The Great Depression represents a significant economic event that occurred in the twentieth century. It began in 1929 and lasted for ten years. During this period, the United States experienced economic collapse. A huge number of Americans lost their jobs or were partially employed. Any previous economic crisis in the American history resulted in such high level of unemployment. Millions of people lived in poverty and fear. Low living standards led Americans to despair. Every nation’s institution, such as bank or farm, became shaky and unreliable. It took much time and many efforts to combat the Depression and ensure prosperity. This paper highlights the causes of the Great Depression and explains why it lasted so long.
Two events laid the foundation for the American economic downturn. Firstly, the decline in residential and nonresidential construction had a major depressing impact. Secondly, the agricultural sector that was important for the United States economy also experienced difficulties due to the heavy indebtedness and falling world prices. Such mild economic downturn in1929 turned into the Great Depression due to the series of successive destructive blows.
The first blow was connected with the decline in the United States stock market in October 1929. Roger Babson, a famous investment adviser, predicted that the Wall Street crash was coming. One of the most significant predictors was falling prices in September 1929. However, it did not cause a panic. On October 23, millions of shares were sold. October 24, October 28, and October 29 were called “Black Thursday”, “Black Monday”, and “Black Tuesday”, accordingly. Thus, during “Black Thursday”, 13 million shares were traded, while only 3 million was regarded as normal. “Black Tuesday” was marked by selling of 16 million shares that entailed the fall the industrial stock index. As a result, all the gains that the market made during the previous 12 months was completely destroyed. The market experienced significant decline until the middle of November. Thus, the stock market crash had a devastating impact on the United States economy.
The waves of bank failures also contributed to the economy decline. Banks in the South and Midwest were among the first that undergone the failure and experienced heavy losses. It occurred in October 1930. However, the Federal Reserve paid a little attention to this occurrence. The failure of the Bank of the United States in New York that happened on December 11 was the largest in the American history. It meant that the country’s financial system was in danger. The Federal Reserve regarded the banks failures as a result of bad management. Therefore, it did not become a lender to save the banking system, since it could not realize the importance of such action at that time. In March 1931, another significant event occurred abroad, which destabilized the economic situation in the United States. A major bank in Vienna, namely the Kreditanstalt, failed. It induced people all over the world to convert deposits into the real thing. During the period between 1930 and 1932, 5,000 banks in America suspended operations. Moreover, in 1933, 4,000 banks that contained approximately $3.5 billion in deposits closed.
In addition to the banking panics and the stock market crash, the Smoot-Hawley tariff also referred to the causes of the Great Depression. The bill approved in June 1930 raised tariffs on a huge number of goods, including agricultural products. Proficient economists were against this bill. They considered that high tariffs would decrease imports. Moreover, the economists emphasized that other countries also would rise tariffs in response to the American tariffs, and it would lead to the decline of trade. Actually, the Smoot-Hawley tariff worsened the overall economic situation in the United States. The bill generated many controversies that caused the pessimistic attitude toward the future and eliminated willingness to invest.
Another reason that entailed the collapse of the American economy was poverty. In 1929, many families in the United States lived at a poverty line. They could not afford to buy needed goods. The level of productivity in the American workers was high. However, they could not buy goods produced by them. If the workers had received good payment for their job, they would have been able to pay for the products, which, in its turn, would had been rewarding for the American economy. The level of the country’s credit structure, another cause of the Great Depression, was connected with poverty. Most of people made purchases on credit, since they were unable to pay cash for goods. Farmers also were in debt. Therefore, many small banks faced difficulties, since their customers could not pay on their loans.
Another no less important factor resulted in the Great Depression was the international debt structure. The United States lent billions to European nations, which engaged in war. However, France and Britain could not repay their debts due to the difficult economic situation.
The Hoover administration are ordinarily blamed for inaction. However, he established the Reconstruction Finance Corporation. It was responsible for providing assistance to banks, railroads, farm mortgage companies, insurance companies, and other businesses, which faced financial difficulties. This agency could lend up to $2 billion to private institution. The main failure of the Hoover administration was inability to press the Federal Reserve to increase credit and money as well as refusal to establish federal program of work relief. The Roosevelt administration announced the bank holiday and prohibited existing transaction in gold. Thus, President Roosevelt removed the United States from the gold standards and established managed currency. He also was the initiator of the New Deal in order to combat the Depression effectively.
Before the Great Depression, the United States had undergone many financial crises and coped with them rapidly. The economic downturn in 1929 covered the longest period of time. It lasted during a decade. One of the factors that may explain such situation lies in the fact that the level of private investment spending was depressed during the period of the economic collapse. New Deal Policies discouraged investments. The National Industrial Recovery Act and the National Labor Relations Act, which were approved in 1933 and 1935 respectively, aimed to restore prosperity and enhance living standards. The National Industrial Recovery Act contributed to the creation of the National Recovery Administration. Its purpose was to solve the problems of overproduction and economic instability. Besides, it provided new codes of competition that should limit production and set prices as well as worker’s hours and wages. Thus, prices and wages jumped in many industries that had succeeded in passing codes of fair competition under the National Industrial Recovery Act and received government approval. However, the industries that failed to achieve such agreement maintained low prices and wages. Similar situation was in the agricultural sector. The National Labor Relations Act, in its turn, entailed further wage increases. Therefore, the Depression persisted and the level of unemployment remained enormously high.
New Deal fiscal policy also was not effective enough to ensure full employment. The Federal Reserve failed to increase the money supply steadily and rapidly. Therefore, such actions deepened the depression, rather than stopped it. In addition, the banking system collapse increased the duration of the Great Depression. It connected with the fact that banks should spend much time in order to establish new relationships with borrowers. If banking system had managed to survive in 1929 to 1933, lending could have been restored during short period of time.
In conclusion, from 1929 to 1939, the United States undergone substantial economic decline. This difficult period is known as the Great Depression. Americans became jobless and lived below a poverty line. There are several significant causes of the economic downturn occurred in America. The first cause is the stock market crash in 1929. Banks failures represent the second cause of the Great Depression. The situation worsened when the Kreditanstalt, a main bank in Vienna, failed. The Smoot-Hawley tariff also contributed to the deepening of the depression. This bill raised the tariff on many goods that resulted in the decline of trade. Poverty and the level of the country’s credit structure refers to no less significant causes of the Great Depression. Finally, the international debt structure led to the American economic collapse. President Hoover and then President Roosevelt attempted to combat the depression and ensure prosperity for the country. Thus, the Hoover administration created the Reconstruction Finance Corporation responsible for helping private institution overcome difficulties, while Roosevelt administration removed America from the gold standards and implemented the New Deal. The National Industrial Recovery Act and the National Labor Relations Act were passed in order to achieve economic stability. Despite all efforts, the Great Depression was the longest economic downturn that the United States experienced during its history. Several factors caused such long duration of the depression. Thus, New Deal fiscal policy failed to provide full employment. The restoration of the banking system required much time. Lastly, New Deal Policies discouraged investments.