The Great Depression is a global economic crisis that started in 1929 and ended in 1939. This event had one of the most significant impacts on many countries' economies, especially in North America and Europe. Many people lost their jobs, inflation and deflation occurred to some nations, and poverty skyrocketed worldwide. There are various factors that experts attribute as leading causes of the great depression. First, there were monetary contractions, and banking panic where bank customers, fearing for the collapse of those institutions, attempted to withdraw their money. In turn, this event encouraged others to do the same, leaving little money to run the economy. Secondly, there was a reduced level of international lending among countries. Most American banks stopped offering loans to many European countries, some of whom were financially struggling. Some of those institutions also recalled those loans leading to the affected economies take a downward trend. Another factor that significantly contributed to the great depression was the gold standard that existed during that time. The United States experienced deflation and declining output, thus making their products cheaper to other countries. As a result, there was a massive gold inflow from other countries that depleted their reserves quickly. The Great Depression, which occurred due to various measures and actions, had a long-term effect on many countries' economic, political, and social foundations worldwide.
Causes
1929 Stock Market Crash
In 1929, many stock markets crashed but had little effect on the economy. However, the one that took place on October 29 th had the bearing effect, overshadowing those that had taken place earlier in the year. As many referred, the “Black Tuesday” marked the beginning of the Great Depression when many stocks started plummeting at an alarming rate. Before this period, the United States markets had seen a dramatic rise in prices. Many experts believe that exaggeration led this increase leading to many investors to take dangerous gambles. Despite some professionals sounding the alarm earlier about the impending economic disaster, people did not take this warning seriously, continuing with reckless buying and selling stocks. By September, the prices had reached extraordinarily high. However, during that month, they started dropping at an alarming rate prompting some investors to withdraw their investment. On October 24th, the markets slid, but investors managed to contain the situation. However, the most significant crash would occur four days later on the 29 th , when investors lost about 12 percent of this crisis's investment. This rate accounted for about 14 billion US dollars. By December of 1929, investors had lost about 40 billion dollars on their stock investments.
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Bank Failures
In the years before the Market Crash of 1929, many banks and other financial institutions had engaged in the dangerous practice of lending to investors who, in turn, bought a stock at the prevailing prices. Many also started taking stock as collateral for those who wanted to make more from this frenzy. However, this came to a stop when the market plunged, rendering many into a state of economic turmoil. Banks and other financial institutions started recalling their loans, but only a few borrowers could manage to pay them. This situation meant that many of those lenders could not continue with their operations, leading to a bank collapse wave. Many people who had saved with those institutions started withdrawing their money for fear of losing their savings to this economic disaster. This panic led to many people rushing to do the same and, in turn rendering many banks insolvent. By 1930, around 3000, lending institutions had collapsed. This trend continued up to 1939, where over 9000 banks had gone down. However, few banks survived this crisis but were unable to lend, fearing similar disasters.
The Gold Standard
The gold standard played a significant role in the Great Depression in various ways. During that period, the US Dollar and other currencies were backed by a certain amount of gold; thus, a country would use it instead of fiat money. After the Market Crash of 1929, many countries took precautionary measures to protect the domestic industries. The United States devalued its currency to increase the level of export by making its products cheaper. This action means that imports from other countries become expensive, thus creating a trade deficit. Those nations retaliated by instituting the same measures, which resulted in the United States experiencing declining output and deflation. There was a massive inflow of gold from other countries that were experiencing a trade deficit. This situation threatened the value of other nations’ currencies as their gold reserve dried. To prevent this situation, they raised their interest rates to a level that stopped liquidity flow. Secondly, the bank failure of the early 1930s led many citizens to hoard gold, fearing excessive devaluation of the dollar. This action, in turn, reduced the United States government reserve, which could back its currency. As a result, the purchasing power sharply reduced significantly, affecting the economy. President Franklin. D. Roosevelt signed the Gold Reserve Act, which prohibited the public from holding gold up to a certain amount. This action, in turn, increased the government's reserve, thus reviving the economy.
Reduction in Spending
The Market Crash of 1929 wiped out investments of larger households and businesses alike. This situation meant that many people depleted their savings; thus, most of them unable to afford essential and non-basic commodities. Those who had money also decided to minimize spending, thus cutting the vital monetary supply. The second cause of the reduction in general spending resulted from many banks and financial institutions collapsing. Due to the Market Crash of 1929 and the panic that followed, many lenders did not survive leaving just a small fraction. The remaining banks were unwilling to lend to businesses or the general public, fearing an impending collapse. This situation led to a contracted monetary supply and, in turn, less money to spend by the general public and firms. It also triggered the collapse of many businesses, thus rendering many people jobless. They could not afford essential and no-basic goods and, in turn, led to the economy's contraction. During this time, the employment rate shot to about 25 percent.
