THE CAUSES OF THE GREAT ECONOMIC DEPRESSION

THE CAUSES OF THE GREAT ECONOMIC DEPRESSION

The Great Economic Depression was a situation characterized by the collapse of the global economy. It started in the Canadian agricultural sector and by 1929, it had spread to Europe and the entire world after the collapse of the Wall Street Stock Exchange Market in USA in October 1929.




The European economies were badly hit except Russia which had a communist economy, especially due to the fact that they were just in the post-World War I recovery process.

The depression was characterized by mass unemployment, low prices, failure of agricultural markets, closure of banks and other industries leading to the decline in the standards of living. During the depression, there was also widespread violence characterized by riots and strikes, human misery and social-political tensions. Generally, during this period there were many goods but with less money to purchase these goods.

THE CAUSES OF THE GREAT ECONOMIC DEPRESSION

The effects of World War I of 1914-1918 led to the occurrence of the depression. This war devastated world economies, destroyed industries, ships, agricultural farms or gardens and even human resources. It’s estimated that a total of 186 billion United States dollars were lost or incurred as a result of World War I. Such devastations affected production, employment rates, individual purchasing power and general economic activity in the world. For example, trade declined because countries were left so poor that they could not import large quantities of agricultural and industrial produce. Consequently, there was low level of import and consumption which explains why the depression was severest in the USA which was the greatest producer in the period after the war. 




The effect of the Gold Standard System which operated in the world economies before 1929 created economic rigidities that led to the depression. Under this system, every individual economy in the world was supposed to have; in its circulation, a total sum of money equivalent to its gold reserves in the bank. However, the reality was that several nations naturally possessed less of such gold reserves, and secondly; many countries indebted to USA were by 1929 required to pay American debts in gold. As much of the gold reserves of the indebted nations flowed out to America, this created acute shortage of money supply among world economies because several nations were either paying their gold to USA or simply naturally endowed with little gold resources. As countries reduced their money supply in circulation, there was increasingly declining purchasing power which resulted into lower investment returns or profits. As the profits declined, this led to the failure and closer of businesses. This in effect made the employers to lay off workers, hence leading unemployment and thus the outbreak of the Great Economic Depression.

The policy of economic nationalism or protectionism pursued by some countries caused the Great Economic Depression. After World War I, countries of Europe and America pursued economic protectionism in order to safeguard their economies against foreign competition, but the policy instead ruined or shattered international trade hence leading to the economic depression. For example, America, the less affected economy after the war, adopted a protectionist policy by which she charged high import taxes as a way to discourage importation (to her internal markets) while pursuing an aggressive exportation of her industrial and agricultural output. Other countries especially in Europe also responded in similar ways not only to the USA but also among themselves. This undermined international trade as countries increasingly produced larger volumes of outputs and could only sell them locally where the purchasing power was very limited. As a result, home markets became flooded with locally produced goods which forced the prices to decline. This led to a decline in profits which called for a decline in production, and a reduced production meant further reduced profits. This brought about the retrenchment of industrial workers and closure of businesses. All these paved way for unemployment, famine, general collapse of the economy and human suffering, hence leading to the occurrence of the Great Economic Depression of 1929-1935.




The effects of overproduction in the 1920s coupled with limited markets caused the Great Economic Depression. The post war period saw scientific and technological advancement not only in Europe but also America and other parts of the world. After the war, scientific innovativeness tended to shift from the warfare or military field to agricultural and industrial development. In the field of agriculture for instance, new machinery and tractors as well as modern farming techniques were invented to foster large scale farming while in the industrial sector; better industrial machines were also invented to facilitate rapid industrial production. Such scientific innovations more than ever increased the production of both agricultural and industrial goods that soon exceeded the domestic consumptions. This was worsened by the protectionism policy which virtually deprived such heavy production of external and overseas markets. The result was huge surplus production that could be sold only if prices were reduced. This mostly hit the agricultural sector whose products couldn’t wait for the possibilities of price increase because they could easily perish. Producers that hesitated to sell at down cut prices had a great deal of their products unsold or expire which forced them to cut down production or simply fall from business. A situation of this kind led to enormous loss of incomes by producers, bred a financial crisis, unemployment, and general breakdown of economic activity in the various world economies, hence leading to the occurrence of the Great Economic Depression of 1929-1935.

