Causes and consequences of the Great Depression

Western Civilization

The Great Depression

This is a paper on the Great Depression. There are four references used for this paper.

Throughout American history there have been occurrences which have had a dramatic impact on thousands of people. It is important to look at the Great Depression and its causes in order to gain a better understanding of this crucial incident of the 20th century.

What Was the Great Depression

The Great Depression began when the stock market crashed in October, 1929, creating "such a shock to most Americans that some early attempts to explain their causes blamed sunspot activity or medieval prophecy. A few held it to be a divine retribution on a people who had indulged themselves in a decade of hedonism after World War I and were due for a sobering experience. Others recognized that the 1920s that brought hints of an agricultural recession, amid uninhibited business speculation (Unknown)."

Effects on the World

The Great Depression had a profound effect throughout the world. The Hoover administration "was at fault before the crash in allowing the underlying weaknesses of an apparently buoyant economy to go unchecked. Its reaction to the onset of the depression failed to restore confidence, through a reluctance to use federal assistance and employ federal controls (Unknown)."

No True Consensus

The Great Depression is still not understood clearly. "Economists have offered many theories for both the massive decline and the slow recovery of output during 1929-39, but no consensus has formed on the main forces behind this major economic event (McGrattan)."

Economic historians have tried to explain what led to the Great Depression, and these efforts have "been characterized by a degree of 'theological' controversy. This divides adherents of the various economic philosophies, communist and capitalist, monetarist from Keynesian and others. Their lack of consensus in explaining the Great Depression stems from these distinctive philosophical starting points (Unknown)."

Theories

There have been a number of theories of what brought about the Great Depression. Some of most prominent theories "blame the Great Depression on frictions in labor and capital markets. The sticky wage theory is that wage stickiness together with a monetary contraction produces a downturn in output, while the cartelization theory is that an increase in cartelization and unionization leads to a slow recovery. The investment friction theory is that monetary contractions increase frictions in capital markets that produce investment-driven downturns in output (McGrattan)."

Getting Rich Quickly

The crash on Wall Street can be attributed to too much speculation in stocks. This was a "symptom of the feverish 'get rich quick' mentality that had accompanied almost a decade of growth following post-war reconversion.

The over-valued commodity markets suddenly lost confidence, and prices tumbled, setting in motion a sequence of disasters that became an economic catastrophe for the richest nation in the world (Unknown)."

Under-Consumption

Another cause of the Great Depression was under-consumption. It was not noticed that the "distribution of national income was not only inequitable but was failing to generate sufficient demand at the broadest level of society to meet the rising levels of supply made possibly by new production technologies, thus under-consumption was both a cause and a symptom of the Great Depression (Unknown)."

Irony

An unusual chain of events may have triggered the Great Depression. "American farmers and workers were producing too much. They were too inventive in their modes of production and the enormous power of their economy crushed those of other states. With cruel irony, a surfeit of wealth and power brought disabling poverty (Unknown)."

Effects on Thousands

During the Great Depression, a number of banks failed, resulting in thousands of people losing their entire life savings. In 1930, the failure of Bank of the United States caused many "thousands of men, women and children, mostly immigrants and the working poor, to line up at the bank's doors through the night in a vain hope of getting their money back (Byrd)."

The failure of banks was not the only negative impact of the Great Depression. Businesses "laid off workers or closed their doors altogether, mortgages were foreclosed, and people who, a few years earlier had been prosperous found themselves out of work, homeless, and hungry (Byrd)."

Turning to the Government

During the period between "March 1930 and March 1931, unemployment doubled from four to eight million, grossly overburdening local and state relief agencies. The private sector simply could not handle the immensity of the human tragedy, and forcing Americans to turn to Washington for help. The federal government was the people's last resort, the only institution capable of tackling the crisis, but the president and the Congress were divided and unsure of what to do - fearful of making mistakes that would worsen the situation, locked into old ideologies, and hesitant to adopt bold experimentation (Byrd)."

Decline in Productivity

During the Great Depression, there was a "striking short-run productivity change to the U.S. economy. Between 1929 and 1933 in the United States, real output per adult fell more than 30%, and total factor productivity (TFP) - changes in output not accounted for by changes in measured inputs - fell about 18%. This TFP decrease is much larger than just extrapolating the TFP decrease that typically has occurred during postwar U.S. recessions (Ohanian)."

Figures of the Depression

The facts and figures of what occurred during this era are startling. During the Great Depression "United States Steel and General Motors had dropped to 8% of their pre-Crash prices, stocks listed on the Big Board were worth 11% of their 1929 value, investors lost 74 billion dollars, more than 5,000 American banks failed and 86,000 businesses closed their doors. The country's Gross National Product fell from 104 billion dollars to 41 billion, in 1932, 273,000 families were evicted from their homes, and the average weekly wage of those who had jobs was $16.21 (Byrd)."

Conclusion

While it is not clearly understood what caused the Great Depression, a number of theories provide insight into what may have triggered the collapse of America's economy. It is important to understand these theories, and learn from them, in order to protect not only the United State's economy in the future, but the world's as well.