The American credit culture combined with the falsely boosted economy lead to the New York stock market crash of 29 October 1929. The speculation on investments and profits over inflated the American economy which then collapsed. This is the point that many historians suggest the great depression began.
The fundamental causes’ of the great depression remains a debated topic amongst economists and historians. There are economic historians who suggest different causes for the depression. In the main stream there are; Keynesian, Monetarist, Austrian School and Neo Classical. There are some other interpretations such as a Marxist view and the former perceptions.
The former perceptions are the contemporary theories from the early 20th century. There was a popular view that the start of the depression was just the continuation of the boom and bust cycle of the markets. This theory was not accepted once the bust stage had prolonged itself and the downward spiral of the economy continued. There was one former theory that affected the policy of the government. This was the theory that over-production and under-consumption caused the great depression. The theory suggests that the producers produce more than the consumers can consume. At this point the growth of industry surpassed the growth of income. The over-production and under-consumption theory is still upheld today.
One man named John Keynes, in 1936, theorised against the boom and bust cycle of former theorist. He argues that without government to stimulate demand in the economy the bust will be deeper and more prolonged. He suggests that the government should go into debt if it is necessary for the health of the economy. In comparison to the great depression, Keynes believes that the government should have taken action to stabilise the situation. This Keynesian argument is noted by historians as one of the common cause theories for the great depression.
The early 1960s suggested two more interpretations for the causes of the great depression. These came from the Monetarist and the Austrian School of Economics. The Monetarist theory is that the American central bank, the Federal Reserve, implemented the wrong fiscal policy in dealing with the economic boom and then the depression. The other explanation provided by the Austrian School explains that the increase in the money supply and the subsequent credit culture, are the principle causes that went on to produce the depression, which started with the stock market crash in 1929.
The causes of the great depression have been theorised in a modern interpretation. This is the Neo-Classical Approach. This perspective explains that the decline in productivity resulted eventually in the depression of the late 1920s and early 1930s. The results of the study found that in America and the major industrialised nations of Europe, that a supply in workforce and capital was the result of the declining economies, and so productivity, in turn, declined.
This essay therefore can argue that the foundation causes of the great depression are; employment, trade, policy, production and consumption. In the case of these causes they are all inter-linked. On the issue of employment; this can be viewed as the migration of labour, which fell in America from the pre war level of fifteen million immigrants, to five-and-a-half million in the fifteen years after. There was also a strengthening of labour powers and unions, which in turn raised the costs by decreasing the work hours and increasing the wages of the employee. With the end of the First World War and as the 1920s boom in trade started to decline, nations were becoming more self sufficient and, on an international level, began an economic stagnation in the flow of capital. The governments of the industrialised nations, such as America began to promote protectionist policy for domestic businesses. This was usually an increase on foreign tariffs which benefited home grown business. The downside however to tariffs like the Smoot-Hawley Act is that it constricted the export market and so this was another factor that decreased global trade.
The evidence from the historical interpretations suggests that the world was not ready for such a devastating impact as that of the great depression. The impact and the depth of the depression could have been curbed. In arguing the foundation causes of the great depression, one would align the Keynesian theory along with the over-production and under-consumption theory, as the major explanations for the depression. The other historical arguments are still valid, although the conclusions this essay has drawn suggest that these are only partial pieces to a worldwide socio-economic problem which caused the great depression.
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E. Hobsbawm, The Age of Extremes: The Short Twentieth, (Abacus 1994) Page 91
E. Hobsbawm, The Age of Extremes: The Short Twentieth, (Abacus 1994) Page 88
E. Hobsbawm, The Age of Extremes: The Short Twentieth, (Abacus 1994) Page 89
E. Hobsbawm, The Age of Extremes: The Short Twentieth, (Abacus 1994) Page 89