Introduction
As observed by Romer (2003), “the great depression took place in the late 1920s to the late 1930s and was the longest and most severe depression ever experienced in the industrialized Western world” (p 1). The world wide economic downturn that originated from the United States was characterized by massive decline in output, widespread unemployment, and acute deflation in most economies across the globe (Romer, 2003).
However, the timing and magnitude significantly varied in various regions across the world with some parts of the world such as United States being adversely affected while other regions were mildly hit. In the United States, the great depression set off in 1929 and continued until early 1933 where it was set on a road to recovery but these efforts unfortunately failed and the American economy was highly characterized by drastic falls in prices and real output (Romer, 2003).
In addition, the industrial production of the country’s economy fell by 47% while the real gross domestic product fell by 30% and the whole sale price declined by 33% resulting into deflation; further, the unemployment rate is believed to have exceeded 20% which negatively impacted on the purchasing power of the individuals consequently reducing aggregate demand (Romer, 2003).
Poverty and despair were the main features of the great depression in American region with most people being unable to access the basic needs of food, decent clothing and shelter and relying on aid from charity organizations (Burgan, 2001).
The depression was the worst to ever hit the nation and when president Franklin D. Roosevelt brought new policies and ideas to Washington, there was a link of optimism in the region but this was short lived since the depression worsened in 1938 and did not end until the country went into world war ll in 1941 (Burgan, 2001).
Factors That Led To the Great Depression
The prevailing government policies at the time highly facilitated the occurrence of depression and the failure and derailment in recovery of major economies. From 1929-1933, the American economy experienced substantial reduction in money supply from the federal reserves (Edwards, 2005).
This, coupled with subsequent bank failures served to intensify monetary contraction in the economy and destabilize the economy which precipitated the occurrence of depression (Edwards, 2005). Scholars believe that substantial decline in money supply which was attributed to Federal Reserve decisions had severe contractionary effects on overall output in the economy as well aggregate demand (Romer, 2003).
This may have significantly influenced people’s decisions to spend as there was widespread fear and uncertainties with consumers and business owners anticipating decreases in wages and prices in the future (Romer, 2003). To further worsen the situation, most states prohibited banks from diversifying their portfolios across jurisdictions which significantly promoted bank failures while in countries like Canada which allowed nationwide bank branching, incidences of bank failures during the period were not experienced (Edwards, 2005).
Bank failures led to widespread bank panics across the American economy whereby depositors lost confidence in the solvency of banks consequently withdrawing their deposits from banks (Romer, 2003). Increased withdrawals by depositors forced banks to liquidate loans in order to raise the required money which served to increase bank failure in United States (Romer, 2003).
The early 1920s was characterized by tax reductions which facilitated economic boom in the American economy during the period (Edwards, 2005). However, President Hoover signed a revenue act in 1932 which created a provision for significant tax increment in the region increasing the tax rate from 25% to 63% while President Roosevelt further increased individual and corporate taxes with the highest individual rate increasing to 79% (Edwards, 2005).
The tax increment killed the laborers’ incentives for work as well as investment and entrepreneurship consequently reducing the amount of spending which intensified the effects of depression and frustrated the efforts of recovery (Edwards, 2005). In addition, the Smoot-Hawley trade act which had been established to boost farm incomes by reducing foreign competition in agricultural production in America may have played a significant role in reducing world trade during the period of depression (Edwards, 2005).
The trade act had raised import tariffs to an average of 59% on more than twenty five thousand products which prompted other countries to retaliate by imposing increased restrictions on United States’ products consequently reducing trade such that by 1933 the overall international trade had reduced by two thirds of the level prevalent before the recession (Edwards, 2005).
However, some scholars believe that this policy had minimal significance in the occurrence of the depression but may have contributed to extreme decline in world price of raw materials which resulted in severe balance of payment problems for primary products exporting countries (Romer 2003).
Another damaging trend that may have facilitated the occurrence of the depression was the prevalent inequality in wealth distribution whereby in 1929, the richest 24000 families in the US owned 34% of all the monetary savings in the country while an approximate 21 million families lacked any savings (Burgan, 2001).
Consequently, only few Americans could afford to locally produce goods despite the fact that factories kept on producing goods which led to under consumption which further led to the weakening of the economy (Burgan, 2001).
Conclusion
The great depression caused devastating effects to major economies of the world and adversely affected international trade. Numerous measures implemented by the government proved fruitless in containing the situation and the contemporary economies should learn from this occurrence in order to avoid incidences of depression in the current dynamic economy.
Reference List
Burgan, M. (2001). The Great Depression. Minneapolis: Compass Point Books.
Edwards, C. (2005). The Government and the Great Depression. Web.
Romer, D. C. (2003). Great Depression. Web.