Developments Of The Modern Day Depression Essay, Research Paper

OUTLINE THE MOST IMPORTANT CAUSES OF THE GREAT DEPRESSION. PROVIDE APPROPRIATE EVIDENCE TO ILLUSTRATE THE SCALE OF THE GREAT DEPRESSION IN ADVANCED NATIONS

The Great Depression was the largest economical disaster ever to have happened. Unlike World War One, fifteen years earlier, the great depression had an astronomical effect world wide. The economist Hobsbawm (1995) describes the depression as the world s largest earthquake in economical terms. Indeed the effect of this global economical demise was immense. There are numerous reasons that led to and caused the Great Depression, but undoubtedly the biggest contributor of the slump came in 1929 when the American stock market crashed. The Wall Street Crash of 1929 sent shock waves through all the economies of industrialised nations, and plunged the Capitalist system into the worst economic slump in history. This essay will attempt to consider the effect of the Wall Street Crash in causing the Great Depression, but also consider other causes such as the massive unequal distribution in income that existed and the lasting effects of the war in the form of debts owed to the US.

To understand the sheer consequence of the Great Depression we can consider a normal economy. Most economies experience a Boom and Bust cycle, where economies fluctuate between times of prosperity and times of recession. The economist Maynard Keynes believed these cycles would occur roughly every seven years (1). However, the Great Depression was more than a normal recession and nearly saw the end of the Capitalist system, as we know it. None of the capitalist economies had predicted it, and none of their businessmen were prepared for it. Karl Marx had believed that these cycles were a pattern leading to the ultimate destruction of Capitalism. It was infact a Russian economist, N.D.Kondratiev who predicted a large economic downturn, by looking at economies over a larger time scale or Wave (A). However the capitalist economists dismissed his claims.

On the 28th of October 1929, a day now known as Black Tuesday, the American stock market collapsed

A) N.A.Kondratiev had studied economic cycles over larger periods of time. He measured cycles over fifty and sixty years, and predicted a downturn in the economy. However, with many sceptics, and an incapability to explain the waves, his prediction was ignored.

The collapse had initially been caused by mass speculation on the stock market. When this happens, it causes share prices to rise in times of confidence and prosperity, and fall during slumps and lack of confidence in the market. Between 1928 and September 1929, the Dow Jones rose at a staggering rate from 191 to 381 (2). This meant that any investors with shares in the market were making very large amounts of profits. This profit incentive was too large for many companies, and this caused company profits to be ignored. At the time they seemed to be unimportant, especially when huge profits were being made from constant rising share prices. To make the situation worse, investors could borrow money of brokers, pay back what they borrowed and still make huge profits. However, the confidence in the market was short lived. In late October, prices began to fall sharply, and investors reacted by selling their shares. This simply sped up the collapse of the market. By the end of trading on Monday 27th of October the share prices had fallen an astronomical 13% (3). On the 28th of October, the situation had got so bad, sixteen and a half million shares changed hands (4). The price of shares plummeted, and more shares changed hands. The price of shares fell by such a substantial amount that there were no buyers at any given price level. Billions of dollars worth of shares became nothing more than bits of paper. In one day, the US market which had flourished, although artificially (b), during the 1920s collapsed into economic frailty. The repercussions of this crash were devastating.

In the US alone, millions of jobs were lost and thousands of businesses were declared bankrupt. The problem was simple. During the so called prosperity in the 1920s, millions of people bought cars and other such luxury goods on credit. However, the large firms had lost millions of dollars, and hence any thing bought on credit was ordered back to the factories. This meant that factories were filling up with goods an inventory they had no chance of selling. The wealthy didn t want to purchase them and the middle classes and lower classes couldn t afford to purchase them without credit.

b) The American economy flourished during the 1920s. However, it was really quite frail. It relied on two industries: automobile and radio. It also relied on European trade. However, all European purchases were made with money being borrowed from the US. If the lent money was not returned, the US would have struggled

2) Robert,S,McElvaine,(1981) The Great Depression: America1929-1941 New York Times Books

