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Main Causes of the Great Depression - by Paul Alexander Gusmorino



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A short history of the Great Depression



Short video of the start of the Great Depression



The Great Depression is the period of history that followed "Black Thursday", the stock market crash of Thursday, October 24, 1929. The events in the United States triggered a world-wide depression, which led to deflation and a great increase in unemployment.

Many economists argue that the Great Depression was both caused and prolonged by government action. Richard Rahn wrote, "After the stock market crash in 1929, government revenues fell because of the drop in economic activity. The Hoover administration and the Congress increased taxes in a futile attempt to balance the budget. The tax increase only caused a further drop in economic activity, which enlarged the deficit even more. [1]

Although the initial trigger event may not have been the result of government action, many have argued that incorrect economic policies turned the stock market crash from a momentary crisis into a decade long depression. In particular two policies have been singled out by economists.

The first is the tight money policies of the Federal Reserve which restricted the money supply. The second was the recourse to protectionism with measures such as the Hawley-Smoot Tariff Act, which raised tariffs on imports in order to protect local producers who were being hurt by foreign competition. In response, many other countries also raised their tariffs, badly hurting US businesses that exported their goods. This led to a chain reaction of tariff increases which fragmented the world economy.

In the United States, Herbert Hoover was president, and he tried to do something about the situation without much luck. One of the major problems was that with deflation, the currency that you kept in your pocket could buy more goods as the prices went down. The other was that there had been no oversight in the stock market or other investments, and with the collapse, many of the stock and investment schemes were found to be either insolvent, or outright frauds. Unfortunately, many banks had invested in these schemes, and this precipitated a collapse of the banking system in 1932. With the banking system in shambles, and people holding on to whatever currency that they had, there was minimal cash available for any activities that would cause positive change.

In Germany unemployment increased drastically, fuelling widespread disillusionment and anger. Promising to fix the situation, Adolf Hitler took over the government there.

In 1933 the United States elected Franklin Delano Roosevelt to replace Hoover as president. With unemployment near twenty five percent of the workforce, he initiated a number of government programs to increase liquidity and provide jobs, which jointly are called the New Deal. Some believe that these actions helped bring the country out of the depression--though there is considerable controversy over the extent to which this is true--and provided some of the infrastructure, including roads that are still in use today.

Because the US was still in a state of depression when it entered World War II, it is hard to make a serious argument that the New Deal was a success. The reasons, however are open to debate. Some argue that the inherent instability of a market economy caused such a bad depression that even the well-chosen interventions of the New Deal could not correct it quickly. Others argue that because this longest depression in US history was also marked by the greatest degree of government intervention in US history, it is more reasonable to argue that government action worsened, rather than lessened, the severity of the depression.

It is known that Roosevelt's New Deal programs were initially struck down by the Supreme Court, so that his initial interventions in the economy were all halted. During this time the economy was on a slow improving trend. After the Court began to uphold his interventionist legislation, the economy took a sharp downward dip, which has been called a depression within a depression, from which it was only slowly recovering when the US entered WWII. Thus it is claimed that his intervention delayed the economic recovery that had been underway. This argument is supported by the fact that his programs significantly increased business costs and uncertainty about future government interventions, thus inhibiting business investment and hiring.

Many believe that it was government-induced World War II spending that restarted world-wide economic expansion, but this is at best only partly true. Germany and Italy had "recovered" prior to WWII by making massive military and infrastructure investments. The US moved to full employment during WWII through massive military investments, but also by shifting a very large percentage of the potential work force into the military. While this was necessary, it meant the US economy had not returned to natural market conditions, and when the war ended a period of readjustment was necessary when millions of soldiers returned home. One of the purposes of the G.I. Bill was to ease this transition. In countries such as France, England and the Netherlands, of course, the war caused tremendous harm, rather than being a source of economic revival. While war is always profitable to particular businesses, it causes social and economic dislocations that outweigh any stimulus effects it might have.
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Destitute pea pickers in California. 1936. Photographer: Dorothea Lange. (Library of Congress USZ62-95653.)
Destitute pea pickers
in California. 1936.




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Farmer and sons...dust storm, Cimarron County, Oklahoma. 1936.  Photographer: Arthur Rothstein. (Library of Congress LC-USZ62-11491)
Farmer and sons...dust storm,
Cimarron County, Oklahoma. 1936.


Top Web Sites of the
Great Depression, FDR
and the New Deal
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People, Events and Places
of the
Great Depression of the 1930's





Articles, Collections and Photos
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Great Depression of the 1930's




Hyper-Inflation in Germany (Library of Congress LC-USE6- D-009361)
Germany after the last war, it was possible to pay 50 million dollars for a nickel cup of coffee, and $35 million for a $35 suit of clothes. This Berlin woman, realizing that fuel costs money, is starting the morning fire with marks "not worth the paper they are printed on".




Timelines and Events of the
Great Depression of the 1930's
History


  • Note: The causes of the Great Depression are and probably always will remain in dispute. As you read the different theories on the web and in books, remember that there is still a lively debate on this important issue.
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