Causes of the Great Depression

Period of Great depression remains a memorable economic period in the US history. During this period millions of people lost their jobs, and the United States experienced the worst economic hardship ever (Conlin, 777). The effects of the depression had a significant impact all over the world, including Germany where it resulted into World War II. It was not only caused by a single factor, but by a combination of factors including both, domestic and worldwide conditions.

One of the reasons which caused this Depression was overproduction of the agricultural sector. Workers had to be laid off until the manufactured surplus was used up (Document M). It hampered considerably with the business cycle when people had enough of what they needed.

As a result, the agricultural farm products’ prices dropped (Document N). Some could not afford to pay the government taxes and had no choice but to sell their farms in order to pay these taxes. Those who had debts had their land auctioned to repay the loans. As a consequence, farm products reduced in quantity and many farmers lost their land leading to reduction in industrial production.

Another reason which led to depression was the decline in spending or the aggregate demand. This was due to unemployment, loss of jobs and present harsh economic time. Reduction in demand affected the supply and many industries shut down and some laid off their workers in order cut down production. The economy of the United States had worsened to an extent where those who had jobs got enough to keep them alive. They lived on forty cents a day, and had little money to use in making purchases (Document I).

Stock market crash also fuelled the Great Depression of the United States. Many people had invested in the stock market by 1920’s as heavily as never before. Trading on stocks was the most lucrative investment during this decade, and many of those who had invested in stocks flourished. The deviation from the long term trend was above twenty percent after 1920 (Document A). There was a heavy investment in stock during this period leading to extremely marginal stock.

However, the down fall of this came in 1929, when a few stock market investors started selling their stocks. This was due to a prediction of the end of rise in the stock market thus; there was a nationwide stampede to unload the stocks (Document D). A sudden decrease in stock prices was then realized since there were no buyers and a large number of desperate sellers. The result was a loss in millions of dollars. It led to the Great Depression in the United States.

The American foreign policy also played a role in the Great Depression. It was an attempt by the Americans to export more than it could import (Document P). The policies favored monopoly and rise in inequality in terms of wealth and income. However, it charged a higher tax for the imports, thus reducing trade with other countries.

This happened after the government’s creation of the Smooth Hawley Tariff of 1930 which raised the average duty on European imports from forty percent to sixty percent (Document P). Although this was created in favor of America, it had a significant contribution to the extreme decline of world prices of raw materials. It affected international linkages of the US to other countries, and in revenge other countries came up with their own policies as a correction to trade imbalances.

Banking panics were felt towards the end of 1929, and at the start of 1930’s. Most of the banks had inherent weak financial structure. People started losing confidence with the banks, and as a result there was a simultaneous demand by those people who had deposits in the bank (Document L).

Most of the banks ran into insolvency during the period with the weakness of one bank spreading to the rest (Document L). More debts reduced chances of getting more loans. Most of the banks had run into bankruptcy. It affected the stocks, and most of the industries which depended on banks were shut down. Their workers were left jobless, and they had to be laid off. This led to hard economic times in the USA which had never been felt before.

Lastly, the period of 1920’s was a period of economic boom. Many people enjoyed the privilege by buying goods on credit and installments, since most of them were employed. Debt was taken as a normal thing which could be repaid after some time. Three out of every four radios were purchased on the installment plan, as well as sixty percent of all automobiles and furniture (Document H). They didn’t take the future into consideration.

The unemployment percentage rate had risen from 4.7 percent in the year 1926 to 23.1 percent in the year 1930 (Document F). With most of the people losing their jobs, they were not able to pay the monthly installments. They remained with their large debts, and with most of them, goods were repossessed.

In conclusion, these factors combined led to The Great Depression that had a great and very negative impact on the US economy, as well as on the economy of other countries worldwide. After this period, many countries reacted by developing crucial macroeconomic policies that fuelled economic downturns and upturns. Up to date central banks all over the world try to moderate recessions from time to time.

Works Cited

Conlin, Joseph R. The American Past: A Survey of American History. Boston: Cengage Learning, 2011.

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