The Great Depression, which started in the late 1920s, was experienced in the entire 1930s, making it the longest economic crisis in the American history. In the 1920s after the World War 1, American economy experienced a boom following the rapid development of various sectors. The market growth in both the local and international set up encouraged organizations and farmers to increase production. The employment was largely high, which implied that the income level in the economy was favorable. The banking sector gained momentum due to the increased number of people and organizations they served. After a decade of boom, the economy went into the great depression starting in 1929, when the New York stock exchange collapsed. Although there are other underlying issues, the failure of the stock exchange is considered as the event the started the great depression.
Causes of Great Depression
The first factor that is likely to have led to the great depression is the lack of the national economic plan and monitoring from the government. The Republican administration, which governed the country under presidents Warren Harding, Calvin Coolidge, and Herbert Hoover, lasted from 1921 to 1933. During the Republican administration, the economic policy utilized laissez-faire approach. Under this program, the government intervention was relatively low, implying that no control measures were in place to keep the economic trends at the preferred levels. According to Laffer and Skousen (2013), the government did not attempt to control trading in stock and bonds, while the banking sector, manufacturing, and agricultural productions were not controlled. The government did not collect and analyze statistics to point out the increasing problems in the key sectors of the economy. Therefore, inadequate interventions by the government are one of the main causes of the great depression. In this aspect, the economy continuously accumulated issues that were not addressed (Robbins 30). In fact, the government failure to play a role as a regulator and controller of the economy is one of the primary factors behind the Great Depression.
The agricultural woes are the other factors behind the economic crisis. During the World War I, there was a large increase in agricultural production as the farmers eyed the growth in the European food market. Europe had faced significant destruction during the war with agriculture segment being one of the largely affected sectors. The availability of the marker encouraged farmers in America to invest heavily in food and other agricultural production. By the end of the war, economies in Europe embarked on reconstruction with the agriculture being one of the priority areas. In a few years after the war, the European economies had improved the agricultural output, leading to the decreased demand for agricultural products from America. By this time, the output of the American agricultural sector had grown to massive surplus. The end of the ready market in Europe and the growth in competition from South American states, particularly Argentina affected the agricultural sector in America. Indeed, the absence of a ready market and overproduction led to the drastic fall in prices for the products, a situation that reduced the income of the farmers (Tauger 112). Individuals who had borrowed to invest heavily in the agricultural sector had the no time to repay the loans, while others could no longer afford even the seed for planting. Farmers were frustrated and many had to stop working or reduced the scale of production. The eventual outcome, in this case, was the increase in unemployment and the local consumption of consumer goods because agriculture employed a large number of the American.
Manufacturing and overproduction are other factors considered to have contributed to economic depression. The boom after the World War 1 had a large number of Americans in employment; hence, the purchasing power had grown significantly. The progress in demand from the local market encouraged companies to invest in machines and equipment to ease production and increase the output level. The outcome of the efforts was the production of consumer products more than the local demand. The trading companies and retail outlets were supplied to the excess, and the warehouses and stores were filled beyond the recommended levels. Traders and retail outlets could no longer hold more stock, and they stopped ordering goods from the manufacturers. After manufacturers had accumulated huge volumes of stock, it was hard for them to continue producing more. As a result, a large number of the people employed in the factories were laid off (Walton and Hugh 429). The unemployment created implied that the purchasing power in the economy declined, goods overstayed in shelves, and stores, leading to spiral downwards of the economy.
The boom in the manufacturing sector and high employment in the economy led to the growth in the disposable income. In the bid to accumulate more income in the future, a large number of the employed Americans started investing in shares offered in the stock exchange. The buying and selling of shares became popular because many people secured employment in this setup. However, it became a norm to buy and sell shares due to the growth in income surplus. In addition, large numbers of people would access bank loans and invest in shares hoping to repay the loans from the employment income and earnings from the investment. As stock prices were steadily rising in the early and mid-1920s, the stockbrokers borrowed a huge amount of loans to purchase more shares. The trend, in this case, did not last for long. Trading in the stock market declined, leading to a situation where those holding stocks had no willing buyer. Due to the panic and speculation that the prices would decline drastically, many of the brokers floated the shares in the market. The increased supply at the decline in demand led to the crash in the stock market in 1929 (Walton and Hugh 429). In addition, the failure in the manufacturing sectors and the high unemployment rate reduced the amount of disposal income and people embarked on purchasing of the consumer goods.
The banks that had offered loans to brokers would not receive the payment making it hard to continue operating. The problem intensified and the banking sector started experiencing operational challenges due to the failure in the manufacturing and agriculture sectors where borrowers were struggling to repay the loans. The failure in the agriculture sector, manufacturing, and the stock exchanges brought panic in the banking sector, a situation that made depositors withdraw their bank balances in their accounts (Walton and Hugh 429). Eventually, many of the banks could not meet the depositors’ demand because the repayment rate from the borrowers was slow. Many of the banks were forced to close down and stopped their operations.
Why did the Great Depression Persisted
It is evident that many factors caused the great depression. The other concern is the reason it took sometime before the recovery of the economy. The government expenditure and tax policy, the National Labor Relations Act, and lack of confidence in the economy were the primary factors behind the prolonged great depression. In the attempt to revive the economy, the government embarked on increasing its spending to facilitate the amount of money in supply. In addition, it introduced the tax cuts to increase the amount of disposable income and encourage investment (Walton and Hugh 439). The disadvantage of government spending to recover the economy is that the government increases consumptions but does not participate in the production. The increased demand and low growth in output led to the rise in the inflation rate affecting economic growth and development. The tax cut policy applied by the government was for the wealthy and encouraged them to invest in productive activities in the economy instead of holding resources in unproductive forms (Walton and Hugh 435). In this aspect, the tax cut in led to a situation where the country’s economic wealth was concentrated in just a few individuals, while the majority remained poor.
The National Labor Relations Act, enacted in 1935 aimed at assisting in reducing the exploitation of the employees by the employers. The workers were allowed to form and join labor unions to fight for their rights and seek better employment terms. The formation of the trade unions in such a delicate economic led to the prolonged economic crisis in two ways. First, many of the unions called for industrial actions against the employers leading to disruption in the production of goods and delivery of services (Strecker 12). The economic output was adversely affected. Secondly, the labor unions led to the dramatic rise in the wage levels, leading to the growth in the cost of production and eventually the reduced profitability of the organizations.
Lastly, low level of confidence among the people in the economy was also a key factor for the prolonged great depression. Despite the fact that the economy had started improving, many of the people affected during the recession period took longer to regain the confidence. People had no trust in investment and the security markets. The support to the stock exchange and the banking sector remained relatively low for long making it hard to drive the economy into a recovery.