The Great Depression - Causes and Effects
Date Added: April 19, 2010 07:18:37 PM
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Category: Society & Culture: History

The Great depression can refer to an economic event but it can also refer to the cultural period and to the political response to the economic events. Beginning of great depression in United States is associated with stock market crash on 29th October, 1929. The depression had devastating effects.

Economists, historians & political scientists have posed several theories for the causes of Great depression with surprisingly little consensus.

Stock Market Crash:It began with the dramatic crash of stock market.  16 million shares of stock were quickly sold by panicking investors, who had lost faith in American Economy. It was not actual cause of depression, but had certainly increased the difficulty of recovery.

 

Postwar Economic Policies:Vast economic costs of WW-1 weakened the economic situation and the postwar economic policies of government stimulated the businesses.

 

Discrimination in Industries:The production of some industries was much prospered than others. For example chemical industry was earning more; coal mining had declined because of high consumption of fuel oil & electricity.

 

Fall in the prices of Agriculture:Textile manufacturing was declined. The prices of cotton &other agricultural goods were decreased due to the postwar policies. Cotton was exported to different countries.

 

Growth of automobile industries:The policy of buy -now- pay -later had increased the demand for automobiles. It raised the debt up to seven billions.

 

Credit purchases:Widespread use of home mortgages &credit purchases of furniture & other luxurious goods boosted the spending but created a huge consumer debt.

 

Monetary Contraction:Poor policy by American Federal reserve system caused to shrink the money supply by one third and continuous crisis in banking system caused people to withdraw their money back for the fear of loss.

 

Business:Excess of business was also a main cause of this depression.  Lending from banks made the people able to start new businesses.

 

Unequal income distribution:Growth in major industries raised the employment & therefore the income. There were 503 people having highest income. 60% persons had $2000 per year while 21% had income of $1000 per year.

 

High tariffs on imports:Protectionist barriers made the international trade an unsteady & uneven economic activity.

 

Continuous Investment:The continuous investment by major businessmen and saving their money with themselves reduced the money supply. This caused to limit the income in some hands.

 

Effects:

Banks and financial institutions were in great trouble due to buy-now-pay-later policy. In 1929 when banks were not unable to recover their money, they increased the interest rate. Prices were also increased. Investors had withdrawn their money. There were no cash in banks. It reduced the money supply. There were 659 banks closed in 1929 and 2294 were closed in 1931.

Debt was raised un-imaginably; wages were cut down approximately to 20%. 25% of the total work force was unemployed. GDP was fallen down about 40% in that year. Dollar was devalued but the debt remained the same. Farm prices were also shrank drastically. Many farmers lost their homes and lands, many went hungry. Families split up & migrated from their homes in search of work.