Macroeconomic Causes of the Great Depression
The Great Depression was a period of the continuous recession of the economy that caused significant rates of unemployment and low productivity levels in the industrialized countries. Economists have attributed the great depression to different macroeconomic factors, which primarily focused on financial and monetary failures. Issues such as persistent deflation, minimal productivity, and high commodity prices further marked the historical period. Globally, the great depression resulted in low exchange rates, wages, and housing. Subsequently, these changes in the prices of products and services caused monetary shocks globally. Notably, the great depression was mainly caused by abandoning of the gold standard by major world trading economies among other financial, monetary, and political factors.
The onset of the economic crisis leading to the great depression occurred before the 1929 crisis (Shi and Tindall 116). During this period, the world population was growing, unlike previously when it had been stationary for a long time. The aggregation of people in large cities also increased thus exceeding the rates at which the supply of necessities occurred across the world. However, the economic mechanism created to adapt to this conditions were ineffective. Similarly, the influence of war and political activities also contributed to significant distress to the economy, for instance, the substantial disruption of the world market that shifted the actual flow of demands and supplies to the consumers.
The Great Depression was an international phenomenon. However, the countries that were majorly hit included the US and Britain (Romer and Romer 22). On the contrary, Britain’s economy which had high unemployment rates occurring throughout the 1920’s after abandoning the gold standards became one of the first countries to recover from the crisis. Strategically, the U.S took a top position in the world’s trading activities, for instance, is the world’s principal trader of most of the industrial outputs at around 1925-1929 (Robbins 2011). Therefore, imports contributed majorly to its economic growth. Ideally, since the USA heavily relied on imports, a subsequent reduction following the great depression heavily affected its economy and weakened the trading partners.
Largely, political factors contributed to the economic downfall, for instance, the struggle, which targeted to end nationalist issues created discontinuous changes that had vast destruction on the economic activities within the most affected regions. The efforts were further restrictive which meant that free economic activities failed to take the required course such as reduced productivity. Besides, other factors such as creating offerings to Mars created significant losses among the competing countries. Limitation of increase of wealth also occurred during the struggles of restraining peace and recovering economy after the war. However, a division of labor market faced significant challenges regarding structural dislocations.
Similarly, the breakup of international unity and monetary system contributed to the major causes of the Great Depression, for instance, the forty years before the war marked a significant growth as the leading countries were united by the gold standards. Trade intensified and countries had different exchange rates. As a result, a state of equilibrium was often achieved especially for the nationally traded commodities. The war caused disunity, which was evidenced by hostilities from one country to the other. The financial centers such as Britain also started to abandon the gold standards. However, the US was the only state left still facing the gold rules after the war. Consequently, disequilibrium occurred among the trading countries, and foreign exchange rates started decreasing. The situation marked the first instance of disequilibrium trade. Even with practical strategies and peaceful talks, the case failed to succeed.
During the war, the countries faced more monetary problems, for instance, the US experienced severe inflation while Great Britain’s economy also collapsed with great economic stagnation. Similarly, Europe faced a long duration of increase with depreciation in structural dislocation of the economy and minimal impact of trade affairs among the leading economic zones. However, by mid-1920s, the world economy started to recover since several key countries globally started balancing their budget strategy and trading systems (Shi and Tindall 116). Similarly, most of the countries that had suspended the Gold standards returned to similar operations. However, various fluctuations encountered across different countries rose drastically even after strategizing on the way forward. Trade revived and income started to rise and many countries began to generate more revenues. Expansion of trade and industrial boom picked up with increasing rates of productivity across both agricultural and financial sectors leading to drastic growth in manufacturing industries. However, the richness of a specific farm produces faced an intensified decline. The growth in the manufacturing industry was not universal, and this affected other economic factors indirectly. Between the pre-war and post-war period, the former was shown to have been much flexible regarding readjusting various resources with the aim of reconstructing the economy. On the other hand, the post-war period was incapable of adapting to different changes that were meant to recover the economy. The rigidity of the labor market further intensified this difficulty causing issues that negatively influenced commodity prices and wages.
The historical issues that occurred way before l929 contributed significantly to the occurrence of the Great Depression (Temin 150). However, major political issues also added to significant disputes noted in the region. The most important aspects to consider were the trading and fluctuations in economic growth. The historical factors linked to equilibrium exchange rates, peace issues, and stability significantly affected the growth of the economy. The US monetary policies proved to be ineffective because it limited the stock market growth. The market cash reduced and issues such as consumer purchases faced a decline.
Even though significant causes of the depression contributed to the financial and monetary downfall, there was a considerable effect related by the partnering states across the world. According to Temin (p.144), the associations fostered between the U.K, Europe, Australia, and regions such as Arab played a crucial role in their economic growth. With a significant division created during the war era, the substantial drop witnessed in economic growth across these countries was uniform and almost affected each state differently. Besides, various factors linked to investments in the war derailed the capital reserved for major countries that took part in World War I.
