The Great Depression

[MrPresident]

What do you think was the single most important cause of the Great Depression? Now, I know that there were many different causes but I want you to pick out which one you feel is the most important and give your reasons why.

 

[nixon]

Wall Street 1929, no need for an explanation, IMO.

 

[Hitro]

I'd say the same, if you really want to narrow it down this much.

 

[TheStinger]

no, it was the tightnening of monetray policy following the downturn caused by the crash. That and the trade barriers going up.

 

[MrPresident]

I say it was the tariffs that were the most important reason.

 

[Vrylakas]

The basic cause behind the Great Depression was the failure of the world's leading economic powers to coordinate their response to the Stock Market crash of October 1929, and this stemmed from a sort of nationalist approach to economics that had developed in the 1920s. The World War had severely mauled the world's economy and had knocked Britain out of its role as world economic gatekeeper, without finding a replacement. Each country went their own path with tarriffs/protectionism, different currency standards, etc.

The world economy had been becoming increasingly integrated at a rapid pace in the 1890s, 1900s and 1910s (in fact, some thought it had reached such a level that a major war could never happen again in Europe) and this integration enabled the world, with British economic leadership, to circumvent some other major "hiccups" in the international economy. After 1918, however, that integration had broken down and when another major economic crisis (i.e., "hiccup") arose in 1929, there was no coordination to face the crisis, and each state found themselves alone facing an international economic crisis with only national economic tools. Their response: protectionism. The world was not doomed in 1929; it could have spared itself the Depression. Could have...

 

[napoleon526]

Overspeculation and buying stock on margin. It worked while the economy was growing, but when the market fell people not only lost what they invested, they ended up owing more to the banks who loaned them the initial investment. Soon, nobody had any money.

 

[marshal zhukov]

All recessions are caused by the same reason: drastic spending reduction by the economic sectors which are: Family( you, me and so on) goverment and private companies.
The question to be asked is then: Who caused that drastic reduction in spending in 1929 ?
Wall Street Crash is one of a number of factors that brought about the Great Depression and it is not the most important. It would be naive to think that a crash of the Stock Market alone could bring down a economy so big and powerful such as the American.
Other reasons for the crash were:
- Poverty in rural areas caused by falling prices of agricultural goods, that caused farmers to reduce spending.
- Widespread speculation not only in the Stock Market but in all areas that speculation was possible, speculation that defied all logic and comon sense.
- Bad wealth distribution, that means the families had little to spend, worse yet had little power to ensure that all the wealth returned to the economy in the form of demand and/or expenditure.
The most important cause for the depression in my opinion is this one:
- Drastic fall in the rate of Capital formation, or Capital expenditure in America.
Bad wealth distribution( highly unequal income distribution )means that few people receive a large chunk of wealth, if they fail to invest it all back, you will soon have a crisis, due to insufficient expenditure. I say investment because, you can only spend so much on consumer good.

President Hoover also took to long to realize that the economy wasn't going to recover on its own from the Depression, he failed to react quick enough.
Inexistence of govermental safety nets for a economical down turn. Today we run no risk of going through another Depression due to the existence of safety nets from the goverment.
The Great Depression marks the end of the Liberal Capitalism and the beginning of Directed Capitalism.

EDIT: bad wealth distribution read highly unequal income distribution.

 

[Richard III]

Kids! You can do better than these glib, picture-book answers! To my shock, Marshal Zhukov is the only one to even hint at the correct answer.

The central cause, by far, was overproduction in the agricultural sector, resulting from sustained production during the 1920s at WWI productivity levels without commensurate spikes in demand. To remain competitive in this environment, farmers had leveraged themselves to the hilt with debt to buy farm equipment, land and so forth. But to no avail: with input spending and productivity rising but no increase in demand to meet it, prices tanked - and the farm sector and its credit tanked with it. This in turn led to the severe softening of the economy in 1928-29 that made SYMPTOMS like the slump and then collapse of securities markets, the raising of tariffs to protect commodity prices, and the collapse of the frontline banking sector possible.

The biggest mistake made in current historical education on the Great Depression is to presume that the economy of then was the economy of today. It wasn't. In most western economies, agriculture was still an equal or bigger player than industrial production.

R.III

 

[marshal zhukov]

Pardon me, Richard III, but, I believe, that my answer is actually more accurate than yours.
Even hint?! What?!
Do you really think that overproduction in the agricultural sector played a central role in bring down the US economy?
I agree that falling purchase power by the farmers played a role, but not a central one, because during the 20's the US was already a highly industrialized nation and therefore other sectors of the economy could compensate the falling expenditure in the agricultural sector.
The most important cause of the Depression,was the highly unequal income distribution, not food overproduction. That was followed by a catastrophic reduction in investment ( capital formation) which was caused by the same highly unequal income distribution. Investment was reduced because of a number of reasons including the Wall Street crash.

Had the income distribution being more equal it would have been possible to avert the crisis. Had the quantity of investment not being reduced you could also have avoided the Depression.

I think I am make a mistake when I choose one cause to be the most important.
The Great Depression was caused by a combination of causes rather an important one.

 

[Richard III]

Originally posted by marshal zhukov
Pardon me, Richard III, but, I believe, that my answer is actually more accurate than yours.
Even hint?! What?!
Do you really think that overproduction in the agricultural sector played a central role in bring down the US economy?

