Friday, July 6, 2007

The Causes of the Great Depression

The Great Depression was a time in U.S. History of economic downturn due to the fact that stock market had crashed. This lead to everyone was being bitter due to the fact that no one had money and everyone was struggling to obtain some. But this lead to a huge problem. Nobody knew why the stock market crashed. Now that it has been more than 80 years we know what causes made the stock market crash. The Great Depression was caused by many more reasons then the stock market crashing.
Macroeconomists, including the current chairman of the U.S. Federal Reserve Bank System Ben Bernanke, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher(Wiki). These people believe that debt is one of the main factors of the Great Depression. The United Sates spent a lot of money on buying businesses and factories and they where using money that they did not have. They used these factories to produce stuff at an enormous rate and the demand was lowering but the supply was growing. This lead to inflation, causing these businesses to get less money which lead to massive lay offs of employees resulting in a 25% unemployment rate(Wiki). Banks that financed a lot of this debt failed due to massive withdrawal of money of debtors worried about their money. With banks failing no one could get money out of the bank, thus contributing to the depression.

During the Great Depression, America had a 100% gold standard which meant that all American currency was backed by a certain amount of gold. This was not good when people began to hoard all the money meaning that people began to withdraw all their money so they can have their money in convertible form. With everyone withdrawing everything they have, banks were running out of convertible money and began producing money that they did not have the gold to back up. This meant that people started using money that had no value. This it self contributed in no one having money to spend which helped contributed to the depression.


At a crucial time in its history, the U.S. made it harder for countries to trade with them. Martin Kelly, a American History expert, writes in his article “ Top Five Causes of the Great Depression“:
As businesses began failing, the government created the Hawley-Smoot Tariff in 1930 to help protect American companies. This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation.
Americans need this trade with other countries so they could be able to live easily. Without these necessities, Americans found it hard to live.
The Great Depression had many factors that lead up to its beginning. The stock market crash was not the only reason that caused the depression, it also had a lot to do with the government trying to be greedy along the people withdrawing all their money from the bank so they could have proof that they actually had some. It was also the bank’s fault for giving away money that had no gold to back it up. The Great Depression is a misunderstood time period of history and people should do research before assuming that the crash was the only cause.

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