The Roaring twenties started so promising. Technology and innovations were making air travel, telephone, radio and electricity easier to use and access. The economy was on the rise even after an expensive Great War. But it came to a crashing end in 1930s. The Great Depression altered many American lives. It gave birth to many modern economic policies. But the question many historians have argued is, what caused the Great Depression?
Initially, many historians believed the Great Crash of 1929 caused the Great Depression. But, as more studies have been completed, some historians have steered from this notion. They still believed the Great Crash played a factor in the economic downspin but was not the cause of the Great Depression. An economic article by Jason Taylor explains “the economy turned down because of other factors and dragged down the stock market with it. Over the last several decades, in fact, economists have moved away from the notion that the stock market crash caused the Great Depression”.[1] These other factors are believed to be bad economic policies. Let’s start with the banking policies.
If you see the graph below, the money supply and the price level fell. This was due to bad banking polices leading to bank failures and reduction of bank deposits.[2] It started with small, rural banks losing money due to large loan failing.[3] These failures date back to 1925 “especially in the middle west where prices of commodities and farm land had started down in 1925 after an enormous rise during and following the First World War.[4] The stock market crash in 1929 started worry in the banking system. This led to banks closing to depositors. In 1931, “Britain departure from the gold standard” deepen the depression.[5] Eventually, the failed banks had to be liquidated at a considerable loss.[6] Unfortunately, these losses and polices led to depositors having their assets frozen or devalued. Many banks had no assistance to reopen business or to repay their depositors. These failures were attributed by bad policies of banks trying to grow rapidly by taking on high risk loans.
As explained above, the money supply and pricing level falling played a role in causing the depression, but a decline of economic output led to money and prices dropping. The demand for supplies were down. With the demand being down, production slowed down, and this led to unemployment. If unemployment is high, wages would drop due to people rather working for less than not working at all. However, President Hebert Hoover believed in the High-Wage Doctrine. Hoover believed higher wages led to “prosperity, rather than the other way around”.[7] If you make more money, you will spend more money is the belief of the President and his staff. This leads to more supply and demand. However, this led to employers having higher marginal costs which led to products being more expensive.
The last policy was the Smoot-Hawley Tariff. This tariff raised the average tariff rate on dutiable imports. It was the highest rate in “nearly hundred years”.[8] The tariff was met with a wave of retaliation. Countries like Spain, Switzerland boycotted American goods. Canada, Mexico, Cuba and France raised their tariffs on American goods. President Franklin Roosevelt explained the tariff, “forced other countries off gold by preventing them from paying their debts in goods. This was the standard accusation that the United States had failed to act like a creditor nation”.[9] Roosevelt argued that when we ran out of gold, more countries sent goods which caused lower prices when in reality it should’ve been opposite.
The Great Depression showed an underlying defect in the system. Or does it show, at times policies do more harm than help. In the end, it was caused due to economic policies and lasted to the Second World War. And unfortunately, it was not the last economic downturn in American History.
Biography
Douglass, Lonna, and Brett Flehinger. “Great Depression: Causes: What Caused the Great Depression?” History in Dispute, edited by Robert J. Allison, vol. 3: American Social and Political Movements, 1900-1945: Pursuit of Progress, St. James Press, 2000, pp. 54-61. Gale In Context: U.S. History, https://link-galecom.ezproxy.liberty.edu/apps/doc/CX2876300015/UHIC?u=vic_liberty&sid=UHIC&xid=d443938e. Accessed 22 Mar. 2020.
Hamby, Alonzo L. For the Survival of Democracy: Franklin Roosevelt and the World Crisis of the 1930s. New York: Free Press, 2004.
Kindleberger, Charles Poor. The World in Depression, 1929-1939. Berkeley: University of California Press, 1973.
Richardson, Gary. “Categories and Causes of Bank Distress during the Great Depression, 1929–1933: The Illiquidity Versus Insolvency Debate Revisited.” Explorations in Economic History 44, no. 4 (2007): 588-607.
Taylor, Jason. The Great Depression and Its Aftermath 1929–1950s. CQ Press Guide to U.S. Economic Policy /. Thousand Oaks, California: CQ Press, 2014.
Footnotes
[1] Jason Taylor, The Great Depression and Its Aftermath 1929–1950s, CQ Press Guide to U.S. Economic Policy. Thousand Oaks, California: CQ Press, 2014.
[2] Ibid.
[3] Gary Richardson, “Categories and Causes of Bank Distress during the Great Depression, 1929–1933: The Illiquidity Versus Insolvency Debate Revisited.” Explorations in Economic History 44, no. 4 (2007): 588-607.
[4] Kindleberger, Charles Kindleberger, The World in Depression, 1929-1939, (Berkeley: University of California Press, 1973), 129
[5] Gary Richardson, “Categories and Causes of Bank Distress during the Great Depression, 1929–1933: The Illiquidity Versus Insolvency Debate Revisited.”
[6] Ibid
[7] Jason Taylor, The Great Depression and Its Aftermath 1929–1950s, CQ Press Guide to U.S. Economic Policy.
[8] Ibid.
[9] Kindleberger, Charles Kindleberger, The World in Depression, 1929-1939, (Berkeley: University of California Press, 1973), 124
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