How did the actions of government lead to the Great Depression?
How did the actions of government lead to the Great Depression?
Historians and economist vary on the reasons for the Great Depression. However, there is some agreement as to principal causes. Government inaction in the face of unethical banking practices was a major culprit. The signal event of the Great Depression, of course, was the stock market crash or Panic of 1929. Many investors began to sell of their stock, significantly lowering available operating funds for American business. The New York Stock Exchange reported a decline from $87 billion to $55 billion, or a 37% drop. This would translate into loans being recalled, businesses closing, and significant job loss across the country.
Specific causes of the Great Depression include industrial and agricultural overexapansion, where industries and farmers over produced and could not sell their over stock during the difficult financial times Hicks, Mowry, and Burke (1965). "Technological unemployment" was another reason (Hicks et al., 1965). Simply put, the creation of automation or labor-saving machinery resulted people losing their jobs. The unintended consequence of automation included less wages formerly earned by people to buy products created by machines.
Other causes included unethical banking practices, international trade imbalance, overextension of personal and business credit, and the unwise reinvestment of capital profit into the financial machine rather than worker's wages.
Thanks for your question.
Hicks, J.D., Mowry, G. E., and Burke, R. E. (1965). A history of american democracy (3rd ed.). Boston: Houghton Millflin Co.
One can't speak about how government caused the Great Depression without mentioning Herbert Hoover. I'll never forget first studying the Depression and hearing about how all of those hobos "lovingly" called their homes "Hoovervilles." (Ha!) I simply have to expand upon what larrygates said about Herbert Hoover (in that I don't agree fully).
Hoover wasn't in office very long before the stock market crashed, but it did happen on his watch, so he does have to receive at least some of the blame. Hoover's deal is that he wanted to increase efficiency in both the economy and the government. He either can be accused of not getting down to work fast enough, ... or accused of creating a failed theory. His goal to combat the Depression was through volunteer work, ... AND raising the top tax bracket to over 60% (when previously it was only in the mid-twenties). Yeah, that didn't work. He was never reelected because, to use a more modern phrase, "it's the economy, stupid." Of course it took the New Deal (... or was it just the passage of time and/or WWII?) to end the Depression.
The Great Depression was directly related to the Wall Street stock market crash. The crash was directly related to the absence of governmental financial market restrictions (the government acted so as to decline to act)--it was a bastion of the free capitalistic system that resulted from the Industrial Revolution and resulted in loss of life and limb in unregulated industrial environments. Proof of the significance of the financial markets to the market crash and Great Depression is the subsequent creation of the Securities Exchange Commission (SEC).
Inaction on the part of the government was certainly key to the downward spiral of the economy that led to the Great Depression; some historians and economists such as syndicated Walter Williams criticize FDR for being responsible for dragging out the depression by enacting such ineffective measures as the National Recovery Act. In addition, there were no safeguards such as the FDIC, the Federal Deposit Insurance Corporation which protects investors' money. Also, the government nowadays will close the Stock Market's trading in order to prevent total collapse as was done on 9/11/2001, but this was not done in 1929--obviously.
As #2 points out, it was the marked lack of restrictions and control over the economy which helped create the Great Depression. As other editors have established, the laissz faire policy of leaving the economy to sort itself out resulted in the situation that created the Great Depression. I wonder if we can draw a similar parallel to the financial crisis we are all experiencing today thanks to the lack of regulations and restrictions on financial institutions and the way that they have been able to push us over the edge of financial stability.
Three major government policies contributed to the Great Depression:
- Then Secretary of the Treasury Andrew J. Mellon began a program consisting of lower taxes and reduced government spending. Mellon, who was very Hamiltonian in his thinking, believed that wealth in the hands of a few would promote the general welfare; accordingly he proposed tax breaks for the wealthiest Americans. Mellon anticipated that this would spur spending and growth; instead his policy encouraged over-saving, which led to speculation in investments, particularly the Stock Market.
- The U.S. was then on the Gold Standard, so the only money in circulation was that supported by gold in the treasury. This kept money tight and worsened the economic situation. The only way to improve the economy on the gold standard was a high degree of deflation which would hurt many people.
- President Herbert Hoover believed that "volunteerism" was the cure for the nation's economic woes, not large government programs. He believed that the economy was stable, and would correct itself. Obviously, he was wrong.
The government encouraged economic actions, by both individuals and businesses, that were ultimately reckless and destructive to the economy as a whole. Presidents urged Americans to "keep prosperity going" by buying more and more material goods. They supported the theory that continual consumption was necessary to enjoy further economic success.
With few regulations in place, they allowed a climate of fear to emerge in the stock market, and for credit to expand in almost all areas of the economy, far past a place that was wise or sustainable.
This doesn't directly address your question, but it follows up on post 2. Relate the actions taken or not taken, as explained above, to the economic situations in the United States in the past three years or so, and you have numerous parallels that are the basis for many of the debates and accusations regarding what should be done to help rebuild the economy of today. "The government let the economy run unregulated...allowed the stock market to boom excessively...failed to provide enough stimulus spending to get the economy going again" Sound familiar?
History does repeat itself. The question is, have we learned any lessons that will help with the recovery this time around?
According to most historians, the government helped to cause the Great Depression not by acting, but by failing to act. Once the Depression started, some government actions also helped to make it worse.
The most common critique of the government in the 1920s is that it was excessively laissez faire. This line of criticism holds that the government let the economy run unregulated. By doing this, it allowed the stock market to boom excessively and it allowed production to rise too high. This allowed something of a bubble to form. When the bubble burst, the Great Depression started.
Once the Depression started, the government is said to have made it worse by what it did and by what it failed to do. If failed to provide enough stimulus spending to get the economy going again. It acted wrongly by setting up tariffs that stifled trade. By doing these things, it helped to make the Depression worse.
Overall, then, the government is generally said to have done too little to regulate the economy. This allowed the Depression to start and then to worsen.