This Recession was a devastating and prolonged economic Downturn that lasted a decade, 1929-1939. There appear to be more than enough reasons which can account for this tormenting financial period. These included factors like The Stock Market Crash of 1929, the panic in the banking system, the Standard Gold policy, reduced purchasing, and the catastrophic dust bowl; which marked the start of a decade of high unemployment, poverty, deflation, and plunging. In this research paper, the causes and effects of the above factors will be stated to help us determine the primary purpose of the historical occurrence. Although there are various reasons behind the Olympic Decline, in people’s ability to spend stands to be stronger the greatest proprietor of the recession.
Causes and Effects
Stock Market Crash of 1929
Speculation and consumer overconfidence led to a drastic rise in stock prices back then from 1921 to 1929. People became optimistic in investing, and thus almost all of the stocks were thereon purchased on margin, using loans from the stock brokers. As the stock market ascended, investors used their life savings and borrowed from the stockbrokers to take advantage of the boom. Unfortunately, on ‘Black Thursday’ The Federal Reserve in its efforts tried to raise the interest rates with a target to regulate the highly shooting stock prices (Romer). It made the investors lose confidence totally and thus the stock market bubble initiated. Investors, afraid and with no faith in investing, ended up liquidating their holdings, even changing the then situation from bad to worse. Consequently, there resulted in a very massive decline in stock prices at that time, thus referred to as the Great Crash of 1929 (Romer).
Afterward, people were unable to buy durable goods. The population was not enough to maintain a demand for the products in supply (Sofya). The construction industry seriously dropped from $7295 million in 1928 to $6421 million in 1929 (Romer). However, some scholars say that the boom in the construction industry in the mid-1920s was the primary cause of declined spending on housing in 1928 and 1929 (Romer). Spending on automobile and construction companies depreciated and thus the production level also reduced (Romer). Because manufacturers cut their production and some workers were also to be laid off. It significantly affected the economy at that period.
The Great Crash of the Stock Market in 1929 was an occurrence of its kind. Both the decline in production levels and rising heights of unemployment are the afterward effects of the crash in the stock market (Kraner). Bad monetary policy can only be the real cause of a catastrophe such as the one of the great depression. Any activity in the stock market cannot suffice to a great depression unless it connects to bad monetary policies (Kraner). Thus, being that the Great Crash of the Stock Market and the Great Depression are two distinct events, the former is however not a strong case for the latter.
The Banking Crisis of 1929-1933
The credit structure of the whole American economy was severely affected after the Great Crash of the Stock Market in 1929. The banks especially faced heavy losses out of two reasons: first, the value of the stock prices that had significantly reduced and second, those who had borrowed loans from the banks were after that unable to clear their debts (Sofya). There was a high rate at which depositors began seeking for their cash from the banks. More and more Americans withdrew their money from the banks mainly because they were uncertain of the solvency of the banks (Sofya). Consumer spending and business investment spending was in turn reduced (Romer). It is what led to the banking crisis or better termed as banking panics, then.
Too much pressure is enough reason to cause institutions to shut down. There were four episodes of the bank panics, with the final crisis being on March 6, 1933, when it was declared the bank holiday (Romer). It is at this time that government inspectors closed down those banks which were at the threat of bankruptcy. So severe the process was that by 1933, most of the banks that had previously initiated in 1930 were forced to shut down (Romer). Banking panics depressed production and prices both in the U.S. and other parts of the world (Kraner). In the end, lending interfered with thus causing a depreciation in the level of investments.
Such declines in money supply, caused by Federal Reserve decisions, led to a significant reduction in output by industries. Because of the Great Recession, very many banks were closed causing millions of people to lose their life savings. It was a form of monetary collapse and is one who played a crucial role in hastening the Great Depression in the United States. In the early 1930s, both the money supply and the production went down, causing spending to reduce also. The bank failures affected the money supply as opposed to credit intermediation (Rackauckas). After the crash, there were strict regulations that were in place, as well as financial protection, which were enforced by the newly formed securities. It was, therefore, a partial and not a whole cause for the Great Recession in 1929.
The decline in International Trade
International trade operations were the other great influences of the recession in 1929. At first, international lending to Germany and Latin America had improved tremendously in the mid-1920s (Romer). High-interest rates after that resulted in a fall in the credit to abroad countries. Furthermore, the Smoot-Hawley tariff which began in 1930, also reduced foreign competition in agricultural products (Romer). Many of the other states followed that trend in an attempt to counter the imbalances in foreign trade operations (Romer). Protectionist policies can be seen to reduce international trade, thus influencing the great recession severely.
