The Great Depression is widely regarded as the longest and most severe economic downturn in the modern world. It is a worldwide calamity, which started in the United States and subsequently moved around the world, spanning ten years (1929-1939).
The collapse of the United States Wall Street Stock Exchange on October 24, 1929, was the most recent incident that triggered the Great Depression. Investors incur losses as a result of this. This led to a rapid economic downturn, followed by a substantial drop in consumer expenditure and investment. This resulted in the shutdown of several enterprises, leading to widespread unemployment, poverty, and human suffering. It was also one of the primary causes of World War II’s outbreak.
What are the causes of the recession?
Exceptional growth in the 1920s and stock market crisis
The First World War ended in 1919, with the United States emerging as a major victor. Between 1920 to 1929, the United States saw “The Roaring Twenties,” a period of prosperity, economic development, and significant social and political transformation. A variety of economic activities supported the postwar economy. Men and women both entered the labor in greater numbers. Banks began to lend money, and people began to invest their money in various channels, and the stock market grew in popularity.
The majority of Americans invested in the stock market throughout this decade, and some even took out loans to do so. Banks, on the other hand, bought stocks using customer deposits.
In contrast to the extraordinary expansion in money and financial markets, the real economy, or the output sector, has begun to stagnate. As a result, food prices began to rise and salaries began to fall. Stock market operations, on the other hand, proceed at a rapid pace despite these indications. Eventually, the stock market devolved into a forum for gambling, with no regard for rationality in decision-making. The sole goal of investing was to make quick money. However, with this artificial growth, investors have become more and more uncertain about the future. Finally, the stock market crash on October 24, 1929, led to this uncertainty. This is, theoretically, the commencement of the Great Depression. Thousands of people began selling their stocks on that day. On that day, 12.9 million shares were traded, driving the stock market down and nicknamed “Black Thursday.” This sudden fear had a number of consequences: some shares became worthless, some people lost their life savings, and others went bankrupt. Many loses their jobs, people were not able to get their money back.
The Dust Bowl
The poor soil conservation techniques and over-cultivation that prevailed until the 1930s led to a severe drought throughout the United States in the decade of 1930. This severe drought caused extensive winds and dust to spread from Texas to Nebraska. As a result, 100 million acres of farmland were destroyed, and many farmers had to migrate to California. Moreover, crops were destroyed, and thousands of farm animals died. This incident is called the “Dust Bowl”, and it is one of the worst natural disasters in American history.
Easy credit growth and expansionary monetary policy
Another factor contributing to the Great Depression is monetary policy. In the 1920s US federal system pursued an expansionary monetary policy, which led to excessive credit growth. As interest rates fell, Americans became increasingly unaware of rising debt and bought consumer goods on easy credit. Moreover, they began to invest heavily in the capital market. There, many Americans were eager to buy shares with the money they had borrowed. The end of this speculative action was the collapse of the stock market, leaving the people heavily in debt.
Lack of a proper policy for banking
In the 1920s, there were no federal regulations to govern the banks. Many banks took advantage of this and invested their customers’ money in the stock market. These banks lost their assets as the stock market crashed. Depositors’ confidence in the banks was shattered and they tried to get their deposits back. However, banks failed to return the deposits. During this period, thousands of banks closed their doors to customers. Through this, more than 3000 banks went bankrupt. Banks stopped lending, and the economy plunged further into recession through the destruction of savings and low lending.
The US Government policies
The foreign policy pursued by the Republican government under President Hardin (1921-1923) and President Calvin Coolidge (1923-1929) is known as isolationism. Its objective was to make the United States economically self-sufficient through protectionism policies. The imposition of high import tariffs limited foreign competition and sought to isolate the United States from diplomatic affairs in other countries. As a result, the prices of imported goods went up and inflation increased.
Another factor that contributed to the recession was the Smoot-Hawley Tariff Act, signed on June 17, 1930. Through this, import duties increased by about 20% and commodity prices rose, creating a shortage of goods in the United States. This policy outraged the European countries and they also imposed taxes on American goods. Through this, U.S. imports fell by 40% over the next two years. The collapse of the market, the decline in exports, and the stagnation of economic activity exacerbated the recession.
How did the Great Depression affect people?
The Great Depression had an influence not just in the United States but also in Europe. The debt that many European countries accumulated during World War 1 drained them further and further. Germany and France were also hit hard by the recession. As a result, Adolf Hitler rose to power and World War II broke out. International trade plummeted as a result of the decline in economic activity. Many governments have begun to impose tariffs on other countries in order to control their imports. This trade war eventually escalated into a full-fledged war in 1939. On the positive side, this economic depression led to emerging new economic thought; Keynesian Economics.