The Great Depression may be described the worst economic recession in history. The Depression lasted almost a decade and caused millions of people to suffer. During this time, there was the highest amount of unemployment ever recorded. The Great Depression affected all the sectors of the global economy. It received its title namely due to the state that people were in due to their standard of living. This essay will look at the different views on the causes of the Depression.
Firstly, the cause of the Great Depression may be due to the policies implemented. Many economists at the time believed that lower interest rates would mean that the amount of consumption and investment would rise in the economy, however, that wasn’t the case in 1930. This is because, if the outcome of an investment is likely to fail due to the economy being terrible then consumers are not going to invest, even though the cost of capital is reduced (O’Driscoll, 2007). So, since there is a low amount of consumer expectation the demand in the economy decreased as consumption and investment were low. This was the disproving Say’s law which states that any supply must have demand. Another policy that was applied during the recession was a rise in taxes. The policy was used to lower the shortages to the budget brought by the Depression. suggested to make the Federal Reserve system create new money for the government to utilise, nevertheless, Hoover went on with the policy (Keynes, 1936). These strategies used by the president put the economy in a worse environment.
Secondly, the cause of the crisis is lack of demand in the economy. Keynesian economist suggests the Great Depression occurred due to massive supply of goods not being able to meet the demand for them (Rothbard, 2002, p. 38). Since the money was secured to a reserve, which consisted of expensive rare gold, the amount of money which was in the economy was too low, and hence the shortage of effective demand for goods and services. Furthermore, a massive drop in the price level caused businesses to fail, this lead to unemployment, fall of consumer demand, and which reduces the economic output (Rothbard, 2002).
The cause of the Depression is also believed to be because of the federal reserve. For example, (O’Driscoll, 2007, p. 72) writes “The Federal Reserve System raised interest rates in early 1928”. This increase in interest rates caused the recession to become worse, because, it acts as an incentive for businesses to save and not borrow from the bank. Therefore, the production of many firms fell during the year (O’Driscoll, 2007, pp. 72-73). The federal reserve is also criticised for not operating correctly at the beginning of The Depression. This is because the main goal of the federal reserve system is to prevent the bank from failing when many customers wish to take money out depleting the banks money. However, the federal reserve did nothing to stop the bank’s from failing, this went on to cause many banks to shut down and consumers left without their savings (Parker, 2003). The problem of high interest rates was later increased as the Federal (Rothbard, 2002)Reserve raised interest rates further (O’Driscoll, 2007).
The cause is also thought to be contributed by the Banks as well. For instance, according to (Milton Friedman, 1963, p. 15), the reason the great Depression lasted so long as it did was because the banks being unwilling to make new loans after 1933. During this period, banks would only offer safe and conservative bank loans due to their belief that the federal reserve would not help them if problems occurred (Mises, 2006). A reduction in bank lending reduces consumer spending, investments, and growth in the economy (Pettinger, 2012). Consequently, making the recession worse due to the negative multiplier effect.
Thirdly, the tariff system imposed by the government is thought to have been a cause of the Depression. The Smoot Harley act was an import tariff that was set up to protect American businesses and farmers from international businesses (Britannica, 2016). However, it achieved the opposite, because, the introduction to the Smoot Harley act induced uncertainty (Beaudreau, 2017). Therefore, the amount of investment in the economy decreased. In addition. The high tariffs caused retaliation from other countries, because of this, the trade between and the US and Europe declined by two-thirds between 1929 and 1932 (Britannica, 2016). The Smoot Harley tariff is also believed to have started negative speculation before the stock market crash (White, 1990).
Some economists believe that the recession was caused by the economic boom before it. Economists claim that the decision to raise price levels in the US economy to attempt to support the UK remain on the Gold standard at a rate which was irresponsible (Mises, 2006). They claim after the rapid rise in GDP in the roaring twenties a recession became inevitable and it was the damage from low consumer confidence in the banking system which caused the most damage (Mises, 2006).
To conclude, there are many proposed causes of The Great Depression but most economists attribute it to the policies that the federal reserve system implemented. However, this may not be the case as all the factors in this essay and more are involved in the plummet of the world’s economy. The Depression was long and hard for the people that had to endure it. The citizens of the united states couldn’t help themselves as they couldn’t invest or spend. But, The Great Depression does serve as an economic lesson on how to better manage the economy in the circumstances.