Great Depression

Introduction

Throughout the 20’s the US economy experienced a period of consistent prosperity which in essence only served to weaken the economy. During this period, novel industries and production methods fueled prosperity. The country enjoyed a rich domestic supply of the necessary raw materials essential for the production of chemicals, steel, machinery and glass which resulted in a great supply of numerous consumer goods (Robbins 16). The stock markets grew at a phenomenal rate and many American citizens invested heavily in the financial sector and realized huge financial returns. This ended abruptly on the 29^th of October 1929 also referred to as Black Tuesday when the stock markets crashed. This led to the beginning of an arduous and prolonged period of great economic strife which led to similar trends in the social and political aspects of the greater US society. This paper seeks to discuss the causes of the Great Depression as well as offer insights into why the Great Depression lasted an entire decade.

Causes of the Great Depression

As much as the great stock market crash of 1929 is regarded to as the tipping point of the Great Depression, there are a number of reasons as to why the dire economic times lasted for such a prolonged duration (Allison, Richard and Hanes). These include:

• Continued agricultural overproduction
• Continued overproduction by the manufacturing industries
• Unequal wealth distribution
• The composition of the American businesses and the entire manufacturing industry
• A speculative stock market trend
• Incompetence of the Federal Reserve System
• A weak banking system

Agricultural overproduction

One of the most worrying truths of the US economic boom witnessed in the 20’s is that the US agricultural sector did not experience the economic prosperity. American farmers had began to overproduce agricultural produce since the onset of the First World War (Allison, Richard and Hanes). During this time, Herbert Hoover who later became the US President during the Great Depression managed the national government’s food administration department. He successfully oversaw increased agricultural in effort to support Western Allies in the First World War. After this War ended, agricultural overproduction continued buoyed by technological advances in agricultural machinery and equipment. The reliance on agricultural exports to the European continent saw the industry employ about 30% of the US population.

However, the European countries resumed partial agricultural food production though economic challenges made it difficult for the continent to pay for the food it was receiving from the US. Competition from South America and the African continent only served to oversupply the global market leading to a major plunge in commodity prices (Allison, Richard and Hanes).

The US administration under President Coolidge partook of the agricultural sector’s problems as trivialities and the measure taken by Congress failed miserably. The effect of this was that the farmers had to borrow from bank to finance agriculture (Allison, Richard and Hanes). This meant that farms and homes were set up as collateral. As the prices of their output plummeted they remained in serious debt throughout the 20’s and their loan defaults served to weaken banking institutions. Many banks failed and the 30% of Americans dependent on agriculture for income suffered greatly.

Industrial overproduction

The twenties era benefited greatly from the mechanization of industries to such a degree that from 1923 to 1929 industrial output increased by over 32%. This resulted in a trend that saw warehouses overflow with fished products (Allison, Richard and Hanes). Advertising and the film industry ensured that American consumers spent more than they earned. Through new sales strategies such as installment buying, manufacturers of electronic goods enabled many citizens to buy new electronic goods which made life easier.

This was especially the case in cities where the working population sought to improve their standards of living. However, as consumers progressively bought what they needed, manufacturing industries reached saturation point. Buying trends collapsed and warehouses filled up (Allison, Richard and Hanes). This led to layoffs prior to the infamous stock market crash. When the financial markets collapsed, more people lost their source of incomes as well as savings. Unemployment led to consumers purchasing only what was necessary for basic living, manufacturing ceased and more workers were left unemployed leading to a vicious downward spiral.

Wealth Distribution disparities

As much as the 20’s decade was a period of great American prosperity, only a handful of American citizens realized phenomenal wealth. This resulted in a trend whereby 1% of the population had a total wealth possession equal to that of more than 40% of the lower cadre populace. This 1% was determined to increase their wealth such that as the average citizen realized a wealth growth of about 10%, the 1% of wealth Americans saw their wealth grow by over 70%. The wealthy population was able to save significantly while the poor lived in spiraling debt (Allison, Richard and Hanes).

As much as employee productivity rose by about 30%, wages only increased by fewer than 10%. Prices remained constant, mass production led to lower production costs thus significantly increasing profitability. The wealthy took away all the profits, workers felt the pinch as prices began to increase and wages remain the same (Allison, Richard and Hanes). The US congress acted poorly during this period by offering the wealthy tax cuts. The average workers attempted to employ industrial action to have incomes increased which rubbed the government the wrong way. The 20’s saw the wealthy invest a lot in the American economy but after the financial markets crash, all such investments ground to a halt and they opted to save.

The composition of the American businesses

The American industries and businesses were weakly regulated by the federal government. This led to a surge in the number of holding companies. These organizations dictated industrial operations and managed industry leaders without contributing to the production process (Allison, Richard and Hanes). Holding companies bought out operating companies by selling bonds and company stocks to the general public. The profits from these companies enabled the holding pay dividends and when the stock markets collapsed public investments were devastated allowing for the public to understand the real motives of the holding companies.