The rumours about the closure of the World Stock Exchange Market at the Wall Street in USA sparked off the economic storm (fear or fight) that caused the depression. In the post war period, the value of stock (shares) had risen to unrealistic heights but as rumours began to spread about the impending end to this situation, about 600 investors rushed to sell their shares. On 24th October 1929, 13 million shares were sold and on 29th October 16.5million shares were exchanged. At the end of October 1929, American investors had lost 40,000 million dollars and even withdrew their short term loans from Europe.  At the same time, they stopped lending and this was unfortunate for countries like Austria and Germany whose post war re-construction was entirely dependent on the American credit. The consequence was that there was less money to buy goods on the European continent. This caused paralysis in investment and production, hence causing the Great Economic Depression of 1929 -1935.




The widespread unemployment that existed in the world economies at that time caused the Great Economic Depression. For example, although most European countries like Britain, France and Germany registered some level of economic boom in the post-World War I period, unemployment remained high. This therefore caused falling standards of living as people could not afford to purchase the basic goods and services due to the lack of jobs. Consequently, industries closed down as their output lacked adequate markets, hence leading to the occurrence of Great Economic Depression by 1929.

Income inequalities and poverty also worked to plunge the world into an economic depression between 1929 and 1935.  Most of the profits made by the industrialists were not evenly distributed among the workers. Although wages were increased by an average of 88% between 1923 and 1929, profits also shot up by 20%. This reduced the purchasing power of the workers at the same time the manufacturers and industrialists were not willing to improve the welfare of the workers through increased pay. For example, millions of Europeans could not afford a radio, a car or electric washer while the employers at the same time seemed not to be willing to change the wage structure. This made an economic depression inevitable by 1929.




The nature of the American loan or credit scheme partly led to the occurrence of the Great Economic Depression. During and after World War I, both the victorious and defeated European nations borrowed huge loans from the USA in order to sustain the war and to rebuild their devastated economies respectively. Thus, at the end of the war, almost all European countries were deeply involved in repayment of the American loans. From 1924, when USA pressurized the repayment of the outstanding loans, this created a situation where huge sums of money and gold flowed from the European economies to the USA not in exchange of goods and services but rather in repayment of loans. This reduced the level of investment, aggregate demand and purchasing power across Europe, hence leading to a financial crisis that finally led to the Great Economic Depression by 1929.

The heavy war reparations or indemnity also partly caused the Great Economic Depression of 1929-1935. At the end of World War I, Germany and her allies like Austria and Bulgaria were fined huge sums of money for the damages (human and material) caused during the war.  But as if not enough, these nations of Europe were forced to surrender some of their economically rich territories to the allied powers which hampered their economic prosperity. For example, Germany lost the rich mineral areas of Alsace and Lorraine, the Saar coal mines and all her African colonies. On top of this, the defeated nations were neither free to export nor import to and from the other European countries. All these strained relations and highly affected international trade between the victor and the defeated nations and the world at large. The result was an increased financial crisis which deteriorated into the Great Economic Depression by 1929. 

The failure of the League of Nations also laid ground for the occurrence of the Great Economic Depression. For example, it failed to establish an economic framework or mechanism to promote free international trade. As a result of this weakness, countries began to pursue economic protectionism, a policy that paved way for the depression. International trade was therefore compromised as the world slid into over production without readily sufficient markets. Secondly, as the watch dog of global peace and prosperity, the League of Nations also failed to come out with a clear policy to regularize currency circulation in regard to the prevalent gold standard system. One may also argue that it was a league’s weakness not to regulate the US-Gold based debt recovery and the reparation payments which ruined relations between the USA and her debtor nations on one hand and also the defeated powers and the victor powers on the other hand. All this affected the international trade, hence paving way for the occurrence of the Great Economic Depression by 1929.




The growing speculation by prominent politicians about the depression in different countries caused the Great Economic Depression.  These people were using the mass media or press and they circulated rumours and propaganda about the impending depression which created panic, speculation and paralysis that disorganized economic activities even before the actual depression. For example, the speculation about the closure of the Wall Street Stock Exchange Market in USA made people to withdraw their money in the banks and kept it in other forms like buying gold. This reduced the amount of money in banks that would have been provided to people to buy the goods on the market. A situation of this kind therefore paved way for the occurrence of the 1929–1935 Great Economic Depression.

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