The real causes of The Great Depression 1929
There are so many reasons which caused the great depression in 1929, which began in the United States of America and expanded all over the world. The great depression was one of the major causes of the war world two. Those reasons can be summarized are some points as follows:
False Prosperity:
The over dependence on mass production caused to a big gap between supply and demand in the American market where supply became much higher than demand which lead to the decrease in commodities prices and all companies tried to decrease their production because there were not be able to sell it. Those companies were forced to decrease their labors in order to decrease their costs. Those actions lead to the increase in the unemployment rate in the United States of America. Researches concluded that 5% of the Americans have 33% of the American income which was another gap in the states economy, inspite of that real wages increased only by 11%.
Another cause for the great depression was the Stock Market Crash where a dramatic decrease in the stocks prices which is due to the economic factors.
Banking Crisis, where so many depositors withdrawn their funds from banks which is called deflation, 9000 banks fail in 1930, 1932 waves and Austria’s bank failed May 1931
Unemployment rate:
This rate increased severely due to increase in supply over demand and the companies are not able to sell what they produce so many leading companies was forced to close and unemployment rate rose to 25 to 35 % of total labor force and sometimes much more in some states. The farmers’ income decreased 60 percent and one third of lands were lost.
Trade Collapse:
The international business decreased due to the imports and exports policies some countries put on imported goods which lead to the decrease in the United States of America exports and lead to a big problem in sell what they had in their inventories. Weimar Republic unable to pay reparations or U.S. banks loans and U.S. had been creditor with $638m annual surplus.
Another reason for the great depression was the Americans’ wrong speculations where they were very optimistic about the economic situation of the U.S.A but that was a deadly mistake. Those bad speculations were:
- Fed loaned at 3.5%, gold inflow 1927, Great Bull Market 1928
- broker loans on call rose from $3.5b in 1927 to $8.5b in 1929
- Goldman Sachs investment trusts, 50% margin trading at 5% interest
- only 1.5m of 120m population were investors
Speculation in the 1920s caused many people to by stocks with loaned money and they used these stocks as collateral for buying more stocks. Broker’s loans went from under $5 million in mid 1928 to $850 million in September of 1929. The stock market boom was very unsteady, because it was based on borrowed money and false optimism. When investors lost confidence, the stock market collapsed, taking them along with it. Short signed government economic policies were one of the factors that led to the Great Depression. Politicians believed that business was the key business of America. Thus, the government took no action against unwise investing. Congress passed high tariffs that protected American industries but hurt farmers and international trade. The economy was not stable. National wealth was not spread evenly. Instead, most money was in the hands of a few families who saved or invested rather than spent their money on American goods. Thus, supply was greater than demand. Some people profited, but others did not. Prices went up and Americans could not afford anything. Farmers and workers did not profit. Unevenness of prosperity made recovery difficult. The best example for that what happened in Brazil where the farmers were forced to use their coffee beans as fuel for trains instead of selling it because they were not able to sell it at acceptable prices?
The great incentives that was given for the investors at that time were so bad because they encouraged the investors to buy more and more stocks without any collaterals, some of those incentives were decreasing the interest rates which is considered as a positive incentive for buyers to buy more and more stocks because the decrease in interest rates will lead to a big boom in the stocks prices. That’s why a lot of those investors was investing money in a virtual secured market where that was only an illusion.
The Great Depression was caused by problems in the U.S. economy, and that these problems were beyond U.S.A control. He also believed that the key to recovery was confidence in the economy. Factories and businesses tried to maintain confidence, and even as they shut down, Roosevelt believed that keeping high and steady wages for workers would bring recovery. He called together many business leaders and got their promise on keeping workers wages reasonable and steady. They held their part of the agreement for a few months, but they soon started to drop wages. The government, in an effort to create more jobs, built new public buildings, roads, parks, and dams, he tried through this way to create new job vacancies for the American to work which will help the business cycle and refresh it. A Presidents Emergency Committee on Employment advised local relief programs. The American president created a new tariff system to protect domestic industries from foreign competitors. However, these tariffs backfired European nations countered the tariffs by increasing their tariffs on American goods. In 1932, he set up the Reconstruction Finance Corporation (RFC), which gave government credit to banks so that they could extend loans to clients. Many people felt that this measure did more to bring prosperity to the bankers rather than to the ordinary citizens.
