Running Head: Great Depression in America Essay

The timing as well as severity of the Great Depression differed significantly in various countries. The Depression was mainly extensive and severe in the United States. Perhaps the most unpleasant depression ever, originated from a large number of causes. Drop in consumer demand, fiscal fears, and imprudent government strategies caused economic productivity to collapse. The ‘gold paradigm’, which connects almost every nation of the world with a network of predetermined currency exchange rates, had an important part in spreading the American recession to other nations around the globe (Watkins, 2009, p. 77). The revival from the Great Depression was stimulated mainly by the desertion of the gold paradigm and the consequent financial development. The Great Depression resulted in ‘primary alterations’ within financial establishments, macroeconomic plan, and economic presumption (Temin, 1991, p. 83).

In the United States, the Great Depression started during the summer of 1929. The slump turned distinctly worse during the last part of 1929 and carried on until the start of 1933. Actual amount produced as well as costs dropped sharply. “Between the peak and the trough” (Watkins, 2000, p. 203) of the recession, industrial output within the United States dropped 45 percent and gross domestic product decreased 29 percent. The harshness of these declines becomes particularly apparent when they are put in comparison with America’s subsequent worst slump of the 20th century.

The basic cause of the Great Depression was a drop in aggregate demand, which led to a decrease in output as producers as well as merchandisers observed an unplanned increase in inventories. The sources of the reduction in spending differed during the course of the Depression, however, they cumulated into a massive drop in aggregate demand.

During the Depression itself, different factions gave explanations regarding the catastrophe that goes contentedly with their personal interests. The Hoover management held global fiscal forces responsible and sought to “stabilize world currencies and debt structures” (Kennedy, 2003, p. 193). ‘New Dealers’, aimed at finding a domestic solution to the catastrophe, said that the Depression was a calamity of ‘under-utilization’, that low earnings and high costs had made it extremely complicated to acquire the commodities of the industrial financial system; and that a shortage of demand had caused the financial slump (Rothbard, 2011, p. 72).

One of the earliest significant post-war explanations came was given by economists ‘Milton Friedman’ and ‘Anna Schwartz’, in their ‘Monetary History of the United States (1963)’. They argued about what has identified as the ‘economic interpretation’. Hey claimed that Great Depression was caused by a ‘radical contraction of the currency’ (Rothbard, 2011, p. 103). This argument goes well with the ideas that Milton Friedman has supported for several years.

Another very different argument, known as ‘spending interpretation’ was put forward by the economist Peter Temin. According to Temin, cause of the depression was not financial contraction, but a slump in savings and buyers’ spending, which led to the drop in the money supply and caused financial crisis (Bernstein, 1989, p. 103).

As a result, of the severe drop within buyer as well as business demand, actual output in the United States, which had been going down steadily up to this level, dropped quickly during the last part of 1929 and throughout 1930. The ‘decline in stock value and demand’ causing the drop in manufacturing as well as employment within the United States (Rothbard, 2011, p. 23).

A number of economists think that the Federal Reserve permitted or sourced the massive drops within the American demand partially to ‘maintain the gold criterion’. According to the gold criterion, every nation set a rate of its currency with respect to gold and took financial steps to protect the unchanging price. It is feasible that had the Federal Reserve developed significantly with regard to the financial institutions’ panics, foreign persons could have lost assurance in the United States’ loyalty to the gold criterion. This could have caused huge gold outflows and the United States could have been required to undervalue. In the same way, had the Federal Reserve not stiffened during the fall of 1931, it is achievable that there would have been a exploratory assault on the dollar and the Unites States would have been ‘compelled to discard the gold criterion’ together with Great Britain (McElvaine, 1993, p. 82).

Economists have several different ideas as well as theories regarding the causes Great Depression. Peter Temin argued that fiscal forces were not the reason of the slump. Alternatively, he attributes the depression mainly to an unexpected and inexplicable drop in consumption. John Maynard Keynes (1930) attributed the catastrophe to the outcome of modifications in Federal Reserve economic policy. Afterwards, in his book The General Theory of Interest, Money, and Employment (1936), he blamed the depression on the “loss of business confidence” (Roth et al, 2010, p. 171) that weakened the spending on investments.

Once the U.S. financial system started to drop sharply, the propensity for gold to flow out of other nations as well as in the direction of United States strengthens. This happened since depression in the United States made American commodities mainly attractive to foreigners, whereas low earnings decreased American demand for overseas commodities. To neutralize the resultant trend “toward an American trade surplus” (Roth et al, 2010, p. 229) as well as overseas gold outflows, central banks around the globe increased interest rates. Preserving the global gold criterion, basically, needed a substantial financial tightening all over the world to go well with the one happening in the United States. The outcome was a drop in amount produced as well as in demand with nations all over the world that as well nearly harmonized with the slump in the United States.