Drought
The Great Depression significantly worsened due to the environmental conditions the United States was facing at the time. In many parts of the country, there was a widespread drought that ravaged farmers' economic life. They harvested less for sustenance while others defaulted on the loans they had taken to finance their operations. Many farmers could not afford vital commodities while others fled their home areas, fearing for the worse. Drought also meant that food prices rose to make many people unable to afford them as before. This condition, coupled with widespread joblessness, meant that farm produce's expenditure fell sharply, rendering many farmers destitute.
The United States’ Economic Policy
The Great Depression quickly spread to other countries due to economic interconnectedness between the United States and Europe. When this crisis blew, the American government undertook some measures meant to protect their economy. One such action happened in 1930 when Congress approved the Smoot-Hawley Tariff Act. This law imposed huge taxes on the imports leading to retaliatory measures by the trading partners. Those actions reduced the trade between the United States and other countries, especially on the European side. Both sides lost a considerable amount of income, thus worsening the economic crisis that was already ravaging them. The markets for many countries' goods considerably collapsed, resulting in world trade falling by more than a half in from 1929 to 1934.
How the world could have avoided the Great Depression
Many experts suggest various measures in the United States and the European countries could have avoided the Great Depression. One among them was Charles P. Kindleberger, who proposed five strategies that could have helped avoid the crisis. They include open market on both sides of the Atlantic, providing long-term and countercyclical lending, and stabilizing the exchange rates. Kindleberger also proposed macroeconomic policy coordination and the government providing liquidity to the economy. Those measures could have significantly averted the Great Depression or reduced its effect.
Maintaining Open Market
The protectionist measures taken by the United States and the European countries are much to blame for the Great Depression's worsening. During the early years of the crisis, Congress passed the Smoot-Hawley Act, which imposed high tariffs on American imports. This action resulted in retaliatory measures by other countries, thus worsening the situation. The United States and its trading partners should have maintained an open market and allow goods to flow between them uninterrupted (Kindleberger, 1973) . As a result, the action would have kept the economies on both sides running while finding a lasting solution. In turn, many people would have continued earning and increased overall purchasing in the United States and other countries.
Countercyclical and Long-term Lending
The Market Crash of 1929 triggered a chain of events that resulted in many businesses collapsing while few struggling to survive. Many households and firms lost much savings, thus denying the economy the much-needed cash in expenditure. Banks and other financial institutions minimized their lending, fearing an imminent collapse. The United States government should have offered long-term financial assistance to businesses about to collapse, thus giving them a lifeline. In turn, this action would have helped many people keep their jobs, thus preventing the economy from collapsing. It would have also increased the level of expenditure, thus reviving the markets.
Coordination of the American Macroeconomic Policy
The United States government and its trading partners should have coordinated the macroeconomic policy during the Market Crash of 1929 and followed. During the Great Depression, many countries undertook monetary system policies meant to serve their domestic agenda. They did this without looking at the effects those measures had on their trading partners, thus setting off a chain of events that significantly worsened the economic crisis (Johnson, 2017) . Countries across the world should have formulated macroeconomic policies that were fair to each, thus avoiding the Great Depression's widespread effect. They also needed come up with a quicker solution that to the collective problem each faced as a result of this crisis
Policing Stable Exchange Rates System
During the Great Depression, many countries lost a lot of market due to actions taken by one another in protecting the domestic industries. To make its products cheaper and increase the export, each nation depreciated the currency, triggering a similar trend from the trading partners. This process continued for a long, thus worsening the Great Depression the world was experiencing. The United States and most European countries should have policies that could prevent such currency manipulation. In turn, the world economy would not have declined significantly.
Acting as a Lender of the Last Resort
The Market Crash of 1929 triggered a chain reaction that much hurt every sector of the economy. The banking sector was one of the most significant casualties of this crisis, where most lending institutions fell. The United States government chose not to intervene, allowing those banks to go under due to a lack of liquidity. In turn, households and businesses could not get money to buy goods and services or finance their operations. Other countries repeated this action, thus worsening the Great Depression. During the early years of this crisis, the United States government should have stepped in to help the situation by acting as the lender of last resort to the banking institution. This action would have kept many banks operational and able to lend to businesses and households, thus sustaining the economy.
Role of the Federal Reserve in the Great Depression
Ben Bernanke, an American economist and a former chairman of the Federal Reserve, has claimed that the institution played a crucial role in the Great Depression. According to him, the United States Central Bank undertook steps that worsened the situation instead of saving it. During that time, the Federal Reserve had decentralized most of its operations and decision-making procedures, with each branch coming up with a different policy (Bernanke, 2009) . This action created confusion as there was no coordination between various districts. Governors of different branches disagreed on essential issues like open market investment leading to a downward trend. Secondly, the Federal Reserve erred in raising the interest rates between 1928 and 1929. This action resulted in loans becoming expensive to the businesses and the household. Therefore, many people shied away from credit, thus reducing the general expenditure and slowing economic growth. However, the Federal Reserve's decision to raise the interest rates was to reduce speculative trading in the stock market. The third factor that much caused the Great Depression was the Federal Reserve's failure to act as a lender of the last resort. One of the main reasons for forming this institution was to step in during economic crises and cushion banks and other financial institutions from collapsing. However, through the Federal Reserve, the United States decided to watch from far as the crisis unfolded, leaving many businesses to fall into the abyss. Instead, this institution should have provided financial assistance in direct loans and grants to central banks to keep the economy afloat.