Various policies were invented and targeted at supporting the buying of in made products and protecting local farmers, by increasing the cost of imports. Scholars believe that the rules may have lowered trade in large industrial producer countries (Romer). Contractionary strategies formulated in primary-commodity producing countries due to severe balance-of-payments difficulties. Although these protectionist policies were the key factors to the falling trade, they, however, are not a significant igniter of the Depression.
The Gold Standard
It is a monetary system in which a country’s currency likens to the value of gold. Certain economists argue that in the struggle to preserve the gold standard the Federal Reserve reduced the American money supply (Romer). Due to the bank’s unpromising results, foreign investment was almost at the point of withdrawing. It could have also led to the devaluation of the currency due to massive gold outflows. Hence, competition between firms increased, since they could be in a devalued currency. It is possible that the U.S. would have been obligated to abandon the gold customary along with Great Britain (Romer). It was another influence on the banks’ collateral which caused bank panics.
The government initiated this idea in order to overcome rising unemployment. It is clear that the Depression had already taken its way and this rule was only there to try and cure the ‘disease.’ Contrarily, it ended up increasing the competition between member countries who participated in it (Romer). For effectiveness, the individual causes of the Recession should have been dealt with one by one. It leads to the verdict that the gold standard was just a small approach to deal with the Downturn in 1929 which transmitted it to the rest of the world.
Decline in Spending
The decrease in aggregate demand, in other words, reduction in total spending, also influenced the pronounced Collapse. Firms will typically react to low demand by also dropping their prices until they attain an equilibrium as had been before. Keynes argued that lower corporate expenditures are the factor for massively reduced income and thus high rates of unemployment which in turn leads to lessening production (Kraner). He goes ahead to propose that the government raises its demand for products so that industries may employ more workers to manufacture more. In turn, people find the ability to earn and spend thus fostering expenditure. Therefore the problem of unemployment will be solved.
A decline in spending is the primary cause of a fall in money provision. It is because if at all people are unwilling to spend, demand is practically low. And with squat demand individuals do not buy goods and services; thus industries end up making little or no profit and even incur losses at some extreme cases. With regards to the monetary elaboration, the U.S. monetary policy caused the Prodigious Stagnation. It was the consequence of bad decision making by the Federal Reserve. The flop in the supply of money is what caused a decline in spending. It suffices that the feature depressing aggregate demand was the global narrowing money supplies. In this regard, the reduction in spending is by far the most significant basis for the Boom in 1929.
The Dust Bowl
It is a disaster which occurred in the Southern Great Plains of South America during the 1930s. It resulted in exceptional drought in U.S. history. The drought exacerbated terrible soil conditions due to endless years of poor farming techniques such as: over planting, overgrazing, as well as heavy plowing under of natural grasses without replacing them with drought-resistant crops. Several miles of farmlands were impacted by the dust bowl causing farmers to lose their farms and property. They, in turn, moved to towns in search of jobs to sustain themselves. They were however not received because too many people there were already out of work.
The agricultural devastation helped to lengthen the Great Depression which had worldwide effects. After losing their farms and homes, they were left with no economic activity to sustain themselves. The prices for the crops they were able to grow dropped significantly. Unemployment rates also rose as a result. It only meant that money to spend was lacking and thus a sign that the renounced Recession was on the play. The severe dust bowl was an accelerator of the Great Depression.
The great depression was as a result of unlucky factors which negatively affected the U.S involvement in their economy. At some point, there was a change in stock prices which led to destabilized demand. It was followed by the adverse Banking Crisis which, apart from the closure of many banks, meant that citizens could also no longer need for products since there was no money available to use. The future of their economy was unclear and unstable policies such as the Smoot-Hawley tariff were invented to try to mend the situation. However, it was one way in which the Great Depression spread out to other nations. It narrows down to the last reason behind the great recession which is the decline in spending. It affected the levels of production since there was a close relationship between spending and output. In the end, there was the intensification of the greatest Decline of the decade from 1929 to 1939.
Sofya, B. Lahcene. (2008). The Great Depression of 1929 In The United States of America.
Kraner, Saso (2010). Causes of the Great Depression and the Great Financial Crisis.
Rackauckas V. Christopher. (2014). An Application of Robust Regression to Bernanke’s Analysis of Nonmonetary Effects in the Great Depression. Journal of Statistical and Econometric Methods. 3. 153-178. www.researchgate.net/publication/263226897_Bank_Failures_and_Output_During_the_Great_Depression