Cause and Effects of the Great Depression

Economics

The Great Depression

The Great Depression started in 1929 and lasted until the end of the Second World War, it was the most severe depression seen in the western world. The depression had far reaching economic, social, and political consequences. To understand the depression it is necessary to look at the event itself, underlying causes, the impacts and the way in which recovery took place.

The Great Depression may be argued as starting in August of 1929, when the countries GDP started to decline; but it is the cash of October 1929 that marks the official beginning of the crisis (Robbins & Weidenbaum, 2009). The stock market crash of 1929 was a surprise for many; the previous decade had been one of growth and prosperity. On Black Tuesday 29th of October the bottom dropped out of the stock market, which resulted in panic selling loosing 40% of the paper value of the stocks (Robbins & Weidenbaum, 2009). The initial response from politicians and major business leaders was one of optimism, and predictions for a rapid recovery. However, the depression was to carry on for more than a decade, with the stock market crash being only the first problem. By 1933, unemployment had increased to 25%, when it had only been 3.2% in 1929, and the fall in the stock market continued, with the total value being work less than 20% of its value prior to the crash (Robbins & Weidenbaum, 2009). Farm incomes fell by 50%, by 1932 industrial output had decreased by 45% and many banks suffered and failed (Robbins & Weidenbaum, 2009). Numerous banks had invested their account holders' money in the stock market, resulting in looses, which led to bank customers withdrawing funds, afraid of loosing savings, increasing the pressure on banks and accelerating closures (Cecchetti, 1992).

The impacts across the country were severe. With more than 13 million unemployed by 1933, it meant that there were approximately 34 million people in families where there was no full time worker earning wages. In past recessions the farms had only suffered minimal effects compared to the city dwellers, they had the means to feed themselves. However, in the Great Depression this changed, not only where there poor economic influences, there were also poor weather conditions creating a dust bowl (Bernanke, 1983). A drought combined with dust storms, which were partly due to many years of over grazing, resulted in the loss of grass. With many small farmers already in dept, the situation was exacerbated by the environmental conditions. The failures of farmers to pay debts saw a large number of small farmers lost their homes and businesses.

The causes of the recession may be argued as the major disparity between the developments in production, and overproducing goods that the country could not consume in the years leading up to the recession (Cecchetti, 1992). There had been rapid development in technology allowing the level productivity to be exponentially increased, but there was not sufficient demand in the economy to buy the goods that were being made. The initial gains in productivity served to widen the gap between the rich and the poor (Cecchetti, 1992). The rich and middle classes saw their savings increase, but the level of increase was often based on irrational expectations of continued growth, so the value of the investments (stocks) was not sustainable (Cecchetti, 1992). The industrial development and growth of previous years had not been built in a solid foundation. The failures of the banks and problems with the farms exacerbated the situation.

The optimisms expressed by the politicians, including President Hoover, and their failure to manifest led to political changes (Bernanke, 1983). In 1932 Hoover did not stand any chance of re-election, and Roosevelt won by a large majority. Roosevelt introduced some new strategies which were aimed at creating stability. He closed all of the banks, only allowing them open following their stabilization. Roosevelt also introduced the 'New Deal'. This was a program aimed at stimulating demand that would help to support the creation of jobs, and included increased government spending, and support for credit provision to businesses (Bernanke, 1983). Federal Deposit Insurance Corporation was also created to insure savings in bank deposits of up to $5,000, increasing confidence in the banking system (Robbins & Weidenbaum, 2009). The resulted help to decrease unemployment, more than 2 million men took part in the Civilian Conservation Corps, earning $30 a month working in camps participating in a range of different types of conservation projects, such as tree planting to reduce problems associated with soil erosion (Robbins & Weidenbaum, 2009). This was a major political shift towards higher levels of political interventionist policies, and save a revived labor movement and practices such as collective bargaining (Robbins & Weidenbaum, 2009).