October 29, 1929, marks the beginning of the great depression that started in the American economy and later spread to other world economies. On that day, the US stock market crashed due to a sharp fall in stock prices. By the end of December the same year, the stock prices had dropped by 50 percent compared to the figures of September the same year. They further went down by 30 percent in 1932, the year that the depression was at its worst.
Between 1929 and 1932, wealth amounting to $74 billion had vanished. The period also witnessed increased unemployment rates that reached a high of 25 percent in the US. Many Americans felt the depression, and most had to construct makeshift shelters using scrap metal, cardboard, and any other thing they could find in dumpsites. The Americans suffered most as their business culture that had begun in the 1920s eroded due to a lack of jobs and income. However, the effects of depression spread across the world as far as Europe and Asia, for they also were trading with the US.
Causes of the Great Depression
There are various reasons that have been put across as causes of the Great Depression. Some were immediate causes, while others were what led to its prolonged stay as opposed to other depressions. Firstly, there was speculation about the stock market. Stock prices at the New York Stock Exchange were increasingly going up. This was the period between 1928 and 1929 before the crisis. Many investors were buying shares mainly using loaned money from banks, with only 10 percent as cash from their pockets. What lured them most was the belief that their shares would quickly increase in value. As a result, they would be able to repay the loans using the proceeds obtained from reselling the shares and not from their pockets. Therefore, the desire to invest a small amount and reap a fortune lured even more people.
As the stock market continued with an upward trend, it went out of control. This was on the ‘black Tuesday’ when the confidence in future stock gains faltered. As a result, creditors demanded that those who had borrowed money from them waiting to repay through resale proceeds to repay immediately. Everyone panicked and tried to resell his or her shares, yet there was no willing buyer. Banks also had no cash to give to their depositors. The stock market crashed, and banks became bankrupt because their monies were held in their shares. Companies also could not pay their employees and creditors because banks had closed, and therefore they were forced to lay off their workers. All these events led to the beginning of the Great Depression.
Mistakes by the Federal Reserve also led to the depression whereby the Federal Reserve employed some measures that worsened the situation. For instance, they restricted money circulation in the economy and increased interest rates. As a result, the public found it hard to secure credit. Such a measure was suitable during the boom periods of 1928 and 1929 because it could have put the stock market to check, and as a result, the economy would have been strengthened. However, the use of such measures after the crash proved disastrous. At such times, the economy needed an expanded supply of money and credit obtained at low-interest rates. This would have enabled debtors to pay their debts easily. By choosing the wrong measures, the economy was forced to starve for credit; hence it plunged deeper into the depression.
Thirdly, the implementation of the Smoot-Hawley- tariff act, which was done in 1930 by the American government, also led to depression. It was meant to shield American farmers from foreign competition, but the tariff was ill-advised because it raised the tariff by a whooping percentage (8 percent to 40 percent). This was the highest that the tariff had ever been raised. Tariffs on manufactured products were also raised by a similar margin. This was disastrous because other countries were angered by this move, and they raised their tariffs too, hence locking out American products from their markets. This was another big blow to international trade, which was already weakened by the Federal Reserve’s credit policies and seriously needed a boost.
Another cause of the great depression was poor wealth distribution in America that hindered a quick economic recovery after the stock market crash. During the 1920s, the average income for the American people rose. However, the rise was only for the wealthiest, who made up only 20 percent of the total population. Their income went up by 10 percent. For the 60 percent, which represented the poor, their income went down by 30 percent. This was because the administration at the time lowered taxes charged on the wealthiest. In the US economy, the rich mostly spent their money lavishly on buying buildings and going on holidays.
The poorest, who were the majority, spent their incomes on consumption goods. In that case, the purchasing power of the majority weakened; hence little consumption took place. Hence, the domestic consumption that was needed to revive the industries could not happen. As a result, the depression was prolonged.
President Hoover’s policy was another cause of prolonged depression. Hoover believed in an economy with less government intervention. He was, therefore, reluctant to adhere to calls of many to initiate direct rescue packages to salvage the economy. This was because he believed that things would turn around without intervention. He urged stable banks to help weak ones so that they avoid insolvency. He also urged farmers to control their output so that prices would go up, whereas industrialists were to hold up wages at levels which they were before the depression. On its part, the government was to give out information and strategies as well as occasional loans.
However, banks were reluctant since they did not see the practicality of the policy. Industries continued to lay off workers as production levels dwindled. Resultantly, the depression continued to bite, and at last, Hoover gave in and initiated direct intervention strategies. However, even then, his efforts had a very minute impact as the economy had sunk deep into depression.