Stock market speculations

Speculators during the 20’s duped investors to think they could always profit from selling stock. In the mid 20’s, it is estimated that only 2% of the population could afford to invest in stocks. Towards the end of this decade, any citizen with a sizeable income had learnt of the successes of the 2% (Allison, Richard and Hanes). They perceived this as a convenient, quick and easy means to create new wealth. Companies hid real financial positions from the public which evolved to a stock buying trend referred to as buying on margin.

This trend enabled investors use a percentage of personal incomes and borrowing the rest to purchase stocks. As the stock markets made significant progress, investors realized sizeable profit margins. Demand pushed stock prices higher to a point they surpassed actual stock valuation (Allison, Richard and Hanes). When the stock market collapsed, investors remained in debt such that the once wealthy investors were unable to meet daily needs.

Timid Federal Reserve System

In 1913, the federal government instituted the Federal Reserve as America’s Central banking institution (Allison, Richard and Hanes). The Federal Reserve System could have cushioned investors from the stock market crash but the bullish market proved otherwise. When called upon to raise interest rates to manage bank lending trends so as to reduce stock speculation, the FSR played soft allowing for a bullish stock market. When the market collapsed, borrowers could not repay brokers. These brokers could not repay banks leading to a collapse of the banking industry (Allison, Richard and Hanes).

Weak banking system

During the 20’s the US banking industry so a rise in the number of commercial banks as a result of weak banking regulations (Allison, Richard and Hanes). The agricultural sector had played a great role in the formation of new banks but after the sector suffered setbacks, these banks collapsed.  Surviving banks sought to attract customers by offering high interest rates and to be able to pay such, they made accessing loans easy on the presumption this trend would continue to the foreseeable future. The different causes of the Great depression merged on Black Tuesday resulting to the beginning of the decade that was the Great Depression.

Reasons as to why the Great Depression lasted for so long

According to Sullivan, the Great Depression dragged on for approximately fifteen years. After the onset of the Great Depression, the US citizens sought for a political solution towards ending the economic downturn (Ohanian). As a result, Franklin D. Roosevelt was elected into the highest office in the land. He instituted the New Deal policy programs aimed at reversing the negative attributes of a depressed economy. Roosevelt endorsed this program on the basic precinct that market competition had led to this economic down turn. By passing the National Industrial Recovery Act (NIRA), the government agreed to an unconstitutional arrangement allowing collusion which narrowed industrial expansion and created floors (Ohanian). Industries were turned into monopolistic entities which could therefore raise staff wages as a result of defined profits. Prices and wages increased significantly as a result but as time progressed, commodity prices surpassed wages leading a prolonged time of economic depression.

After about two years, the NIRA was declared unconstitutional by the US Supreme Court. This led to the passing of a law referred to as the National Labor Relations Act (Ohanian). This Act carried forwards policies contained in the NIRA. This enabled labor unions to bargain for workers’ wages to be increased which only offered a short period of stability (Ohanian). The Great Depression thus only began to subside as the policies on the NIRA and the NLA began to progressively change. This saw a return of the free market economy which slowly but surely led to the rise of the US as a superpower.

Conclusion

The Great Depression will remain as the most significant economic challenge faced by the country over its nearly 400 year history. The wealthy remained or got wealthier at the expense of the average American citizens who bore the brunt of the depression. The political administration failed to come to the aid of the American people which led to a prolonged duration of the depression. When the political administration realized that this only served to kill the American economy, the free market was reinstated brining about an end to an avoidable period of great human suffering.

Works Cited

“Causes of the Great Depression.” Great Depression and the New Deal Reference Library. Ed. Allison McNeill, Richard C. Hanes, and Sharon M. Hanes. Vol. 1: Almanac. Detroit: UXL, 2003. 1-20. U.S. History in Context. Web. 3 Dec. 2014. < http://ic.galegroup.com/ic/uhic/ReferenceDetailsPage/ReferenceDetailsWindow?displayGroupName=Reference&zid=6d3bef0712b41d824dc3a746da70ef24&action=2&catId=&documentId=GALE|CX3425600011&userGroupName=mlin_c_montytech&jsid=c9674adb2ee4f7742f7c0575588b0c0d >.

Ohanian, E. Lee.  “Why Did the Great Depression Last So Long?” Forbes. 5 Jan. 2009. Web. 3 Dec. 2014. < http://www.forbes.com/2009/04/30/1930s-labor-wages-business-ohanian.html>

Robbins, Lionel. The Great Depression. Piscataway, New Jersey: Transaction Publishers, 2011. Print.