Aftermath
Economy
The Great Depression caused the economy to shrink by half during the first five years of its occurrence. Almost every sector much felt the effect of this crisis. After the Market Crash of 1929, many citizens lost most of their savings through dubious investors who had gambled their money. The banking sector experienced the brunt of this crisis by witnessing one of the biggest defaults in history. Businesses and investors could not repay their loans as they had invested, especially in stocks, lost in this crisis. This phenomenon triggered a downward trend in the banking sector, where many lenders had closed down due to a lack of liquidity. Following this trajectory, many firms could not secure loans, thus falling massively (Davis, 2015) . There were also massive layoffs and income loss to many citizens, resulting in widespread poverty across the United States and Europe. However, the New Deal signed by the new president, Franklin D. Roosevelt, in 1934, significantly boosted the economy. It involved massive government spending through various projects across the United States. Many people returned to work, thus restoring hope in the economy.
Unemployment
Before the Market Crash of 1929, the rate of unemployment had reduced to about 4.2 percent. During this time, unofficially referred to as the "Roaring Twenties," the value of stocks had been soaring, positively boosting the confidence people and businesses had on the economy. After the crisis, there was widespread unemployment across the United States and Europe. Various factors significantly contributed to this problem. First, the Market Crash brought down with it many banks and businesses, resulting in widespread unemployment. The majority of the citizens could not afford basic needs, thus relying on the government and well-wishers for various necessities. The second factor that significantly contributed to unemployment was the drought that was ravaging the United States. Many farmers lost a source of their livelihood as there were massive crop failure and death of livestock. By 1933, the unemployment rate had reached 25 percent, representing 15 million people out of work. However, the New Deal significantly reduced this figure, with 14 percent being jobless in 1937.
Politics
The Great Depression contributed significantly to shaping the political landscape, especially in the United States and Europe. This crisis started during the reign of President Herbert Hoover and continued to that of President Franklin D. Roosevelt. People started seeing the negative side of capitalism and the implications it could bring if unregulated. Many experts pointed the finger at the Hoover Administration for the disastrous handling of the Great Depression. In turn, this action led to widespread anger by the public towards the government's inability to contain the situation. Loss of confidence led to the eventual power takeover by the Democratic Party. Across the Atlantic, many European countries experienced massive public outrage against governments for failing to protect them from this crisis. This situation led to the emergence of far-right groups with radical ideologies. This scenario was particularly the case in Germany, where the Third Reich government lost power to a socialist Nazi Party. Different economic policies and ideologies were also at a play during the Great Depression. The outgoing president, Herbert Hoover, highly favored the laissez-faire economics that prohibited government intervention in the economy. Many experts blamed this idea as having caused bank failures that were witnessed in the early 1930s. The new president, Franklin D. Roosevelt, came with Keynesian economics, which advocated more significant government intervention. During his reign, the country saw massive federal projects which significantly raised the economy.
The Great Depression, which started in 1929, had a long-term effect on the economic, social, and political foundations of many countries worldwide. Many experts claim that the crisis began when the American stock markets fell in 1929. This situation triggered a chain of events that shook almost every sphere of life in the United States. First, many banks lost a considerable amount of money in direct investments while experienced massive defaults by investors and businesses invested in the stock market. Those events, coupled with substantial bank runs, saw many lenders fall within the few years. Other causes of the Great Depression included reducing spending, the United States policy on the European countries, drought, and the gold standard. The Great Depression quickly spread to other parts of the world, mainly European countries, which were great trade partners with the United States. The aftermath of this crisis was a high unemployment rate, widespread poverty, political realignments, and a decline in the world economies. Various experts blamed the United States government for failing to take specific measures to stop the Great Depression. One such critic was Charles Kindleberger. According to him, maintaining the open market, countercyclical and long-term lending, and coordinating the macroeconomic policy were some of the measures the government should have taken to avert this crisis. Another voice on the issue came from an economist Ben Bernanke. He claimed that Federal Reserves at the time were to blame for the occurrence of the Great Depression. Having put various measures proposed by different economists, the world can prevent such an occurrence from happening again.
References
Bernanke, B. (2009). Essays on the Great Depression . Princeton University Press.
Davis, J. (2015). The asymmetric effects of deflation on consumption spending: Evidence from the great depression. Economics Letters , 130 , 105-108. https://doi.org/10.1016/j.econlet.2015.03.016
Johnson, M. (2017). Fiscal Policy Before the Great Depression. SSRN Electronic Journal . https://doi.org/10.2139/ssrn.3083919
Kindleberger, C. (1973). The world in depression, 1929-1939 . University of California Press.
