debts found themselves in great troubles.The debtors’ defaults on their debts were only the part of banks’ problem. The depositors who now did not feel save keeping money in banks preferred to withdraw their funds.
The usual Federal Reserve Banking Regulationsdesigned to cope with such situations were not effective neither government guarantees helped. The banking system failed. While the debt was increasing, the drop in prices and incomes at 20–50% worsened the situation as the debts remained the same in dollar amount. It is estimated that 9,000 banks failed during that decade. (Himmelberg, 29) the rest of survived banks reconsidered their policy of lending and concentrated on building up own reserves. Such banks behavior only intensified the deflationary pressures. The situation came to a standstill and made its contribution to turning economic recession into a great depression.
Another event that most probably contributed to depression was the Hawley-Smoot Tariff Act of 1930. It brought about considerable decrease of international trade by increasing US tariffs. While the U.
S. exporting dealt mostly with commodities of farming business such as lumber, wheat, tobacco and cotton the collapse in international trading put the agriculture and farmers into stagnation. The result was that depression successfully spread worldwide. Franklin Roosevelt tried to regulated economy through the New Deal, which was intended to give more power to farmers and lift taxes on corporate profits.
While some of the regulations of New Deal were acknowledged as unconstitutional and abolished, the others proved to be successful and popular.According to the views of British economist Keynes, depression was also cause by government deficit spending. He claimed that underconsumption and overproduction created attractive but ultimately unsatisfactory conditions for economic development.
Keynes argued that the volume of investment in new plant and equipment was “the key variable for maintaining full employment.” (Himmelberg, 43) Circumstances could arise, he held, in which savings would not be translated into investment over a long period and that the result could be a situation, like the depression, of protracted underemployment of resources. Keynes’s analysis provided that the continued state of depression mandated heavy government spending through borrowing.Unforeseen and unexpected, the Great Depression was a traumatic experience for many of the Americans of the 1930s and exercised a profound influence on the generation that lived through it.Works CitedHimmelberg, Robert F. The Great Depression and the New Deal. Westport, CT: Greenwood Press, 2001.