When President Roosevelt put the new deal he created program to give relief, create jobs, and stimulate economic recovery for the U.S. These programs were called “alphabet soup” as well as the “New Deal.” the goals of the new deal were:
- Give people confidence in the banking sector in the country through shutting down all of the banks in the country and all the banking activities were controlled by the U.S government so the people will not be afraid of losing all their savings through banks failure and bankruptcies. after reopening the governmental banks deposits exceeded withdrawals which was a very important indicator about the effectiveness of that system where the major problem which lead to the banking crisis were the loss of confidence of the deposits in banks.
- Creating new job vacancies through building new bridges and dams in the country, in order to refreshing the business cycle.
- Increase self esteem for the people through creating something called Civilian Conservation Corps. The CCC taught the men and women of America how to live independently, thus, increasing their self esteem.
- Ending the sale of tribal lands and restored ownership of unallocated lands to Native American groups.
- Creating something called as Securities and Exchange Commission (SEC).The SEC regulated the stock market. Congress also gave the Federal Reserve Board the power to regulate the purchase of stock on margin.
- Protecting farmers and gave them confidence in the American economy through creating what is called the Farm Security Administration (FSA) .The FSA loaned more than $1 billion to farmers and set up camps for migrant workers.
- National Labor Relations Act (Wagner Act). It legalized practices allowed only unevenly in the past, such as closed shops in which only union members can work and collective bargain. The act also set up the National Labor Relations Board (NLRB) to enforce its provisions.
- Fair Labor Standards Act of 1938, this banned child labor and set a minimum wage.
- Social Security Act, This act established a system that provided old-age pensions for workers, survivors benefits for victims of industrial accidents, unemployment insurance, and aid for defendant mothers and children, the blind and physically disabled.
This new deal was well realized by the Americans because it was the only way out of that big disaster which was horrible for the Americans where a lot of them were unable to find work, homeless and they can find nothing to eat. some of the new deal’s tools was not successful because there were some gaps in the program or the big companies in the united states of America did not helped the president Roosevelt in his program through fixing the wages rates.
John M.Keynes played a vital role during the great depression and gave solution for that disaster. His seminal book, The General Theory of Employment, Interest and Money was first published in 1936. In this book Keynes put forward a theory based upon the notion of aggregate demand to explain variations in the overall level of economic activity, such as were observed in the Great Depression. The book advocated activist economic policy by government to stimulate demand in times of unemployment, for example by spending on public works. The book is often viewed as the foundation of modern macroeconomics.
The main cause for depression was that the demand for commodities is lower than supply and factories were forced to fire their employees because their products are dead in inventories and nobody is willing to buy thus unemployment rate increased and demand decreased severely. This is what is happening in Lebanon, where there are a large number of sellers and few buyers are willing to buy because simply they do not have money to do so. unemployment rate is very high which is officially 18% and officially is much higher, the average salaries in the country in very low and few university graduates are able to find a suitable work for them so they are forced to work at any salary because simply they have to work in order to continue their life.
From our point of view, we think that we are not only fear from depression to occur in Lebanon but to the bankruptcy of the Lebanese government because our government is not giving solution for the economic disaster in Lebanon but giving morphine to the Lebanese economy in order to escape from the situation but this is nonsense.
The only way to prevent a great depression in the country in labor, labor, labor because labor has the potential to destroy and build any economy, it is the power of every economy. Lebanon is facing a very high unemployment rate for the Lebanese but offering thousands of working vacancies for the foreigners who are working freely and sending their salaries to their countries without even spending 10 % of their salary on the Lebanese territories. In our opinion, the Lebanese government must issue a certain decree that make it so difficult for the foreigners to work here and let the Lebanese people do it themselves and by this way the unemployment rate will decrease in a very short time and the Lebanese economy will reboot but this time in a correct way.
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Economies of scale concept is an old concept but the majority of the companies knew about it through education and sometimes through trial an error, this concept as a summary means that as the quantity produced of each product increase , the unit cost per product will decrease thus the contribution margin will increase and the sales revenue also will increase.