A number of researchers highlight the significance of other global connections. Overseas lending to Germany as well as to Latin America had increased significantly during the mid of 1920s. U.S. lending in a foreign country then dropped during 1928 and 1929 because of high interest rates as well as the flourishing stock market within the United States. This drop in overseas lending may have caused additional credit tightening as well as drop in demand in borrower nations.

The Depression modified the global financial system in vital ways. The Great Depression accelerated, if not caused, the end of the global gold criterion. Even though a scheme of fixed money exchange rates was restored subsequent to World War II by the “Bretton Woods system” (Young and Young, 2007, p. 305), the financial systems of countries around the globe never embraced that arrangement with the confidence and commitment they had brought to the gold criterion. By the year 1973, predetermined exchange rates were discarded supporting floating rates.

What made the Great Depression so perplexing to individuals who tolerated it was the apparent fact that the financial collapse had been triggered not by want but by material profusion. The dilemma with American capitalism during the 1930s was ‘a lot’ of everything – a lot of supply but not an adequate amount of demand, many vehicles but not an adequate amount of workforce who could have enough money to acquire them. According to classical economic theory, following a short phase of insolvency of overly inflated resources, the financial system would quickly regain stability on full employment and development would start again.

However, as the Depression just aggravated during the initial years, many started to distrust the classical economists' assurance in the market's long-run capability to correct itself. According to a statement of John Maynard Keynes, “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again” (Reis, 2011, p. 244). In his extremely prominent General Theory of Employment, Interest and Money, Keynes advised that the Great Depression had been triggered by a extensive drop of aggregate demand all over the financial system, which formed a new equilibrium on “less than full employment” (Edsforth, 2000, p. 162) – a condition within which Depression circumstances might carry on for an indefinite period. With the intention of increasing aggregate demand and get the financial system on track again, Keynes said that the government must massively boost its own expenses during period of financial misery, even if it intended to have a major budget shortfall.

The historian Michael Bernstein (1987) presented a very different perspective. Bernstein argues that the reason the depression of 1929 was the “timing of the collapse” (Young & Young, 2007, p. 139). The depression started as a normal recurring decline. Had it started a couple of years before, the fundamental strength of the automobile as well as construction sectors have shown a considerably quick revival. Had it started a couple of years later, a bunch of newer and technologically advanced industries would have facilitated revival in a reasonably lesser time. However, the depression started during 1929, very late for the automobile and construction sectors to be of any assistance and very early for new industries since they were still in their ‘infancy’ stage (Young & Young, 2007, p. 141).

Friedman as well as Schwartz made a persuasive point that the Great Depression had been caused “less by a failure of aggregate demand than by a sharp constriction in the nation's money supply” (Kennedy, 2003, p. 128). According to them, unwise choices by the Federal Reserve joined with accumulation of cash by those afraid of bank collapse, “caused the stock of money circulating in the economy to fall by one-third between 1929 and 1933” (Kennedy, 2003, p. 129). This had a choking effect on jobs, earnings, and costs, needlessly lengthening the Great Depression by years. “The New Deal's Keynesian intrusion into the free market had done little to address the underlying money problem; a savvier monetary policy from the Federal Reserve, Friedman suggested, would have provided better medicine for America's economic sickness during the Great Depression” (Kennedy, 2003, p. 131). In the beginning, Friedman's monetarist thoughts got slight grip, but in view of the fact that the 1970s the free-market idea of Friedmanism has mostly dislocated Keynesianism to turn into the leading financial convention of the time.

“In different ways, both Keynesian and Friedmanist explanations for the Great Depression suggest that American capitalism broke down in the 1930s” (Rauchway, 2008, p. 52) because of a catastrophic disconnect between the requirements of the financial system as a whole and the logical fiscal activities of the people trying hard to deal with it.

Over the years, historians have discovered a lot of modifications to the aggregate demand (Keynesian) and monetarism (Friedmanist) justifications for the Great Depression. They held responsible the “misery of the 1930s on the rigidity of the gold criterion” (Rauchway, 2008, p. 91), or on the disproportionate allocation of affluence, or on the unsteadiness in the American financial institutions and system of banking, or on the increased taxes inflicted after 1930 “that choked off international trade” (Rauchway, 2008, p. 106). Whereas every justification has its followers as well as opponents, the reality is that American economy did experience a huge drop in aggregate demand along with a sharp restriction in money supply; “all other factors just amplified the effects of already started economic downturn” ((Rauchway, 2008, p. 110).

However, in the end, no single justification of the Great Depression has ever considered satisfactory by majority of historians and scholars. According to the economist Robert Lucas, the depression was perplexing by any sensible and realistic analysis. There is no completely convincing and credible answer to the question regarding its causes.


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