Introduction
The government is connected to its people through the policies it makes. This is a statement of importance whose veracity can only be discerned through the historical purview of the economic catastrophe that bedeviled the USA from October 1929. This extensive economic crisis, commonly referred to as the Great Depression, continued for a decade. Many reasons are cited as the causes of the Great Depression, and many of them are inclined toward the policy by the federal government or its related institutions, such as the Federal Reserve System.
Causes of the Great Depression in the US
Unstable Currency Regime
Firstly, an unstable currency regime is a factor that worked in collaboration with other factors to precipitate the Great Depression. In his recollection, Herbert Hoover, the US 31st President, claimed that the Great Depression had its roots in the tremulous contraption of debt and damages remittances emanating from the Versailles Treaty of 1919. As a result, an unstable and unsustainable international currency regime was created majorly from the terms of the aforementioned treaty, plus the desire of European belligerents to return to a gold-based currency standard.
The major European economies had ill-advisedly reverted to the gold standard, notwithstanding their anemic trade balances and national productivity made stable currencies untenable. Like falling dominoes, Austria, Germany, and Britain abandoned the gold standard in 1931, prompting a run on the dollar and straining the reserves of US banks. After the Wall Street stock crash in 1929, nervous investors in the US began to trade their dollars for gold. Consequently, many American businesses closed due to their inability to acquire finances from banks that were needed for their operations.
Deflation in Agriculture and Business Sectors
Deflation in the agriculture and business sectors can be attributed to the Great Depression in the US. A coalescence of diminutive federal laws and the production cycle guaranteed that purchaser and manufacturer costs decreased in the 1920s, to the anguish of farms, businesses, and debtors. In addition, there was damage of about $1 billion damages that was occasioned by a 100-year flood in the Mississippi River Valley in 1927, thereby hurting the productive capacity of the heartland.
The decrease in the prices of agricultural commodities depressed the agricultural sector, which had served as the employer of many American workforces before the depression. The agricultural depression led to a vicious shakeout of small-sized country banks from the nation’s banking system. This decline can be estimated to be about a third of the banks in the US from 1919 to 1930. As evident, the decline in both business and agricultural sectors did not cause the economic depression on their own, but they reawakened other economic factors for the Great Depression.
Increased Money Supply Due to the Fed’s Policy
The Federal Reserve System, commonly referred to as the Fed, also has its blunders that caused the Great Depression in the US. Formed in 1913, the Fed was mandated to ensure the US’ economic stability by regulating the supply of currency. Critically, the Fed’s policies of the 1920s not only failed to stop the economic depression in the later years of the 1920s but also helped in causing it.
In the late 1920s, there was an increase in money supply partly because of the Fed’s policy. Because of the easy monetary policies of the Fed, many people borrowed and overinvested because of the declining interest rates. In 1929, the Fed’s board introduced the policy that contracted the money supply, thereby raising bank interests.
Immediately after the Wall Street Stock crash the same year, the Fed reduced the interest, but it failed to sustain its accommodative policy. As such, the failure of the Fed during the Great Depression was two-fold. The inefficiencies were visibly clear before and after the economic catastrophe that hit the US from 1929 to 1939.
Ill-Timed Passage of Trade Protectionist Policies
Passage and enactment of trade protectionist policies such as the Smoot-Hawley tariff was ill-timed. In May 1929, the House of Representatives passed a bill entitled Smoot-Hawley Tariff that increased duties on the importation of foreign products. Despite the legislation not becoming effective until 1930, it represented a sharp reversal of free trade between the European nations at the time.
Indeed, the USA was not the only single nation that wanted to grow protectionism. In retaliation, other nations discriminated against US goods, and therefore, there was a sharper decline in exports. However, the costs of imported goods experienced a relatively small impact from the new legislation.
Notably, commercial trading between Canada and the US was affected, and the two nations were great trade partners. A ripple effect of this foreign trade policy was that there was uncertainty about foreign trade and regulation, thereby leading to a decline in capital investment by the US corporations. Essentially, this meant that low investments would degenerate into unemployment and decrease in the gross domestic product (GDP).
Conclusion
In summary, the Great Depression in the US was caused by factors that were either ingrained within the US policies at that time or those that were bred from the failure of such policies. This is not to disparage the federal government’s efforts in stabilizing the economic situation during that time. Drawing from the lessons of the Great Depression, each government in place should ensure that it makes sound economic policies to protect the economy within the framework of free trade agreements.
Bibliography
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Captivating History. The Great Depression: A captivating guide to the worldwide economic depression that began in the United States, including the Wall Street Crash, FDR’s New deal, Hitler’s Rise and More. 2018
Congress.gov. “Congressional Record.” Web.
Hoover, Herbert. The memoirs of Herbert Hoover: The Great Depression 1929-1941. Eastford: Martino Fine, 2016.
The Federal Reserve. The Fed Explained: What the Central Bank Does.11th ed. Washington: Online Publication, DC, 2021.