Industrial revolutions were part of the major factors that created a positive move towards reviving the world economy. On the contrary, most of the countries continued to face issues linked to top productivity and poor distribution of labor. As a result, the industrial revolution era failed to take the expected course leading to further intensified issues linked to the existing capital to revive the economic growth. The profitability margins dropped thus creating complexity with equilibrium standards, for instance, the 1920 industrialization left many countries with debt burdens (Brocker et al., 121). In response, most countries tried to restrict various commodity factors such as prices and supply output to ensure the maintenance of the required profit margins as evidenced in not only banking and trading facilities but the entire US financial system.
The period between 1900 and 1940 showed various issues linked to poor financial investments and loan burdens that further intensified with great losses that failed to materialize after investing in other areas of the economy (Temin 144). Besides, the leadership issues contributed greatly to determining the extent of the economy, for instance, factors linked to the distribution of wealth created significant problems across the region. Banks disrupted lending and reduced funds with the aim of recovering its investment targets. Due to loss of confidence in the leadership of financial institutions, revenues dropped leading to inefficient trading patterns since each country focused on rebuilding its economy.
Some of the major economic downfalls resulted from decreased international lending, loss of reliable tariffs, and increased interest rates. The drop contributed to adverse effects to the borrower countries especially German and Brazil (Shi and Tindall 116). Ideally, the international business had initially intensified the economic growth in the US. However, when the trading system collapsed, there was a resultant intense economic downfall. The occurrence of drought due to the environmental destruction that occurred after World War I further devastated the economy. Furthermore, poor farming practices intensified the situation with South East Colorado and Texas being the important cities affected. The problem further manifested itself in the form of dust storms that destroyed property and killed livestock thus decreasing the contribution of Agriculture to the economy. Besides, the agricultural contribution to the economy drastically dropped due to rising competition from Europe and overproduction across other regions of the world. Ideally, these rival countries adopted agricultural tariffs that hindered the international trading system, which America heavily relied on. However, the tariffs failed to address the situation; instead, it further created a cumulative effect that declined the output across many countries. Reduction of international trade meant that reduced economic growth would also have a similar impact on the economy
Furthermore, the unbalanced distribution of wealth in the U.S also contributed to the downfall of the US economy. The unbalanced distribution was a result of a great deal after the interwar period that subsequently caused financial distress in the US and other countries. Besides, the issue of wages had critical ramification on economic growth across different countries.
The government had earlier introduced monetary policies that initiated the economic downfall in 1920 (Romer and Romer 22). It also contributed to poor banking services and increased interest rates. Consequently, the government failed to address emerging number of issues regarding both financial and banking sector. At the beginning of the World War I, the gold value had been affected by the United Kingdom return to the pre-war parity at around 1925. The year 1920 characterized the reconstruction of the gold standards especially the classical period around 1870-1913. Therefore, the gold value became universal with France completing its returns in 1928. Many countries who adopted the gold standards hoped to reconstruct its economy, which was initially materialized by its diplomatic achievements that acted as a core step towards restoring financial and economic conditions in the region.
The financial benefits and expectations of economic improvement relied on the success of the gold standards, which failed to materialize thus creating financial panics. The negative effects not only occurred in countries, which adopted it but even those who had failed to consider the gold standards such as Spain, and Asian countries (Keynes 88). Instead, financial panics and exchange rates crisis occurred due to challenges linked short-lived value. As a result, many states opted out of the systems leading to a complete collapse of the system in 1936. The sharp decline in the global stock markets negatively affected economies of many countries. Ideally, monetary shocks and fiscal contractions have been closely linked with the Great Depression. The process of adjusting to such shocks took considerable time thus providing time to reconstitute other strategies for economic development.
The Great Depression was caused by factors that occurred back prior to 1929 stock market collapse. Notably, World War I, political issues, financial and monetary problems were identified as the major causes of the Great Depression. Moreover, a disrupted partnership among the trading countries was critical for every economic growth across both Europe and Great Britain and the United States. As a result, when major political divides occurred among these countries, financial crisis intensified leaving each of them with minimal opportunities of benefiting from each other. Other macroeconomic issues attributed to labor wages and unemployment rates marked the great depression period. These factors later contributed to the significant stock market crash that occurred in 1929 which marked the peak of the Great Depression.
Brocker, Michael, and Christopher Hanes. “The 1920s American Real Estate Boom and the Downturn of the Great Depression: Evidence from City Cross-Sections.” Housing and Mortgage Markets in Historical Perspective. University of Chicago Press, 2014. 161-201.
Keynes, John Maynard. The economic consequences of the peace. Routledge, 2017. Print.
Robbins, L. The great depression. New Brunswick: Transaction Publishers, 2010. Print.
Romer, Christina D., and David H. Romer. “The missing transmission mechanism in the monetary explanation of the Great Depression.” American Economic Review 103.3 (2013): 66-72.
Shi, David E., and George Brown Tindall. America: A narrative history. WW Norton & Company, 2016. Print.
Temin, Peter. “Great Depression.” Banking Crises. Palgrave Macmillan, London, 2016. 144-153.