The Great Depression may be described the worst economic recession in history The Depression lasted almost a decade and caused millions of people to suffer During this time there was the highest amount of unemployment ever recorded The Great Depression affected all the sectors of the global economy It received its title namely due to the state that people were in due to their standard of living This essay will look at the different views on the causes of the Depression Firstly the cause of the Great Depression may be due to the policies implemented Many economists at the time believed that lower interest rates would mean that the amount of consumption and investment would rise in the economy however that wasn't the case in 1930
This is because if the outcome of an investment is likely to fail due to the economy being terrible then consumers are not going to invest even though the cost of capital is reduced O Driscoll 2007 So since there is a low amount of consumer expectation the demand in the economy decreased as consumption and investment were low This was the disproving Say s law which states that any supply must have demand Another policy that was applied during the recession was a rise in taxes The policy was used to lower the shortages to the budget brought by the Depression suggested to make the Federal Reserve system create new money for the government to utilise nevertheless Hoover went on with the policy Keynes 1936 These strategies used by the president put the economy in a worse environment Secondly the cause of the crisis is lack of demand in the economy
Keynesian economist suggests the Great Depression occurred due to massive supply of goods not being able to meet the demand for them Rothbard 2002 p 38 Since the money was secured to a reserve which consisted of expensive rare gold the amount of money which was in the economy was too low and hence the shortage of effective demand for goods and services Furthermore a massive drop in the price level caused businesses to fail this lead to unemployment fall of consumer demand and which reduces the economic output Rothbard 2002 The cause of the Depression is also believed to be because of the federal reserve For example O Driscoll 2007 p 72 writes The Federal Reserve System raised interest rates in early 1928 This increase in interest rates caused the recession to become worse because it acts as an incentive for businesses to save and not borrow from the bank Therefore the production of many firms fell during the year O Driscoll 2007 pp 72 73 The federal reserve is also criticised for not operating correctly at the beginning of The Depression This is because the main goal of the federal reserve system is to prevent the bank from failing when many customers wish to take money out depleting the banks money However the federal reserve did nothing to stop the bank s from failing this went on to cause many banks to shut down and consumers left without their savings Parker 2003 The problem of high interest rates was later increased as the Federal Rothbard 2002 Reserve raised interest rates further O Driscoll 2007 The cause is also thought to be contributed by the Banks as well
For instance according to Milton Friedman 1963 p 15 the reason the great Depression lasted so long as it did was because the banks being unwilling to make new loans after 1933 During this period banks would only offer safe and conservative bank loans due to their belief that the federal reserve would not help them if problems occurred Mises 2006 A reduction in bank lending reduces consumer spending investments and growth in the economy Pettinger 2012 Consequently making the recession worse due to the negative multiplier effect Thirdly the tariff system imposed by the government is thought to have been a cause of the Depression The Smoot Harley act was an import tariff that was set up to protect American businesses and farmers from international businesses Britannica 2016 However it achieved the opposite because the introduction to the Smoot Harley act induced uncertainty
Beaudreau 2017 Therefore the amount of investment in the economy decreased In addition The high tariffs caused retaliation from other countries because of this the trade between and the US and Europe declined by two thirds between 1929 and 1932 Britannica 2016 The Smoot Harley tariff is also believed to have started negative speculation before the stock market crash White 1990 Some economists believe that the recession was caused by the economic boom before it Economists claim that the decision to raise price levels in the US economy to attempt to support the UK remain on the Gold standard at a rate which was irresponsible Mises 2006 They claim after the rapid rise in GDP in the roaring twenties a recession became inevitable and it was the damage from low consumer confidence in the banking system which caused the most damage Mises 2006 To conclude there are many proposed causes of The Great Depression but most economists attribute it to the policies that the federal reserve system implemented However this may not be the case as all the factors in this essay and more are involved in the plummet of the world's economy The Depression was long and hard for the people that had to endure it The citizens of the united states couldn't help themselves as they couldn t invest or spend But The Great Depression does serve as an economic lesson on how to better manage the economy in the circumstances
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