The Great Depression occurred in the 1930s leading to economic recess IN many countries across the world. Countries such as the United States, Germany, and Japan among others experienced the depression. However, the timing, severity, and causes of the depression varied from one country to the other. In the United States, the Great Depression began in 1929 and ended in 1939. The depression was caused by various domestic and foreign factors which resulted in social, political and economic unrest.
Industrial production in the United States reached its peak in mid-1929 but started declining immediately after that following the implementation of the Federal Reserve policy. The policy was established by the Congress to ensure maximum employment, stable prices and moderated long-term interest rates. However, the policy failed to strengthen the economy because banks increased their borrowing in the discount window period. The borrowing was a result of the increased demand for loans among the Americans. Majority of the population borrowed to invest in the stock market which at the time was unregulated. This led to an increase in the interest rates which affected the industries. The industries could not borrow from the banks due to the high-interest rates leading to an economic recession. Similarly, countries such as Germany and the United Kingdom experienced similar recessions in 1928 but were able to turn this around by 1929. The U.S. economy was affected as the exports to these countries were reduced.
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The unregulated growth of banks also resulted in high amounts of unpaid debts that affected the U.S. economy. Small rural banks mainly focused on the agricultural sector by providing loans to the farmers. These banks were motivated by the increased demand for agricultural goods in the market. They were confident of recovering their money and therefore did not adhere to strict regulations. However, farmers began to experience crop failures due to drought causing them to fail in repaying their loans. The banks were then forced to foreclose on their properties to recover their money. They were unable to dispose of most of these properties leading to the closure of many rural banks between 1921 and 1930.
The U.S. stock market was also affected by the increased interest rates. In October 1929, the stock market crashed as a result. Investors were unable to borrow money to purchase stocks leading to market decline. This caused uncertainties among the consumers regarding future income. Consequently, most consumers cut their spending on irreversible durable goods. Consumers preferred spending their money on food substances as opposed to non-basic commodities. The reduced domestic consumption forced the industries to reduce their output leading to staff layouts and profit decline in industries like the automobile industry which greatly contributed to the U.S. economy.
The decline in production was also caused by panic within the banking sector. Depositors were nervous regarding the safety of the banks and therefore stopped saving. Some depositors withdrew their savings from the banks in large amounts. These withdrawals affected the amount of money available for the banks to lend. On the other hand, the Federal Reserve failed to intervene in the situation as they feared monetary expansion would renew speculation on the stock market making the situation worse. Some of the smaller banks were adversely affected leading to their closure. This affected their clients who were mostly small businessmen as they were not able to access funds from other banks. This restricted borrowing and decreased investments negatively affected the U.S. economy.
Another reason that led to the depression was the banking panics in Europe. In 1931, the Vienna Creditanstalt was unable to publish its annual accounts causing a bank run. Depositors withdrew their savings from the bank forcing it to liquidate its assets at the prevailing low prices during the depression period. However, this was not enough to save the bank as it continued experiencing losses. The Austrian government began supporting the bank to save it. Despite the government’s efforts, the bank continued making losses which created a problem for the country too. Following the Austrian occurrence, German depositors became nervous and started withdrawing their savings weakening the banking industry within the country. More banks in Europe were affected by similar occurrences. Industrial countries like Britain were greatly affected by the weakening banking industry because some of their assets and short-term loans to the borrowing countries were frozen. The speculation turned against the British currency, forcing them to abandon the gold standard. This caused the U.S. to suffer the loss of international reserves as funds deserted the dollar. There was also a wave of bank panics and closures in the U.S as a result.
In conclusion both domestic and foreign factors impacted to a great extent on the U.S economy leading to the Great Depression. Increased interest rates, decreased industrial output, and bank failures led to the Great Depression. The banking failures are seen in both the local and international banking institutions. The banks in the U.S. contributed to the Great Depression by failing to recover debts in the form of loans and restricted access to loans. On the other hand, the banks in Europe failed to ensure there was adequate available credit in the market which in turn affected industrial countries. The negative impacts in the industrial countries also had a significant effect on the economic decline in the U.S. economy.
