Most everyone has at least heard of the Great Depression that hit America by storm in the early twentieth century. Even though people are taught about the Great Depression, I personally think that a lot of people do not understand the severity that it caused and the livelihoods that it forever changed. The Great Depression, which lasted over a period of ten years, resulted in a lot of heartache for many nations worldwide (Fraser, 2010). As for the United States, the worst of the Great Depression harbored between 1929 through 1933 (Fraser, 2010). The Great Depression went down into history as being the worst traumatic economic moment for the United States (Paul Evans). It is still recognized for being the longest and severe depression that has ever been experienced by the Western hemisphere (Romer). The Great Depression originated in the United States causing drastic declines in output, severe unemployment, and heightened deflation in almost every country of the world (Romer). To this day economist and historians are still trying to analyze what really happened in the quake of the Great Depression, along with understanding the true underlying causes that created this grave crisis (Fraser, 2010).
Even though the Great Depression will be forever stamped in history books as the economic meltdown of the twentieth century, we as Americans can learn to oversee and conquer what lies before us by understanding what put us in that dark place to begin with. The following depicts and analyzes the four main causes that economist believe lead to the demise of the Great Depression which are, the Stock market crash, banking panics and monetary contradiction, the gold standard, and international lending and trade (Bernstein). People thank declines in consumer demand, financial panics, along with misguided government policies to the dismay of the drastic decline of output. The decline of economic output was mainly due to a decline in aggregate demand (Bernstein). One of the main causes that contributed to the Great Depression’s radical decline of economic output was the New York stock market crash of 1929 (Romer). Leading up to the great crash of 1929, was the steady increase of stock prices between 1921 through 1929. In order to slow the growing prices of the stock market, the Federal Reserve stepped in and increased interest rates. With the increase of interest rates people stopped purchasing as much, especially in areas such as manufacturing, which in turn reduced production (James, Spring 2010). By the fall of 1929, stock prices reached an overwhelming low, and people started panicking.
This lead to what we now refer to as “Black Thursday”, which occurred on October 24, 1929. On the following Tuesday, stock process hit an all time low which will forever be remembered as “Black Tuesday” (Romer). Since many of the stocks had been purchased on margin by using loans secured by only a small fraction of the stock’s actual value, the overwhelming price decline forced many to liquidate their holdings (James, Spring 2010). During this time, the stock prices for the United States declined a devastating thirty-three percent (Paul Evans). This terrified people, which unsurprisingly lead them to not purchasing items like they had originally. When people stopped spending like they normally did, this caused a chain reaction that lead to the decline of production for manufacturers and merchandisers (Romer). Another devastating cause of the Great depression was the banking panic and monetary contraction (James, Spring 2010). The United States experienced a banking panic through the fall of 1930 to the winter of 1933 (James, Spring 2010). This banking panic lead to countless people simultaneously demanding their money deposits to be paid to them in the form of cash (Richardson, September 2007). People lost all confidence in these banks and wanted back all of their money (Richardson, September 2007).
Unfortunately what people did not understand is that a bank does not keep all of the money that depositors have placed in the bank at all times (Cecchetti, 2008). The bank only keeps a certain percentage of reserves, called required reserves, on hand at all times. The rest of the reserves are excess reserves that the bank can loan out to make money (Cecchetti, 2008). Because banks no longer had excess reserves to loan out, which inevitably allowed them to make more money, banks started experiencing a drastic toll from the depression (Richardson, September 2007). Over one-third of banks in the United Sates during the Great Depression had failed. This seemed to cause a chain reaction to the overall scheme of things (Romer). Since banks were failing there was no one to lend manufacturer’s money for investments for growth, which also meant no money coming into the banks for excess reserves for financial investment (Richardson, September 2007). The gold standard is another assumed cause of the Great Depression (Romer).
