Introduction
The great depression is considered as the worst global economic depression during the decade before the onset of the Second World War. There was a variation in the onset of the Great Depression across various countries and it started during 1929 and lasted for the entire 1930s and early 1940s in some countries (Bernanke 58).
The Great Depression was the longest, extensive and the deepest economic depression during the twentieth century. It originated in the United States, commencing with a decline in the stock prices that started during September 4, 1929, which later spread to other countries across the globe. The market crash affected all the sectors of the United States economy, which in turn spurred a decade characterized with high rates of unemployment, declining profits, a reduction in the farm profits and increasing poverty levels.
The most significant impact of the Great Depression is that it resulted to lost opportunities for steering economic growth in the United States. Despite the fact that the causes of the Great Depression are not clearly known and remains a controversy, it is arguably evident that it resulted to people losing their assurance in the United States economic future.
The most common explanations for the causation factors of the economic depression include regulatory failures in the financial markets, high levels of consumer debt, increasing wealth inequality and the declining growth in the new industries (Bernanke 60). This paper discusses the causes of the Great Depression and why the depression lasted for so long.
Causes of the Great Depression
The Great Depression was caused by a combination of various factors from both the domestic and global conditions. There is no consensus regarding the principal causation factors of the Great Depression. Current theories that attempt to explain the factors responsible for stimulating the Great Depression are widely grouped into two viewpoints. The first viewpoint bases on the macroeconomic impacts on the supply of currency, which includes the Keynesian, monetary, classical and neoclassical economics (Bernanke 65).
The second viewpoint is based on the structural theories which lay emphasis on the under consumption and economic bubbles associated with extreme investments. Most people are of the opinion that the crash of the stock market that took place during 1929 as significant factor that resulted to the Great Depression. However, economists refute the significant weight that is allocated to the stock market crash of 1929 on grounds that the crash played a significant role in causing the initial recession.
Bank failures during the 1930s also played a significant role in causing the Greatest Depression. During the 1930s, approximately 9000 banking and financial institutions failed. This is because the bank deposits were not insured, implying that people lost their savings (Bernanke 65).
This can be attributed to ill regulatory frameworks that did not deploy adequate measures to control lending. The banks that survived during the decade of depression were not sure of the economic situation and therefore laid more emphasis on ensuring their survival rather than giving loans. This further accelerated the situation resulting to reduced expenditures.
The declining purchasing power across the board is also a significant causation factor for the Great Depression. With the stock market crashing and the people fearing further economic uncertainties, people from all socio-economic classes reduced their purchasing. This played an integral role in reducing the level of production and the number of individuals in the productive labor force.
Increasing rates of unemployment meant that people could no longer pay for the assets that they had acquired on installment terms; this resulted to a repossession of the assets that increased the number of accumulated inventory (Bernanke 66). The increasing rates of unemployment in the United States resulted to less spending, which further accelerated the economic depression.
The economic policy that American signed with Europe also played an integral role in causing the Great Depression in the United States. With a decline in business profits, the United States established the Smoot-Hawley Tariff during 1930 with the principal objective protecting American firms. The tariff imposed high tax rates for imported goods, this reduced international trade between the United States and other countries that had embarked on economic retaliation against the United States.
The drought conditions in the United States also played a role in causing the Great Depression in the country. The Mississippi drought of 1930 imposed significant economic effects that resulted to a large number of people failing to pay their debts, taxes and make profits from agricultural business.
The United States monetary policies also steered the Great Depression by hindering the policy measures that could be used to contain the Great Depression and prevent further impacts.
The government was intensively committed towards the gold standard, which barred it from adopting an expansionary monetary policy. In the light of the economic down turn during 1931, there was need to adopt high interest rates to help in attracting foreign investors. The limitation was that the high interest rates played a significant role in preventing domestic borrowing for business.
Why the Greatest Depression lasted for so long
The effects imposed by the Greatest Depression made it difficult to deploy policy measures contain the problem. The cyclic impacts of the Greatest Depression are one of the possible explanations why the Great Depression lasted for over a decade. For instance, the rampant bank failures that caused the Depression compelled the surviving banks to focus on their survival amidst the economic turmoil instead of adopting banking policies to enhance lending, which was much needed address the Great Depression.
In addition, reduced purchasing due to unemployment implied that people spent less, which further helped in accelerating the Greater Depression instead of containing it. The situation was worsened by the fact that banks stopped lending and people had no money to spend, which further resulted to a reduction in the production levels and an increase in the unemployment rates (Bernanke 65). The fact that the Great Depression did not culminate from a single factor made it difficult to curtail.
The United States government did not adopt the policy measures that addressed all of the factors that combined to cause the Great Depression. For instance, the government adopted policies to increase employment but the regulation of the regulation of the banking institutions was not effectively implemented. From this view, it can be summed up that the inappropriate policies adopted by the government contributed to the Great Depression lasting for longer periods.
The policy response by the United States towards external economic conditions also contributed to the Great Depression lasting for long periods. In the light of this view, decision by France to increase its interest rates with the main objective of attracting gold to their vaults has significant impacts on the United States interest rates. From a theoretical perspective, the United States has the options of two policy responses to this situation.
The first alternative being allowing the adjustment of the exchange rate, while the second option being increasing the US interest rates with the primary goal of maintaining the gold standard. This was the case because the United States was extremely committed to the gold standard during the time of the Great Depression (Bernanke 69).
The outcome of this is that most Americans opted to exchange their United States dollars into Francs in order to acquire more assets from France; this resulted to a decline in the demand for the dollar and an increase in the exchange rate. The only option at the disposal of the United States to attain equilibrium was to raise the interest rates.
The conventional approach to the Great Depression was the gradual development and the failure of the government to adopt policies to curtail the Great Depression. The recovery was constrained when the Federal Reserve increased the bank reserve requirements and a reduction of the fiscal stimulus by the Roosevelt administration (Bernanke 70).
Conclusion
The paper has identified the causes of the Great Depression and discussed the reasons that resulted to the Great Depression lasting for long periods.
The primary causation factors that resulted to the Great Depression include the crash of the stock market during 1929 and its subsequent spread, decline in the purchasing power, banking failures, inappropriate policies by the United States and regulatory failures. The effects imposed by the Greatest Depression made it difficult to deploy policy measures contain the problem. The cyclic impacts of the Greatest Depression are one of the possible explanations why the Great Depression lasted for over a decade.
Works Cited
Bernanke, Ben. Essays on the Great Depression. Princeton: Princeton University Press, 2000.