The Great Depression remains one of the most tragic and most crucial events in the history of the American economy. The end of the 1920s and the beginning of the 1930s were a good test to the effectiveness of the economic policy decisions in America. Although the Great Depression covered several countries, it is the United States that faced the most serious economic problems. By 1933, 37 percent of nonfarm workers and 25 percent of the entire labor force were absolutely out of work (Smiley). Starvation and homelessness became a reality for thousands of people in America. Yet, even though the American economy started to recover in 1933, the Great Depression did not end until the beginning of the 1940s. Reasons for which the Great Depression lasted for more than a decade require additional analysis. It would be fair to say that the Great Depression was a complex result of the stock market crash, panic in the banking system, the lack of the production-consumption balance, and the absence of any fiscal policy, whereas high wages, limited competition, and the lack of business confidence prolonged the Depression, making it pathological.
Causes of the Great Depression
The Great Depression is fairly considered as one of the most painful moments in the history of the American economy. Very often, it is claimed to cover four years, between 1929 and 1933. "Most historians would agree that the Great Depression spanned the years between the stock market crash of October 1929 and the Japanese attack on the U.S." (Cravens xi). Still, it is the stock market crash in 1929 that became one of the main causes of the huge economic disaster in America. In 1928, President Calvin Coolidge delivered his address to people, saying that the United States had many reasons to be proud of its economic achievements (Suddath). The First World War finally ended, while the introduction of installment plans helped American consumers to buy the goods and services they could not afford earlier (Suddath). The stock market flourished – the Dow Jones Industrial Average grew four times between 1924 and 1929 (Suddath). Not surprisingly, almost half of all loans provided by U.S. banks were used to purchase stocks (Suddath). The first signs of the crisis came in September 1929, when prices started to fall: that was the time of several bank failures, stagnation in the housing market, and the crisis in steel production. On October 28, 1929, prices fell dramatically, along with the Dow Jones index that fell 13 percent (Suddath). On the next day, October 29, 1929, 3 million shares were sold and another $2 million were lost due to the crash in the stock market (Suddath). As a result, a total of $25 billion were lost – that sum would equal almost $320 billion today (Suddath). The stock market crash launched a chain of other economic reactions, as "companies incurred huge layoffs, unemployment skyrocketed, wages plummeted and the economy went into a tailspin" (Suddath).
The stock market crash was followed by a series of banking panics, which make up another cause of the Great Depression. The result was not surprising, since many financial resources were borrowed from banks to be later invested in stocks and bonds. The banking panics happened for two reasons. First, banks wanted to recover their loans from the clients, who had invested their money in stocks. However, because of the stock market crash, thousands of Americans simply had nothing to give back to banks. Second, at the beginning of the economic crisis, depositors attacked their banks to withdraw their funds (Wheelock xii). Given that banks kept just a share of their customers' deposit value in reserves, they could not always satisfy clients' withdrawal demands (Wheelock xii). Banks that experienced the lack of reserves could not borrow additional resources anywhere – borrowing from other banks was very expensive, and borrowing from the Federal Reserve was not possible, because many banks did not belong to the system (Wheelock xii). As a result, thousands of banks simply collapsed, while the amount of money in the economy rapidly decreased. The monetary contraction led to reduced consumer spending, followed by reduced manufacturing and price cuts (Wheelock xii). The economic distress penetrated into every aspect of life in America.
It should be noted, that the stock market crash, as well as the Great Depression itself, was a result of the long-standing imbalance between production and consumption. After WWI, business owners and managers kept their prices high to increase their profits. In the meantime, wages were too low to let workers use the benefits of their own increased productivity (Cravens xiii). The economy could not maintain high volumes of manufacturing in the long run. Many workers found it easier to compensate for low wages by taking loans from banks and investing them in stocks. In the meantime, business owners kept investing their money in manufacturing, thus producing the amount of goods and services the American economy could not consume (Cravens xiii). Those economic problems were too significant to solve overnight, and the government had no effective mechanisms to improve the situation.
