Causes of the Great Depression:The inequality of wealth and income

Author: Christina Pomoni

Author: Christina Pomoni

The Great Depression was the result of numerous factors that affected severely both the domestic and worldwide conditions. Rooting in the failure of the world economy to build up a sustained economic recovery after the end of World War I in 1918, the Great Depression shivered confidence in the stability of capitalist economic systems. Capitalist systems had undergone periodic panic and depressions throughout the 19th century. In imperfect markets, periodic unanticipated crises and deficient economic policies and practices, both governmental and private, often led to market reversals. Often, capitalist market mechanisms used these reversals in order to force required correction of errors. However, the automatic corrective authorities of the markets failed on Tuesday, October 29, 1929. The ruthless forcing of massive price and policy adjustments could not be reversed by any new policy or liquidation of overextended positions that would establish new equilibriums, reinstate stability and construct the conditions for recovery. The severe decline of Dow Jones by 13% on that Black Tuesday was the beginning of Great Depression. Two months later, investors had lost more than $40 billion. Even though Wall Street exposed some signs of slight recovery, still by the end of 1930, conditions hadnt changed much and the United States entered officially to the Great Depression era. During 1930, over 9,000 banks failed. Banking system collapsed and as bank deposits were uninsured people lost their savings. The few banks that survived the economic recession, being unsure of the economic situation and concerned for their future survival, ceased providing new loans to consumers, causing a severe decline in consumer spending. Consumer spending was also affected by the reduction in purchasing across the board. Being concerned with the stock market crash and the fear of further economic recession, consumers from all social classes stopped purchasing items. This caused a severe decline in the number of items produced and a consequent reduction in the workforce. By being unemployed, consumers could not afford paying for goods they had bought through instalment plans and therefore these items were repossessed. As a result, inventories began to accumulate, unemployment rate rose above 25% and consumer spending declined even further. Economic problems were compounded in 1930 when the U.S. Congress passed the Smoot-Hawley Tariff. As U.S. businesses began defaulting, the government introduced the Hawley-Smoot Tariff to help protect U.S. companies. Aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products, the Smoot-Hawley Act erected an enormous wall of tariff barriers. A particularly odd aspect of the Smoot-Hawley Tariff was that the United States was running a balance of payment surplus at the time and it was the worlds largest creditor nation. However, the trade barriers led to high tax charges for imports and had a damaging effect on employment abroad. Other countries reacted to the U.S. action by raising their own tariff barriers, thus leading to less trade between the United States and foreign countries along with some economic retaliation. U.S. exports tumbled in response and the world slid further into the Great Depression.About the Author:

Christina Pomoni has acquired her MBA Finance from the American College of Greece. Her advanced familiarity with financial statement analysis, capital budgeting and market research has been acquired through her professional career at high-esteemed organizations. As part of her long journey, Christina has served as an Equity Research Associate at Telesis Securities (EFG Eurobank) and a Financial & Investment Advisor at ING Group. Besides, having lived at Chicago, IL, Boca Raton, FL and Paris, France has helped her, not only to be a successful professional, but mostly to see life under a more creative and innovative perspective.

Since 2005, Christina provides high quality writing services to numerous websites and research companies contributing her knowledge and expertise. Her areas of specialization are Business, Finance & Investment, Society, Politics & Culture. She also has a very good knowledge of Entertainment, Health & Fitness and Computers & Technology.

Christina currently designs the website of her own writing company. Believing that knowledge is the road to opportunity and development, her mission is to promote her already established knowledge to a growing number of visitors and to provide high quality writing services to meet the most demanding customer requirements.

POST COMMENT