Great Depression refers to the serious economic decline that started in the United States towards the end of 1929 and spread to most industrial countries of the world, lasting until the early 1940s. The period saw sharp declines in the production and sale of goods and a sudden, severe rise in unemployment. Numerous businesses and banks closed down or went bankrupt, people lost their jobs, homes, and savings, and large sections of the population in hitherto prosperous countries had to depend on charity to survive. Economists have discussed and dissected the causes of the Depression ever since and its long-term effects have not even been fully overcome even today. In this paper we shall discuss some of the important causes and effects of the Great Depression.
Causes
The popular misconception about the Great Depression is that the sudden stock market crash of October 1929 caused it. Although the stock market collapse certainly contributed to the subsequent economic downturn, the crash itself was more a symptom than a cause of the economic disease. Some of the major causes of the Great Depression are discussed below:
Economic Inequality and Easy Credit
The end of the World War I saw the American nation withdraw towards an inward looking policy of heightened individualism and the single-minded pursuit of getting rich. New technological innovations in the modern industry enabled quantum increase in industrial productivity. Unrestrained consumerism was promoted through the newly acquired art of advertising. People were persuaded to buy new, attractive products such as the automobile, the radio and household appliances. The problem was that while the public could be easily seduced into abandoning their habits of saving and frugality, the majority of the American public did not have the required buying capacity due to great inequalities in incomes. For example, during the "roaring" twenties (between 1923 and 1929), manufacturing output per person-hour increased by 32%, while workers' wages grew by only 8%. (McElvaine 38) At the same time, massive tax-cuts were initiated to benefit the rich by the government. As a result, the top 0.1% of the American population in 1929 had a total income equal to that of the bottom 42%. (Brookings Institute Study, qtd. By Gusmorino) This meant that the vast majority did not have the required incomes to consume the surplus production in order to keep the wheels of the industry turning. Not to be deterred, innovative businessmen got around the problem by providing easy "credit" by initiating "buy now and pay later" schemes. Hence, by the end of the 1920's 60% of cars and 80% of radios were bought on credit and the total amount of outstanding installment credit more than doubled from $1.38 billion to around $3 billion between 1925 and 1929. (McElvaine 17) This was clearly an unsustainable economic situation.
Agriculture
The agricultural sector in the United States was encouraged to increase production by the government during the First World War due to the demand for food and farm products in Europe. The U.S. government subsidized the farmers and paid $2 a bushel for wheat during the War, but by 1920, when government subsidies were withdrawn, wheat prices had fallen to 67 cents a bushel. (Gusmorino). Since agriculture represented a quarter of the U.S. economy, downturn in the sector was bound to have an adverse effect on the overall economy -- and it eventually did. To make matters worse, beginning in 1930 (when the Great Depression had already started) a severe drought hit the Great Plains. Parts of Kansas, Oklahoma, Texas, New Mexico, and Colorado became known as the Dust Bowl as the topsoil turned to dust due to the prolonged dry weather.
Adverse International Situation
Most of had been physically and economically devastated during the World War I. After the War, the United States assumed the role of the world's chief creditor just as European countries struggled to pay
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