At the end of the 1920s, the American economy lacked any consistent policy mechanisms. The tax policies developed by the government led to oversaving (Cravens xiii). When prices were high, the government used expansionary policies and, when prices were down, constrictive policies were used (Cravens xiii). Tariff policies were too protective, and anti-trust policies were too rigid in their influences on businesses and markets. Manufacturing enterprises were absolutely insensitive to changes in consumer demand (Cravens xiii). Those were the causes of the Great Depression, and many of them translated into a prolonged period of economic stagnation in the U.S.
Why the Great Depression Lasted So Long
Modern economists often wonder why the Great Depression lasted so long. It is not until the beginning of the 1940s that the American economy started to recover. One of the main reasons of prolonged depression was that, for several years, business owners in America kept wages high, despite massive layoffs and the lack of monetary resources in the economy. Even during 1930 and 1931, wages did not fall, partially as a result of President Hoover's requirement to avoid wage rate cuts (Smiley). At that time, economists believed that higher wages would preserve workers' purchasing power and, consequently, save the economy from a crisis. Only in 1931, under the influence of the deteriorating conditions in business, many executives started to cut wages, in order to keep their businesses alive.
The passage of the Smoot-Hawley Tariff was another cause of prolonged Depression in America. The Act was passed in June 1930, with the goal of protecting domestic farmers from the negative impacts of agricultural imports (U.S. Department of State). Due to the rapid increase in the agricultural sector, the 1920s saw massive overproduction of agricultural products (U.S. Department of State). However, what had to protect farmers from agricultural imports led to severe trade limitations, which damaged the U.S.'s trade and economic relations with foreign partners. After the passage of the Smoot-Hawley Tariff Act, similar requests to lift import tariff followed from the industrial sector and other economic players (U.S. Department of State). With time, the new tariffs became even higher than they had been ten years earlier. The Act was the triumph of protectionism in America, but it also generated similar protectionist responses from other countries. As a result, the United States experienced huge difficulties with its imports. Between 1929 and 1934, foreign trade fell 66 percent, leading to a decline of cooperation and trust among nations (U.S. Department of State).
Many other mechanisms made the American Depression last longer than any other economic crisis in its history. Some government policies were implemented to restrict competition. The National Industrial Recovery Act of 1933 gave many businesses the legal power to set minimum prices and restrict capacity increases within their industries (Ohanian). Monopolies and cartels were formed, slowing down the economic recovery in America. The lack of investments and business confidence made the progress much slower (Skousen). Unfortunately, even decades after the Great Depression, its causes and consequences are poorly understood. Many lessons are yet to be learned in the analysis of the main economic events that happened during the Great Depression.
The Great Depression remains one of the most tragic but significant points in the history of the American economy. For many modern economists, the Great Depression is a source of valuable macroeconomic lessons. Its causes were numerous and complicated. The stock market crash was preceded by the years of overproduction, inflated profits, and the lack of consumer spending capacity. The banking panics and the lack of a comprehensive fiscal policy made the situation even more difficult. The Great Depression lasted so long, because the government developed ineffective policies, which limited business competition and negatively influenced foreign trade. Due to the lack of investments and continuous business uncertainty, the real economic recovery started only at the beginning of the 1940s. Even now, many lessons are still to be learned in the analysis of the many economic events that happened during the Great Depression.
- Cravens, Hamilton. Great Depression: People and Perspectives. NY: ABC-CLIO, 2009. Print.
- Ohanian, Lee E. "Why Did the Great Depression Last So Long?" Forbes, 1 May 2009. Web. 13 Dec 2013.
- Skousen, Mark. "The Mysteries of the Great Depression Finally Solved." Fee, 1 July 1997. Web. 13 Dec 2013.
- Smiley, Gene. "Great Depression." The Concise Encyclopedia of Economics, n.d. Web. 13 Dec 2013.
- Suddath, Claire. "The Crash of 1929." Time U.S., 29 Oct 2008. Web. 13 Dec 2013.
- U.S. Department of State. "Smoot-Hawley Tariff." U.S. Department of State, n.d. Web. 13 Dec 2013.
- Wheelock, David C. "The Great Depression: An Overview." Federal Reserve Bank of St. Louis, n.d. Web. 13 Dec 2013.