Historical Events that Directly led to the Prolonged Great Depression

Historical Events that Directly led to the Prolonged Great Depression

Introduction

From 1929 to 1939, the United States experienced the worst economic recession in history since the beginning of the industrial revolution era. This period is known as the great depression. It started in 1929 after the stock market crashed in October. There is a misconception that the stock market crash caused the great depression. However, this is not entirely true. Several reasons directly caused and prolonged this economic recession. Some of the historical events that directly prolonged the great depression include a reduction in the monetary supply, increased taxation, and economic uncertainty.

Causes of Depression

Reduction in the Monetary Supply

There was a sharp reduction in monetary supply between the year 1930 to 1933 and in the year 1937 to 1938. This reduction, in turn, reduced the demand and output. In 1920, the country experienced a steady economic growth where the supply of money increased throughout the years. The stock market in 1920 grew by a margin of 2.7% per annum (Bianchi, 2019). Many people during these years heavily invested in the stock market.

At the same time, the federal government had increased the discount rates that it charged the banks to give out short term loans. Consequently, this meant there would be more money supply in the economy. However, after the stock market crash in October 1929, the federal government started selling government bonds in an attempt to recover the money. The sale reduced the money supply within the economy. It also drained the reserves within the banking systems. Besides that, the government made no effort to inject new reserves into the banking systems — this further prolonged the great depression.

Increased Taxation

In 1931, the federal government’s budget ran a deficit that spilled over to the following year, 1932. According to the dominant view developed during the Keynesian revolution, the federal budget was supposed to be balanced at all times. However, during the great depression, this was not the case. The government needed to source for money to balance its deficit within the budget. Therefore, the easiest way to do this was to increase tax revenues. Increased taxation meant that goods and services would become more expensive. This did not help in reducing the economic recession at the time. It played a significant role in prolonging the great depression.

Economic Uncertainty

During the Roosevelt administration, there were numerous price controls, structural changes, and anti-competitive policies. These elements contributed significantly to creating an atmosphere of economic uncertainty. This undermined the recovery process of the economy. President Roosevelt many policies that helped put an end to the great depression. For instance, the increase in the gold price from $20 to $35 per ounce helped expand the money supply into the economy. He also introduced the federal deposit insurance program, which acted as an umbrella protecting the depositors from bank failures.

However, some policies that Roosevelt made only prolonged the economic depression. For instance, he kept the prices of goods high and their supply limited. This is because he perceived that the declining prices of products were the problem while the problem was the monetary contraction. Many businesses suffered further economic crises as a result of this. This was evident in the agricultural sector, where farmers lost their produce and their animals. For instance, pig farmers lost heavily when more than six million piglets were killed to reduce their supply under the Roosevelt administration.

Conclusion

The great depression was the most challenging economic era that the United States has ever encountered in history. The economic recession was prolonged by the discussed factors, unlike the misconception of the collapsed stock market in 1929. The Americans encountered some of the most trying and hard times during this era. There can only be hope among the American citizens that the mistakes made that prolonged the recession will never reoccur in the future.

References

Bianchi, F. (2019). The Great Depression and the Great Recession: A view from financial markets. Journal of Monetary Economics.