The Great Depression

Seminar Paper 2018 7 Pages

Business economics - Economic and Social History



1. Introduction

2. Causes of the Great Depression
The Federal Reserve
American Protectionism Policy
Reduction in Purchasing Power
Stock Market Crash of
Climatic Conditions
World War

3. Why the Great Depression Lasted For So Long

4. Conclusion

Works Cited

1. Introduction

The Great Depression of 1929 was one of the most remarkable economic challenges in the United States of America that were experienced throughout the early 20th century. The effects of the Great Depression of 1929 were not felt in the United States of America alone, but also in the whole world. Before, the start of this economic crisis in 1929, economy of the United States of America had flourished increasingly to reach a stable status owing to the extensive international trade links that the U.S had established with overseas countries. Economists cite some economic problems in the economy of the U.S to be the principal causes of the Great Depression. Some of these causes include the World War I, the U.S economic policies and the operations of the Federal Reserve System. This research paper will provide a comprehensive overview of the causes of the Great Depression and explain why it lasted for so long.

2. Causes of the Great Depression

The Great Depression of 1929 caused the recession of the U.S economy for about 10 years. Some of the key factors that are believed to have contributed to the Great Depression of 1929 include the World War I, inefficiency of the Federal Reserve System and protectionism. Other factors include the 1929 stock market crash, bank failures and the reduction of the purchasing power in the global market (Weber 286).

The Federal Reserve

The Great Depression is also believed to have been caused by the U.S Federal Reserve System which was created in 1913 to act as the U.S central bank. It was bestowed with the authority to process and issue the U.S currency to all commercial banks. It was also responsible for fixing interest rates through extending loans to other financial institutions in the U.S. Operations of the Federal Reserve System faced a setback in 1928 and 1929, as a result of the Wall Street Speculation which forced it to increase interest rates to counter the financial hitch. Consequently, it reduced its money supply to the local banks and this was the principal cause of the recession.

American Protectionism Policy

Another economic issue that caused the Great Depression was the American Protectionism policy. The U.S introduced several economic reforms before the Great Depression, especially between 1910 and 1928 which influenced international trade links with Europe. The first economic reform was done in 1913 when the Underwood-Simmons Tariff was experimented (Friedman & Schwartz 409). This reform lowered tariffs; thus, causing an influx of imports from European countries. Thereafter, U.S terminated the Underwood-Simmons Tariff and replaced it with the Emergency Tariff Act in 1922. The Emergency Tariff Act was followed by the Fordney-McCumber Tariff Act which increased tariffs beyond the 1913 limits. As a result, most European countries reduced their exports to the U.S leading retardation of the U.S economy.

Moreover, the American economic policies were further modified in 1932 after the election of Franklin Roosevelt as the President of the U.S leading to increased charges over imports from foreign countries. As a result, the impacts of the Great Depression became profound in America and the whole world over.

Reduction in Purchasing Power

American economy faced a further blow after it received unfavorable treatment from its business partners in Europe. This is because its influence on the international trade decreased significantly. Its purchasing power declined considerably because the economy of the United States of America was not sustainable at all, throughout the recession period (Friedman & Schwartz 302). Moreover, the United States of America eventually lost its grip over the international trade, since its foreign business partners failed to cooperate with it over business matters. As a result, economy of the U.S experienced a slow recovery because it lacked adequate foreign exchange that was required for steady economic growth.

Stock Market Crash of 1929

This occurred at a time when it was not expected. Economic development across the European Continent had stalled owing to the impacts of the Word War 1, which was a battle between Britain and Germany in 1919. During the war period and the moments after the war, Europe produced few industrial goods for export, since international trade was adversely interrupted. Therefore, global economy relied heavily on the economy of the United States of America. In 1929, the stock market recorded a tremendous increase especially on 24th October, 1929, when stock shares worth $12.9 million were sold. This share volume was recorded to be the highest ever in the history of the U.S economy because; it was a three-fold increase above the normal share volume. Thereafter, the volume of traded shares in the stock market declined steadily for three consecutive days to record 23% decrease leading to the US Stock market crash on 29 October 1929. It was estimated that stockholders had incurred a loss of over $ 40 billion by December 1929 (Friedman & Schwartz 305). This misfortune became to be known as the ‘Black Thursday’ because it marked the beginning of economic recession that caused the global economic crisis of the 1930’s.

Climatic Conditions

Economists argue that climatic changes in the United States of America especially in the Mississippi valley exacerbated the impacts of the Great Depression. Drastic climatic changes caused a prolonged drought in 1921 and 1930 all over the Mississippi valley leading to a significant decrease in Agricultural production. Consequently, most farmers sold their farming lands at a loss to repay bank loans and this situation influenced Agricultural production leading to food shortage for domestic and export purposes. However, the adverse drought conditions are believed to have imparted little influence to the economic recession that was caused by the Great Depression on 1929.

World War I

Economy of the U.S was adversely influenced by the World War I, even though it joined the war late in 1917. After the war, France and Britain relied on bank loans from the U.S which were to be used for post-war reconstruction. However, Britain and its allies did not repay the U.S loans within the stipulated period leading to economic strains in the U.S. Moreover, the First World War exerted pressure on the European economies because it lost large sums of money and resources. For instance, the Versailles Treaty ruled out that Germany was to compensate for the war damages. It also interfered with international trade links since Britain had incurred enormous economic losses in financing military activities. This caused economic instability in Europe because Britain was regarded to as the Europe’s super power: thus, it controlled the European economy.

3. Why the Great Depression Lasted For So Long

From an economic perspective, the great depression lasted for too long, and this phenomenon was attributable to the failure of economic forces. During the great depression and even in the recession period, normal forces of demand and supply were prevented from working leading to an unprecedented economic stagnation. It is believed that, the government policies that were introduced to restore economic prosperity restricted competition (Bernanke 278). For instance, the National Industrial Recovery Act (NIRA) of 1933 created unsuitable economic conditions such as monopoly profits which were characterized by large wage increases (Ohanian par. 11).

Other reasons for the prolonged impacts of the great depression were the pulling out of the stock market by the investors who had supported the robust growth of the stock market. On the other hand, the collapse of the stock market led to the loss of wealth for thousands of Americans, especially the high class. This happening created a situation of necessity for both middle and high class people leading the disruption of economic forces (Friedman & Schwartz 407). As a result, the government focused policies that seemed to hold the economy, rather than adopting appropriate policies for facilitating economic growth, and this why the Great Depression lasted for so long.

4. Conclusion

Conclusively, the economy of the United Stated States of America recorded a drastic decline owing to the impacts of the Great Depression of 1929. However, it is believed that several economic factors primarily in the U.S economy led to the Great Depression. Some of the most significant causes include impacts of World War I, the U.S economic policies and the decreased purchasing power. Additionally, other factors such as bank failures and unfavorable climatic conditions were believed to have contributed to the Great Depression especially during the period of economic recession that followed shortly after the Great Depression. Despite the government’s effort to restore the economy, normal forces of demand and supply prevented rapid recovery from the Great Depression.

Works Cited

Bernanke, Ben. Essays on the Great Depression. Princeton: Princeton University Press.

Friedman, Milton & Schwartz, Anna. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 2008. Print.

Ohanian, Lee. Why Did the Great Depression Last So Long? HTML file. Web. 8 May 2018. <http://www.forbes.com/2009/04/30/1930s-labor-wages-business-ohanian.html>

Weber, Max. General Economic History, 12th Edition. New York: Cosimo, Inc., 2007. Print.



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Title: The Great Depression