There are thoughts circulating that the Federal Reserve either allowed or possibly caused the decline of the American money supply in order to preserve the gold standard. Since the United States’ money is backed by gold, foreigners were likely unsure of the United Sates commitment to the gold standard (Romer). This would have undoubtedly led to a large outflow of gold which would have unfortunately made the United States devalue. This unfortunately led to the decline not only to the United States but the rest of the world as well (Romer). During the late 1920’s, there became a rise in American stocks and bonds, which in turn brought in hefty inflows of gold to the United States. Gold started flowing from other countries and into the United States due to the product contracts (Richardson, September 2007). Along with the stocks and bonds, there was also a high demand from foreigners wanting American goods. This occurred because the deflation from the United Sates made it so appealing to foreigners (Romer).
On the other hand, because there was such a low income from Americans it reduced their demand for foreign products (Romer). Unfortunately other countries were trying to maintain an international gold standard in order to continue to meet the monetary contraction that was occurring in the United States (Romer). Sadly, this resulted in the deterioration of output and prices throughout countries all over the world. This downturn of other countries started looking like the one occurring in the United States (Romer). Banking panics along with financial crisis started occurring in other countries around the world, not just in the United Sates (Richardson, September 2007). By forcing countries to deflate, the gold standard reduced the value of bank’s collateral and made them more vulnerable to bank runs (Romer). Due to the overwhelming panics in banks and other financial market disruptions, countries globally experienced a tremendous depression in output and prices (Paul Evans). One of the last assumed causes of the Great Depression is the international lending and trade (Romer). During the mid-1920s foreign lending to Latin America and Germany had expanded greatly (Paul Evans).
By 1928 and 1929, high interest rates and the booming stock market of the United States caused this foreign lending to decrease (Richardson, September 2007). Further credit contractions and a decline in the output of borrowing countries could have been caused by the reduction of foreign lending (Richardson, September 2007). This slowing of foreign lending may also be why the economies of Germany, Argentina, and Brazil began to fall before the Great Depression started in the United States (Paul Evans). The Smoot-Hawley tariff of the United States in 1930 and the rise in protectionist trade policies worldwide brought forth their own problems (Romer). The Smoot-Hawley tariff was designed to reduce foreign competition in agricultural products in order to raise farm incomes (Romer). When other countries followed along in retaliation and to correct unbalanced trade, a reduction of trade occurred. Scholars believe although these policies did reduce trade, they were not significant as a cause of the Great Depression (Romer). However, a sharp decline in the price of raw materials worldwide may have been caused by the protectionist policies. This caused balance of payment problems for commodity producing countries and led to contractionary policies (Romer).
The stock market crash, banking panics and monetary contradiction, the gold standard, and international lending and trade were four main causes economists believe lead to the economic shattering of the Great Depression (Bernstein). Today, looking back at what happened and dissecting these four main causes, I think it is safe to say that they all came hand in hand. It was basically a cause and effect action. When one thing occurred it made all the other causes fall into play. The Great Depression did final break away and lead to the devaluation of many countries (Bernstein). By devaluating, countries were able to reduce the exchange value of their currency by decreasing either their gold currency or their value relative to another currency (Romer). Even though this did not increase output directly, it did allow for the expansion of these countries money suppliers without any concern for gold movements and exchange rates (Romer). Many countries saw greater recovery and took advantage in this freedom (Romer). The United States for example increased their money supply by near forty-two percent by 1937 (Romer).
This monetary expansion increased globally which stemmed greatly from the gold inflow (Romer). The expansion of the monetary base, stimulated spending by lowering interest rates and making credit more widely available (Richardson, September 2007). Due to expectations of inflation, potential borrowers became confident that their profits would adequately cover payments of a loan if they chose to borrow (Richardson, September 2007). Along with this, the United States also saw a rise in consumer and business spending (Fraser, 2010). Due to the staggering amount of unemployed workers, Franklin Roosevelt issued the Workers Progress Administration under the New Deal (Fraser, 2010). This association hired the unemployed to work on government projects. Also under the New Deal was the Agricultural Adjustment Association that gave large payments to farmers (Fraser, 2010). This inevitably increased the workforce, along with production (Fraser, 2010). Even though the Great Depression ranks as one of the worst catastrophic economic events our country has ever seen, it is there that we can learn from our mistakes and strive for success in the years to come.