American History

The global economy was plunged into severe economic disaster during the period of the Great Depression. Economist and financial experts have been arguing about the main causes of the worst economic catastrophe in history of humanity but it seems there is not any single theory which can conclusively justify the cause.  

Symptoms of the great economic depression were noticed around 1929 and lasted throughout the decade preceding the World War II.  Most economies stagnated while others completely crumbled. Unemployment in the United States surged to record levels of 25 while some countries even registered unemployment rates of up to 33. The crunch eased in the mid 1930s but unemployment still remained in the double digits levels. It declined from 17.6 in 1932 to 12-13 in 1935 (Kindleberger, 1986, p 240). Industries like construction literary came to a halt and did not recover until later after the World War II. Export industries were severely affected especially through the rising unemployment (Kindleberger, 1986, p 36). Economic scholars and experts have for long disagreed on the root causes of the great depression. Some have described the theories coined to explain the cause of great depression as biased and not objective. They argued that a number of economic upheavals had been recorded before but were ignored due to the impact the great depression had on almost all economies across the world. For the critics the symptoms already existed prior to the depression. Countries experienced drastic fall of their national incomes, financial institutions collapsed, industries were closed and economic activities were grounded. This paper will try to examine the causes and origin of the depression as well as determine why it lasted that long.

Causes of the Great Depression
The interdependence of nations financial markets, the monetary system and trade policies of different countries were some of the factors which triggered the Great Depression. United States and European countries were the dominant players of the global economy at that time and their economic policies directly influenced the shape of the Great Depression. President Hoover in 1930 acknowledged that some of the causes of the crisis may have originated from the United States. According to him the cause of the depression was not limited to a single country rather it emanated from all major economic blocs. They chiefly included the overproduction in rubber, coffee, sugar, wheat, zinc and silver (Kindleberger, 1986, p 70). These problems covered the entire finance, manufacturing and agricultural sectors.

Similarly the First World War brought along numerous economic problems that laid the foundation of the Great Depression crisis. Export sectors of European economies which were vital were completely shattered by the war. There was a decrease in demand for raw materials in Europe which in turn led to a decline in the manufacturing sector. Agriculture which employed the largest number of population was collapsing and Europe was forced to import food from the United States. United States benefited a lot through the importations as almost 25 of its employed workforce was in the agricultural sector (Kindleberger, 1986, p 73). This export gain was later to be wiped out through the imposition of tariffs by other countries in retaliation to the US protectionist measures during the depression.
On the other hand United States financed the war in Europe. It later on continued to issue loans towards the continents rebuilding. Germany was the largest recipient of the loans from the US.  Competition among banks to lend increased exposing them to financial risks. It was done in an unchecked manner that overlooked rules somehow contributed to the collapse of most banks during the depression. Creditor confidence was falling in the US over the accumulation of debt to Europe. Additionally, production incomes and prices declined in the run up to October 1929. Speculators kept revising their expectations on the stock market and finally anxiety and panic took centre stage leading to the stock market crash of 1929. Canadian stocks had risen and fallen later compared to their counterparts in New York. European stocks had fallen much earlier compared to those of North American. The Dow Jones industrial average went up from 191 in early 1928 to a high of 300 point in the year. Traders earned huge profits from the   orgy of speculation in the market at that time (Kindleberger, 1986, p 96). The crash was followed by the collapse of banks and constrained the liquidity in the economy.  This was preceded by deficits and surpluses, exchange rates depreciation and liquidity crises (Kindleberger, 1986, p 70). It was perceived as the start of economic freefall period which ushered the era of economic depression.

Origin of the Depression
The great depression was as a result of the failure of both monetary and financial policies of various countries in Europe and the US. Some economists advocated theories which tied the depression to a single cause or origin. As much as it may make sense, its not likely to give sufficient explanation on the true origin of the depression. Its a grievous mistake to regard the origin of the depression as a single phenomenon originating from mistakes done by the US monetary system (Kindleberger, 1986, p xiv). That has not however discouraged the scholars from coming up with the subjective findings of the depression. A host of explanations that rely mainly on a single cause or origin have come up (Kindleberger, 1986, p 4). Different European scholars have long held the view that the depression started in the US while some American scholars reject the assumption and point its origin in Europe. Monetarists like Milton Friedman believe the great depression was not a historical accident (Kindleberger, 1986, p 3t). All indicators, symptoms and factors according to them point to the United States.

They find the origin from the united states rather than Europe in monetary rather than real factors in policy rather than in institutions or in the tasks that is required of them in national economy rather than in the operations of the international economic system (Kindleberger, 1986, p 3 United States in that respect is thought to be the origin of the crisis owing to the collapse of the US stock market in 1929. Furthermore the  refusal of the US to write off world war I debts, the countrys lending policies of 1927 and 1928 and the failure to properly operate the gold standards which led to the fall of interest rates contributed big to the start of the great depression( Kindleberger, 1986, p 4).

However other leaders like President Hoover had differed with that notion and he particularly insisted throughout his career and in his memoirs that the origin of the depression was in Europe( Kindleberger, 1986, p 4.) According to him, Europe was unable to overcome the effects of the First World War and those of the financial crisis of 1931. Similarly the fact that European banks were distressed long before the American banks felt the effects casted doubt on the belief that the sole origin of the great depression was in the United States.

Time it lasted
Great depression lasted for almost a decade. There was a limited period of economic recovery when the crisis started.  During that time a number of factors contributed to the sustenance of the depression. Some of them included political, economical and monetary factors. Continued ailment of world economies was as a result of declining commodity prices (Kindleberger, 1986, p 136). This was economically disastrous especially for farmers and the industries that relied on exports.

During the recession interest rates spiraled high though not as the previous recessions and circulation of money decreased significantly. Despite the severity of the situation the Federal Reserve did not pursue a monetary expansion strategy which would have eased the liquidity problems in the markets as well as lowering the interest rates. Failure by the Federal Reserve to inject funds into the banks did not instill confidence to anxious depositors who had little confidence in the seemingly collapsing banking industry. Banks as result were starved of deposits from customers which led to failure of many banks and investments stagnated due to insufficient funds.

The fall of personal incomes in the US contributed to the continued excercebation of the depression. Most people at that time were not covered by social welfare programs which grossly affected their real incomes. As a result demand for goods and consumption in the market and economy decreased. Output from the industrial sector was falling as well because of the weak demand and more workers were laid off. This triggered unemployment to record highs further fueling the continuation of the depression. Furthermore President Hoover pursued protectionist measures by imposing import duties on other nations goods. The retaliation from the affected nations led to the decrease of American trade volume, which was not healthy to the US economy. The US and Europe greatly depended on exports to sustain their economies. The declining personal incomes especially in the United States meant low demand for the goods from the European countries. UK and France later in 1932 felt the effects of declining exports effectively helping their economies to remain in recession for a long time.

Credit flow from the United States to Europe especially to Germany was drastically cut. The weak economy which was reeling from the effects of years of war acted as a catalyst to the sustenance of the recession. Germany at the time was also paying reparations of World War I and the diminishing American credit meant it had to borrow from the UK and France though the amounts did not cover the gap they got from the US. Getting out of the depression was therefore going to take sometime. Poor economic policies adopted by Germany to gain lenders confidence led to devaluation of its currency hence increasing its amount of foreign debt.  
                                                     
Conclusion
The US Economy was seen as the main factor behind the great depression. It may have been possible due to the monetary and trade decisions made by the US economy managers which triggered the crisis. However on the other hand, Europe was emerging from war and the aftermath negatively affected their economies. This shows that both the US and Europe may have been the epicenters of the crisis.