The Great depression was a worldwide economic downturn in the 1930s preceding World War II. This began in the United States with the decline of the stock market prices. The depression was marked by unemployment; drop in profits and prices of goods, decline in personal income. Many countries experienced the depression, which affected their respective economic activities. Countries that depended on farming experienced a 60% drop in price of crops, which was due to the massive drop in demand. Other sectors such as mining, logging, fishing, construction, industry also suffered due to drop in demand.
The start of the Great depression was believed to have started in the United States stock market crash. This stock market crash was known as black Tuesday, America lost up to 40 million dollars, and although it was able to recover this money, it was not adequate to sustain the economy of the country. Therefore, this led to the depression in the United States. Another factor that caused the great depression in the United States is the drought that hit Mississippi. It greatly affected the agricultural sector of the United States. This led to the low production of food and, therefore, farmers were unable to earn an income. This also hit hard on the economy of the United States. Banks also failed because they were uninsured. Therefore, citizens’ savings were lost. This made people unsure of saving and taking loans due to the unstable state of the economy. Another cause is the policy made by the United States to protect its companies from being exploited by foreign companies, especially Europe. This policy was referred to as the Smoot-Hawley Tariff. This policy acted by charging high taxes for imports. This eventually scared off potential and existing companies and this deteriorated the economy. People also avoided investing in the stock market because of their fear of losing profit and incurring losses due to the unappealing state of the economic.
Theories have also been put forward to explain the causes of the great depression. They mainly explain the cause of the great depression through demand driven theories. They are the Keynesian, the breakdown of international trade and debt deflation. The Keynesian theory that was put forward by British economist John Maynard Keynes, suggested that less total spending by the economy led to a lower income and reduced employment. Since the private sector could not solve this problem on its own, he suggested a solution for this problem by stating that the government to step forward and increase government spending and reduce taxes. The breakdown of international trade was due to the introduction of the Smoot-Hawley Tariff as explained earlier. Debt inflation also was a cause of the great depression as the debts increased in banks. If the debt is not payable, they could not be paid, accounts were frozen, and there was a smaller amount of money supply as bank loans were being paid off. This led to bankruptcies, and this was what led to the failure of banks which as mentioned earlier was a cause of the great depression.
Monetarists argue that the great depression was caused by the American Reserve Federal System’s poor policies. This was because they allowed the shrinking of the money supply into the economy as the banks failed. Less money supply in the economy meant that loans could not be issued, thus the investors could not get enough capital to run their businesses and pay off their loans. One of the reasons why the government could not increase money supply into the economy was due to the Federal reserve act which was a regulation that required 40% to go back to the reserve. This ended up contracting the monetary supply leading to the depression.
The New Classical Approach argued that the cause of the great depression is the decrease in output, which is the consequence of the decline in productivity in the economy. This is brought about by poor policies in the labor sector and, therefore, there was the rise of unemployment. This also led to the decline of capital stock.
The Austrian school argued that the cause of the great depression was because the American Reserve Federal system increased the money supply into the economy prior the depression. This made it difficult for the Federal system to resolve this issue because the stock and asset prices had increased and this increase could not e sustained. Therefore, it led to the depression, and the attempt of the Federal Reserve to salvage the situation only worsened the situation thereby causing the great depression.
Marxist viewed depression as a result of chaos that is inevitable due to capitalism. Karl Marx believed that capitalism led to the uncontrolled accumulation of wealth led to the acquisition of a lot of wealth, and it result is crisis. The rise and fall pattern of development causes conflict in the productivity in an economy and eventually the conflict of classes and change in the society.
The inequality theory suggests that the economy produces more than it needs. Since there is a decline in personal income, people are unable to buy the produce. Therefore, the Great depression was caused by the unequal distribution of wealth.
The end of the Great depression was marked by the arrival of World War II. This was mostly associated with government spending on the war. It helped improve on the problem of unemployment. Businessman took advantage of government spending, and this helped alleviate the Great depression.
Frank, Robert H; Bernanke, Ben S.,(2007)Principles of Microeconomics(3rd ed.). Boston McGraw Hill/Irwin.p98
Eichengreen, Barry (1992) The Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 .New York: Oxford University Press