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Causes of the Great Depression

The topic concerning the causes of the Great Depression, still today is a matter of hot debate. The Great Depression is the enormous economic downturn, which began in 1929 and lasted for a decade. The industrialized Europe and North America were the main victims but the whole world was traumatized by this economic doom.

The hunt for the causes of the Great Depression is related to the thought of dodging any future depression. So politics and policies are fused in the analysis of the historic episode of the Great Depression. This long-term debate is now bifurcated in two directions,

  • The orthodox classical liberal, monetarist, Keynesian and Neoclassical theory focusing on the macroeconomic effect of money supply and
  • The Structural theories of Institutional economics pointing towards under -consumption and over-investment, popularly called the ‘economic bubble’.

The consequences of the Great depression were a long-term chronicle of economic statistics. There is no one cause you could pinpoint, several causes merges in the quest for the roots of the causes of the Great Depression. Some important causes are:

The Stock Market Crash Of 1929

The Wall Street crash in 1929 triggered off the initial depression. The attitude transformed completely winding towards negativism in the fields of investments and enterprising. There was a brief recovery in 1930 but after that steady downfall made it the greatest market decline of the decade.

The Problem Of Debts

There was a rise in consumer debts during the 1920s gearing up consumer spending. People were deeply in debt and when a price deflation occurred they were in serious problem. Income and prices fell by 20-25% but debts remained in the same dollar amount. As the debtors choke the consumer creating pressure on them, the consumer spending fell. In the face of unpromising profit, investment scenario weakened and banks became more conservative in the wake of bad future prospects. Building up of reserves speeded up the depression.

Decline In Trade Stats And Its Effect

Sharp decline in international trade after 1930 worsened the situation. According to some economists the growing economic intervention made the market inept to deal with sudden changes. Britain encouraged trade within the empire and Germany followed Economic Autarky.

Many historians and economists also blame the Smoot Hawley Tariff Act of 1932 for aggravating the depression by trimming down international trade. American exports declined from US $5.2 billion in 1929 to US $1.7 billion in 1933. This theory points on the crumpling of farm exports leading to default on loan payments as the cause of bankruptcy of small banks. This situation had a long-term effect as the cause of the Great Depression.

The Blunder Of Federal Reserve Policy And The Effect  

Monetarist Milton Friedman and Ben Bernanke focus on the negative effect of the Federal Reserve System. The policy contracted money supply by 1/3 from 1930 to 1931. With less money in the economy, the businessmen couldn’t get loans and even faced problems to renew their old loans. At the end of 1930 the economy faced series of bank failures leading to recurrent liquidity crisis.

Capitalism As The Cause Of The Great Depression

The radical left viewed the Great depression as the ensuing end of Capitalism. The belief in the innate instability of free market was in vogue. But free market at time of President Hoover was not exactly free. So, according to scholars if free market is a cause it caused the Great Depression when it was weakest.

Business As The Cause

Roosevelt and The New Dealers accused excess of large businesses as the root cause of the Great Depression. The New Dealers planned to empower labor unions and poor people and to curb the power of big businesses by raising corporate profit tax. They instituted economic regulations. New dealers busted many large corporate houses thus weakening the economy and perpetuated the Great Depression.

The Paradox Of Thrift

British historian Keynes has coined the term “paradox of thrift” to describe the cause of the Great Depression. This refers to the cut on the spend amount to save more. After the Stock Market Crash in 1929 less spending saturated the market, which is the cause of price deflation leading to the Great Depression. Investment spending lessened and workers were lain off. A dangerous cycle was put into motion. The overall lower expenses reduced income level, which experienced lower savings too during the Great Depression. This is the Paradox of Thrift and the Keynesians requested the Government to restore economy by increasing government spending.

The Historical Causes And Their Consequences

After World War I the war reparations played a vital role in the economy. Though the allies were affected but Germany bore the main burden. This is an immediate cause of the Great Depression in Europe.

The Great Depression is remembered as the biggest depression of world economy and a survey into the probable causes is designated to save the globe from another economic doom. According to some scholars after World War I the decision of Britain to revert to the pre WWI Gold Standard is one of the causes of the Great Depression.