European economic problems were another cause of depression. The farming sector of economies in central Europe had been going through difficult times in the late 1920s. After World War I, the Hungarian empire was dissolved, and countries were birthed as a result. Unfortunately, the economies of those countries were not viable. For instance, Austria was the first one to collapse due to hyperinflation, followed by Hungary.
Between 1925 and 1926, the finances of both countries were under international control until stability was restored. The period between 1926 and 1929, which was the boom period, saw an inflow of capital in Austria as well as other countries in central and Eastern Europe. Unfortunately, this capital was short-term, at least a large share of it. When the export of capital from the US ceased after the crash of the stock market, many shocks happened in Europe.
The foremost financial institution in Austria, the Creditanstalt, had to absorb a large agricultural and industrial bank. Otherwise, its shareholders would have lost severely if the bank went under. This sent panics in the banking system, and Creditanstalt was overburdened by nonperforming loans. Germany also had experienced economic recovery in 1927-1929. However, this was dependent on foreign credit, mostly from the US.
In addition, the credit was short-term. On the other hand, the US was the leader in the manufacturing world, and therefore the rest of the world relied heavily on the US for industrial investments as well as commercial credits. In light of the massive weight of the US economy, the effects of domestic business cycles were easily transmitted to international markets. As such, the economic downturn was propagated to the rest of the world when it started in 1929, leading to the great depression.
European States Response to the Great Depression
The great depression had been felt all over the world, and as a result, countries had to come up with measures to minimize or even avert some of its effects. The European countries at that time had weaker economies as compared to the US economy. They, therefore, responded in varied ways, as explained below. First, Britain was among the capitalist countries hit by the Great Depression at the start of 1930. However, its recession was still not as strong as compared to other countries.
Its industrial production dropped by 17 percent, and it had an unemployment rate of 17percent. In response to the worsening situation, the British government increased government spending in 1931. For instance, unemployment relief was increased to ₤164 Million from 98 million during the previous two years resulting in a budget deficit. In response to the budget deficit in the same year, the government increased taxes by cutting the benefits of unemployment. In September 1931, a new government came into power and decided to remove Britain from the Gold standard.
The French government made some interventionist measures, such as introducing tough import restrictions on agricultural products as well as minimum prices on grains. These were meant to support the farmers’ nominal incomes. The French government also supported industrial cartels and import protection with the aim of increasing prices as well as profits. It also implemented measures of reducing the supply of labor that included repatriation of foreign employees and reducing the length of workweeks.
These were meant to prevent the downward revision of wages. Heavy industries in France, like steel and iron, had grown extensively in 1920, and this left them with large debts. Therefore, in response to the Great Depression, the companies acted in combination in an attempt to restrict output and raise product prices as well as maintain their margins of profits.
When the US implemented its Smoot-Hawley tariff Act that increased tariffs on imported goods, most countries in western Europe were waiting for France to initiate a mobilization process of those countries so that they could stage a unified response. However, France decided to respond to singly. First, the French government in April 1930 increased taxes on imported automobiles. It also increased its use of import quotas, which was aimed at discriminating against US suppliers. As a protectionism measure, it increased duties mostly on US products. This reduced imports from the US by 3 percent such that by 1933 it was at 9 percent.
Germany was under the rule of Adolph Hitler, who mostly resorted to fiscal policies as a response to the Great Depression. Being that by March 1933, he had begun his dictatorial moves as the parliament was weakened, he was able to make individual decisions and implement them without consultation. His first measure was to ban labor unions. Secondly, he was involved in the restructuring of industries to form a series of cartels. He also introduced an intensive military rearmament program that led to the creation of job opportunities. This worked largely as shown by the decrease in unemployment rates while people got incomes to spend, and industries had consumers to buy their products. Nevertheless, Germany was reluctant to retaliate to the Smoot-Hawley tariff that restricted its exports to the US.
The Great Depression had a greater global impact compared to economic downturns that had happened before. The previous ones were restricted to a few countries or regions. There is a general agreement that it was mainly caused by the economic crisis in the US that began in October 1929. This was because the US was then industrially powerful and other economies, mostly in Europe, heavily relied on it.
However, the European economies had also contributed to the crisis apart from the US crisis. This is because prior to the financial distress, the economies were recovering from the turmoil they had gone through after the First World War. Different measures were taken by each nation as a response to the crisis, singly and collectively. The ideologies and understanding of the governments in power at the time determined the measures that were put in place to check the depression..
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