The Cause, Effect and Aftermath of the Great Depression

Topics: Great Depression, Wall Street Crash of 1929, Business cycle Pages: 5 (1964 words) Published: July 23, 2011
The Great Depression in the United States brought an end to a long era of economic expansion and social progress which had been in full bloom since the 1890s (Mitchell 1947). There had been monetary recessions in 1907, 1913 and 1921, but these reversals were never severe enough or long enough to shake the deeply rooted confidence in the American economic system or to generate any widespread national discontent. Many history books tell of the depression of the '30s; they often begin with the stock market crash of October 1929 (Estey 1950). Among economists, a tendency to decry the importance of the crash as a cause of the depression: "The crash was part of the froth, rather than the substance of the situation" (Shannon 1960). The fundamental difficulty was America's failure to readjust to the developments arising from World War I, which culminated in the depression of 1929. One cannot overlook the profound importance of the Wall Street crash. It shrank the supply of investment funds and at the same time shook the confidence on which investment expenditures depend (Hacker and Zahler 1952). Personal expenditures were reduced and international trade and capital flows were disrupted. There were many complicated forces that combined to cause the depression. To clearly understand the circumstances preceding the depression, these influences must be explained. In the first place, there was the familiar business cycle recession (Galbraith 1954). For industry, the 1920s had been marked by prolonged prosperity. This was particularly notable in the field of construction and other capital production. During this period, there was an unusually large expansion of credit because of easy-credit policies which resulted in increased profits (Soule 1947). As often happens following a period of prosperity, cumulative strains brought about a downturn in the economy. The production of the nation exceeded its capacity to consume. Since there were no restrictions by the Federal Reserve Board, too much credit was used for speculation on the market (Soule 1947). In the second place, the economies of many countries were still suffering from dislocations caused by World War I. Although the world had begun to resume its normal progress, the international economy remained unstable. After receiving help with its trade deficits, war debts, and reparation obligations, Western Europe became financially dependent on the United States (Hacker and Zahler 1952). During World War I, all belligerent countries went off the gold standard and experienced various degrees of inflation. The postwar years brought periods of deflation and devaluation, causing hardship to the business communities and resulting in the redistribution of national incomes (Wector 1948). Different valuations were placed on currency as the gold standard was reestablished in different countries. This created inequalities in import and export relations, compounding the problems afflicting business (Link 1955). While gold began to stockpile in some countries, it was almost completely depleted in others. At the end of the decade, France and the United States had the major share of the world's gold. This unusual distribution caused falling prices in other countries and produced a chronic economic depression (Nevins and Commager 1956). These factors, precipitated by the war, weakened the economic stability of the world and made it difficult to restore prosperity. Another factor stimulated by increased war production was technological improvement. These improvements made necessary the shifting of resources, both capital and labor (Wright 1949). The speed of these advances outran industry's capacity for normal absorption. There was difficulty in re-employing workers displaced by new technology. Agriculture was hardest hit by technological change. Mechanization and other improvements made additional cultivation possible in all kinds of soils and climates. The depletion of agricultural staples caused by...
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