First, give me some credit for giving you some credit!

Second, I really DO think this.

Third, we have once again this classic example of americocentrism distorting analysis. The global Depression of 1929-1936 (give or take four years, depending on where) was worldwide, not simply localized to the United States. The route to understanding the Depression is to stop obsessing with the US and realize that if it was starting elsewhere concurrently (or even, previous to) the American collapse, then the reason must not be unique to America (e.g. Wall Street).

Originally posted by marshal zhukov
but not a central one, because during the 20's the US was already a highly industrialized nation and therefore other sectors of the economy could compensate the falling expenditure in the agricultural sector.
The most important cause of the Depression,was the highly unequal income distribution, not food overproduction. That was followed by a catastrophic reduction in investment ( capital formation) which was caused by the same highly unequal income distribution. Investment was reduced because of a number of reasons including the Wall Street crash.

Had the income distribution being more equal it would have been possible to avert the crisis. Had the quantity of investment not being reduced you could also have avoided the Depression.

I think I am make a mistake when I choose one cause to be the most important.
The Great Depression was caused by a combination of causes rather an important one.

I take your point in one way, insofar as several factors sped it along; but if you look chronologically for the "first domino" - and the biggest - then this is it.

Sounds like you've been reading too much Karl Mar... ehem, I mean, too much Rob McElvaine. But since you seem to want more, and since you're being reasonable enough to deserve a fair counterargument, give me a day or so to swing it up.

 

[marshal zhukov]

Richard III, I do think you have some very good points in your first argument ( post).
I have never read Karl Marx, I don't agree with his ideas.
I do read books written by Robert Heilbroner, I think that he is a keynesian economist.
I am wating for your quality counterarguments.

 

[Sultan Bhargash]

It was caused by the stupidity and greed of big business. It was cured by renewed interest in the zealous regulation of such by a forward thinking President.

Depressions/recessions usually follow on the heels of long bouts of "laissez faire" and deregulation. Much rarer, like the 90s tech boom/burst cycle, by the vagaries of a certain industry... though I predict we will see a spiral of mini-cycles fueled by the secondary industry of "stock sellers/money managers/etc" who consciously, unscrupulously inflate/deflate stocks.

 

[MrPresident]

Originally posted by Sultan Bhargash
It was cured by renewed interest in the zealous regulation of such by a forward thinking President.

I thought it was cured by the Second World War.

 

[Sultan Bhargash]

Well you're wrong. FDR administration overhauled business laws, bringing them into the 20th century, and created systems like social security to make sure people had a safety net that could help them out.

And it worked- FDR's laws stayed in place right up until the Reagan administration came in and began tearing them up. Which resulted in a recession.

 

[onejayhawk]

Originally posted by nixon
Wall Street 1929, no need for an explanation, IMO.

This is IMO the most common misconception. The collapse of the stock market effected few people, but was very important to the growing fealing of panic. What caused the depression was the bank failures and the collapse of the credit market.

In 1929 the failure of a business caused the bank carrying its loans to become less liquid. When the depositors came in hordes demanding their deposits in cash, there was not enough cash to cover the demands. All this is shown fairly well in It's a Wonderful Life. A little persistence and restraint could have saved much. As it was many banks folded and all the remaining money went into hiding. As any economist can tell you, money has to work to be valuable. When no one buys, no one makes products, which means layoffs and less money in circulation. Once started the effect spiraled down for a ways.

In 1997 the market had an even bigger plunge than 1929. In that case the Federal Reserve made sure that sufficient credit was available for all the unforseen possibilities. Within 6 months all the lost ground was made up. If anyone had wanted their deposits in cash, every bank had the credit with the Federal reserve to get it for them, so the situation quickly drew back fromthe panicky edge. As it was, the best time in history to buy stock was 1933 and 1934.

Originally posted by MrPresident
I thought it was cured by the Second World War.

Again a common misconception, as is the effects of the New Deal overhauls. What brought the contry out of the Depression is the same thing that always does, increased activity. Since the Depression was a process, rather than an event, it took time to run its course. The recovery followed with the inevitability of sunrise. By 1935 the economy was back where it was in 1925, during the height of the Roaring 20's. By the time WW II hit, The US economy was already fully recovered.

J

 

[Case]

Again a common misconception, as is the effects of the New Deal overhauls. What brought the contry out of the Depression is the same thing that always does, increased activity.

So what you're saying is that the the Great Depression ended because the Great Depression came to an end.
Huh?

 

[MrPresident]

Originally posted by onejayhawk
The collapse of the stock market effected few people

Lots of ordinary people had invested large sums of money in the stock market during the 1920s. A far larger amount of people than at any previous time.

Originally posted by onejayhawk
By 1935 the economy was back where it was in 1925, during the height of the Roaring 20's. By the time WW II hit, The US economy was already fully recovered.

According to my figures, America's GNP was $100 billion in 1928. In 1933 it was $55 billion and by 1939 it had risen to $85 billion. The amount of consumer goods bought in 1928 was $80 billion compared with $65 billion in 1939. Also unemployment in 1939 was still 9.2 million people. That hardly sounds like recovery to me.