3) McElvaine 44

4)Hicks,J. (1960)Republican Ascendancy Harper and Row

Within a matter of months production had grinded to a halt. Between October and December, industrial production had fell by a staggering 9% (5). By 1930, unemployment had risen to five million, and it continued to rise until 1932, where unemployment peaked at thirteen million (6). However, the devastation did not stop in America. The Wall Street Crash sent shock waves across the world, effecting all economies world wide. Europe was still recovering from the after effects of World War One. It had suffered periods of high inflation and high unemployment. During the late twenties, however, the European nations, made a small recovery. Again this recovery was artificial. The European nations such as Germany, Britain and France were only able to do this through borrowing from the US. If it was not for the loans from America, the European nations would have struggled to recover. By 1920, after the war the US had lent the European nations a total of 10.3 billion dollars and another 2.15 billion after the Dawes Plan in 1924 (7). Infact an amazing ninety per cent of that which was borrowed was then used to buy US goods. The US relied heavily on foreign trade, and it made up a vast sum of its total income. To make the situation worse the US increased the tariffs on imported goods, to protect domestic businesses. In 1930 they introduced the Hawley-Smoot Tariff, which was the highest ever level of tariff. This basically meant European goods could not be sold in large enough quantities to help them survive. As well as the increased tariffs, America called upon all of their loans to be returned. This single move devastated Europe again. They could not afford to pay back the loans without putting their economies into turmoil. This in turn, meant these countries could no longer afford American goods and within months, the US lost one and a half billion dollars of their usual income. This in effect was equivalent to losing one eighth of their total income. Of course, the same pattern happened across the world. Trading between countries ceased, production levels and income levels fell, jobs were lost, business went bankrupt and the standard of living fell in every country effected. Indeed, the great depression had hit the entire world, causing the international market to deteriorate into nothing.

However, the Great Depression was not simply caused by the Wall Street Crash. There was another major cause, which originated in the US. This was the massive unequal distribution of income.

5) McElavaine 47

6) Hobsbawn,F (1995) Age of Extremes- The short twentieth Century London Abcus

7) Hobsbawn,F (1995) Age of Extremes- The short twentieth Century London Abcus

By 1929, 0.1% of the wealthiest businessmen, had the level of income as the bottom 42%, a quite staggering statistic (8). The same 0.1% controlled 34% of all of Americas savings, while some 80% of Americans had no savings at all (9). For instance, leading businessmen in Americas most prosperous industries, such as automotive and radio, earned millions of dollars per annum (Henry Ford earned 14 million dollars in 1929 (10)), whilst the national average was a mere seven hundred and fifty dollars per annum. At the same time, production was increasing, productivity increased, but there were minimal increases in wages for the workers. Between 1923 and 1929, average output per worker increased by 32%, but they saw a mere 8% increase in wages (11). This simply meant that company profit increased, and businessmen and shareholders increased their salaries. Infact, corporate profits had risen by 65% (12). The problem of unequal distribution in a nation causes many problems. Firstly, it causes oversupply. This is what happened in America, with companies building up huge inventories. Unequal distribution in an economy causes an unstable economy. In a model economy distribution of income should be equal so that demand can equal supply. However, in the US this was not the case. The workers started to stop purchasing goods, which led to over supply. This in turn eventually developed lack of confidence in the economy, as it spiralled towards the Wall Street Crash of 1929.

In this essay we have seen the major causes of the Great Depression. Undoubtedly, the Wall Street Crash sparked off the slump in 1929. When the American economy collapsed it sent shock waves world wide, and almost marked the demise of Capitalism. Indeed, this was the closest the world has ever come to a complete system failure. However, the Wall Street Crash was sparked off by lack of confidence in the American Stock Market. Growing oversupply as a result of consumers lack of purchasing caused this. The massive unequal distribution of income can account for the demise in spending. However, the Great Depression was so devastating to the industrialised nations, because of their dependency on America. These countries especially Europe depended on America for both trade and borrowing money. Hence, when the American market collapsed so did most of the economy world wide and plunged the world in to the worst slump ever.

8) McElvaine 48

9) McElvaine 48

10) McElvaine 48

11) McElvaine 48

12) McElvaine 48

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 Dee,M. (1998) Quote Unquote The Harvard Referencing System Published Material LMU

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 Glynn,S. and Oxborrow,J. (1976) Inter War Britain A Social and Economic History London, GeorgeAllen and Unwin

 Gusmorino,P. (1996) Main Causes of the Great Depression [Internet] Available from: http://www.escape.com [Acessed March 25th 2000]

 Hobsbawn,F (1995) Age of Extremes The Short Twentieth Century London, Abcus