American History

A global economic crisis which came to be commonly known as the Great Depression, left most of the historians and economists with a tight debate on deciphering the exact causes of the depression. After the problem of the Great Depression, several explanations have been put forward to clearly understand the events which triggered the economic collapse. Perhaps, the first step to understanding the causes of the economic crisis is to define the meaning of Great Depression and then try to review on the historical perspective of Great Depression that affected countries worldwide.

The Great Depression was the economic crisis which began with the crash in the stock market in 1929 and then persisted through the 1930s causing a worldwide mass unemployment and economic downturn which made failures in many businesses. On October 24th, 1929, commonly known as the Black Thursday, the United States sold a total of 12.9 million stock shares in one single day. This amount was three times more than the normal sales. This resulted into the fall of share price by 15-20 percent causing an enormous crash in the stock market.

During the Great Depression, about 9,000 banks were declared bankrupt and over 9 million savings accounts got wiped with about 86,000 businesses closing doors. It is believed that the Great Depression led to Adolf Hitler rising to power in Germany and therefore sowing the seed of the World War II. Millions of people in the United States and elsewhere were left jobless and the scenario left a permanent memory in the history of humans for its devastating global impacts.

It is important to identify some of the reasons that led to severe economic downturn so that the chances of problem happening again can be minimized or avoided. Several reasons have been explained by different economists and historians although there are those factors which can be said to have predominantly caused the problem. Some of the major precursors to the Great Depression include the crash of the Wall Street Stock Market, debt deflation, bank failures, depressed consumer buying, and inaction by the FED, gold standards, Smoot-Hawley Tariff Act and finally the drought in the dust bowl years.

Perhaps the immediate factor that led to the Great Depression and the naming of the day of October 29th, 1929, Black Tuesday is the crash in the Wall Street Stock Market. The crash in the Wall Street Stock Market is one of the most cruel stock market crashes that have ever been witnessed in the history of the United States. Prior to the crash, there was a witnessed long period of making profits and there was plenty of money in the system. Speculations started to be made about the stock market. Most of the people regarded the stock market to be a cash cow and a lot of stocks were bought due to such speculations.

Several individuals bought the stocks due to the speculations of the gains. Before the collapse of the stock market, the stock process had skyrocketed in a steady manner and had reached the peak levels. People could even borrow money in order to buy the stocks. In the mid of this rush to accumulate as many stocks as possible, a kind of panic crossed the minds of some investors who started selling their shares at a throw away price a phenomenon in the financial world known as the bubble burst.

Following the panic, a number of bankers made a gathering to discuss about the crucial steps they could take in order to tame the growing fear among the investors. Banks made an effort to buy huge blocks of shares in order to increase the prices of stocks so that the lost investor confidence in the stock market could be recovered. Unfortunately, this great effort by the banks to solve the loss of investor confidence only acted as a temporal solution (Temin, 1976) as the stock prices continued to fall. On the October 29th, 1929 when the stock market was closed, a total of 30 billion equivalent of stocks had been wiped out in merely a week (Rothermund, 1996). This, as a result led to the famous Great Depression which spread globally from a central origin at the Wall Street.

Apart from the stock market crash, debt deflation was among the factors that led to the severe depression. Debt deflation is directly related to the crash in the stock market sales (Szostak, 2004).  Following the huge borrowing of money in order to buy the stocks before the stock market crash on the 29th October, 2009, the supply of money became most limited in circulations in the economic system which had been totally messed up.

The limited supply of money in the economic system resulted into the dry up of the loan availability for business owners. The business owners could no longer borrow money from banks that could be used to cover their costs and expand their business operations. This fact resulted into a number of companies being declared bankrupt and most of their employees being laid off. The massive laying off of employees brought about a huge increase in the rate of unemployment in a majority of economies.

The Great Depression is also suggested to have been brought about by bank failures. The immediate institutions to face the heat of debt deflation were the banking institutions.  Debt deflation led to most of the banks closing down, the bank deposits went uninsured and as the banks collapsed several people lost their money that they had saved in the shut down banks. The banks that had survived became too cautious to give new loans for business operations. The lack of loan provision to businesses aggravated the economic slap in the face as companies drastically reduced their expenditures and most of them ending up shutting down. This consequently resulted to augmenting the problem of unemployment.

Depressed consumer buying also led to the Great depression. As unemployment rate became soaring, it was a time for individuals to hold back their cash with no intention to spend it. Although some compulsory goods could be bought, some goods and services those were not very necessary for basic human survival could not be demanded for. As a result, this exacerbated the depression as business transactions and deals persisted to dry up. Business profits became very hard to be realized and the next step was to close down most businesses.

The Federal Reserve (FED) is the Central Bank of the United States. The inaction of FED is considered to be one of the factors that led to the Great Depression. FED is one of the most powerful among all central banks worldwide. After the inaction of FED, a huge blow of dust called the Great Depression resulted. FED is blamed to have lead to the Great Depression by not acting appropriately to the situation of economy going out of hand. In addition, FED is blamed of leading to the events of the Great Depression by allowing the systems money supply to shrink. The Central Bank did not even make any slightest effort to bail out the huge banks which had failed. An example of these huge banks that had terribly failed although the FED could not bail it out was the New York Bank of the United States that produced bank runs and panic among small banks and the local people.

Conceivably, the better explanation of the core reason that led to the FED not to act to limit the decline in the supply of money was the gold standard kind of regulation (Temin, 1976). Prior to the serious economic crunch, the amount of credit that was issued by the FED was often backed up by gold. In the late 1920s, a period before the beginning of the crash in the stock market, the FED had already hit its utmost permissible credit which could be supported by the gold in its ownership. Because the FED had reached the limit on the permissible credit, any reduction in the gold in its vaults that followed was to be accompanied by a big reduction in the credit.

The Smoot-Hawley Tariff Act was created in the 1930 by the government of the United States after observing that most businesses had started failing at an alarming rate. The Act is also suggested to have led to the Great Depression that left millions of people worldwide to face the harsh tune of economic crunch. The Act was primarily created to protect exclusively the American companies. As a result, the Act made the situation of depression even worse by seriously reducing foreign trade between the United States and other nations. This imposed a huge import tax which was also made it difficult for businesses to suffice their operations.

The last factor which might have lead to the Great Depression was the Drought in the Dust Bowl Years. In the 1930s, a great drought occurred in the Mississippi valley that aggravated the Great Depression situation. A lot of farmers were as a result pushed to do more cultivation in spite of the greater costs of conserving the soils. Unfortunately, these farmers ended up putting their farmlands on sale as a result of the Great Depression. They could no longer do any farming on the farmlands and their living standards grew even worse.

A lot of lessons can be learnt from the events that led to the Great Depression. People all over the world have known that it is a good thing to learn how to save when the conditions are not very pressing. Proper management of risks is crucial in any investment plan. It is not also befitting to carry heavy debts since it is the too much debt that silenced credit availability and eventually the Great Depression. In case one cannot be sure of him or herself that the debt is going to be used as a good debt or a bad debt, then it is healthier not to accumulate the debts. In the recent recession, the problem did flourish since major Central Banks all over the world came in to see that all was fixed. This action was due to the lessons learnt from the Great Depression of the 1929.