Sample Paper on An Investigation into American Economic Depression

  1. Plan of the Investigation

The investigation will consider the degree to which the Wall Street Crash caused the Great Depression in the United States in 1929. It is the worst economic damage in the history of the United States. The effects were felt later in various parts of the world. The investigation will assess the influence of the crash in the stock market by analyzing political decisions such as war debts and high tariffs. By selecting and summarizing relevant sources, the investigation will examine domestic and international issues that occurred during the successful 1920s, which later triggered the crisis. For an effective conclusion regarding the investigation, two of the sources with a contrasting account of the causes will be evaluated.

  1. Summary of evidence

U.S was the biggest economy in the world before entering World War I in 1917. It played a key role in ending the war by providing war facilities and fresh soldiers to the forces they were supporting. At that time, there was nothing bad, as the economy was doing well. In the early 1920s, farmers’ earnings started to decline. In addition, the earnings for industrial workers also declined. This stopped growth in consumer demand (Robbins 44).

In the middle of the 1920s, a good number of Americans were not able to purchase new houses, automobiles, and durable goods. The weakening demand was escalated by the great bull market in stocks especially on New York Exchange. As a result of larger wealth concentration in the investor class, the prices for stock increased. In the end, the Wall Street stock exchange started to take on risky sensations making the investors pay no attention to less positive indicators of the economy. Speculation and over-investment in the stock market inflated further stock prices. This brought a false impression of a strong economy (“Chapter 15: The Great Depression 230; Livingston 38).

By the time WWI was ending, several European countries allied to the U.S owed American banks large amounts of money. The American government did not reduce the debts or write them off and American banks decided to loan more money to the European governments in order to enable them to pay for their previous loans. European countries were not able to sell goods to the American market because of high protective measures put across by American authorities such as Fordney-McCumber Tariff and Emergency Tariff. U.S economy did not expand to foreign markets but the production was increasing. For example between 1920 and 1929, manufacturing output increased but products were not exported. The Republic Administration did not do enough to regulate business activities. Low capital gains encouraged stock market share speculation. Furthermore, low taxes led to poor distribution of wealth. The biggest banks in the country invested carelessly in the stock market by making rash loans (Gjerstad and Vernon 443).

The crucial point of the depression came in when banks started to loan money to stock-buyers since the stock was the hottest commodity in the market. Wall Street investors were allowed by banks to use stocks as security. When the value of stocks dropped, investors were not able to repay their loans, and banks were left holding valueless security. Banks became broke forcing them to close mortgages in an effort to remain in business. Analysts and politicians argued that the U.S stock market was entering a new era where values could constantly go up. Stock prices were over-priced and any attempt to correct the situation did not yield a solution. In October 1929, the New York stock exchange collapsed. Many shares were exchanged at very low prices. Security values were destroyed. This became the greatest market crash in American leading to the greatest depression. A number of American banks had loaned money to stock purchasers. The falling stock prices jeopardized local banks as borrowers began to default on loans. The depression hit the U.S for some time before moving to other parts of the world (Livingston 38-39).

  1. Evaluation of sources

Livingston, James. “Their Great Depression and Ours.” Challenge (05775132) 52.3 (2009): 34-51.

Livingston is a great economic historian with sound knowledge of the causes of the 1929 economic depression. He strongly believes that the financial collapse due to Wall Street activities. The purpose of the article is to offer interesting information on how the Wall Street crash caused the great depression. Livingston took time to research the topic and he has used many credible materials to carry out the research. The author does not provide the social aspect that contributed to the depression. He only specializes in economic history.

Robbins, Lionel. The Great Depression. Auburn, Ala: Ludwig von Mises Institute, 2007. Print.

Robbins concluded his analysis concerning the great depression in 1934. It is aimed at providing a summarizing commentary on the eye-catching features of the economic depression.  Robbins is one of the greatest economists in Britain. The significance of the source is that it highlights foreigners’ position in the situation. Furthermore, the source offers an equitable analysis of America’s economy by a prominent economist. The author engages the reader and asserts that the topic is controversial. The limitation of the source lies in the fact that the interpretation was conducted at a time when the event was still very fresh. This means that the author does not have the possibility of a hindsight study. When Robbins was writing the book, the effects of the depression were felt in a different way in various parts of the world meaning that there were different views regarding the causes of the crash.

 

  1. Analysis

The collapse of the New York stock exchange initiated the era of the Great Depression. It started in the U.S and with great speed, moved to other parts of the world. Essentially, the outcome of the depression was felt in all corners of the world. Periodic recessions are considered normal in capitalist economies but the 1929 one lasted for a long time and its effects spread to various parts of the world. The 1929 depression is worth to be studied because it helps to figure out how a crisis can come about in order to predict and shun future crises.

There is controversy surrounding the 1929 greatest depression in American economic history. The crash of Wall Street is an essential cause because it initiated the crisis. However, it was a short-term cause. Other fundamental weaknesses in the American economy contributed to the depression. Even if the 1929 depression was the first sign of the crisis, the depression had started earlier and had more serious causes. Analyzing causes that relate to long-term causes of the crisis facilitates the understanding of why the crisis happened. According to Robbins (1934), a crash in the stock market cannot cause depression alone. The crash was a result of a fall in stock prices but the fall of prices did not happen unexpectedly. He believes that the overproduction and misdistribution of income influence prices heavily and are therefore the causes of the depression. The visible prosperity in the 1920s gave Americans unnecessary confidence to invest. People began to speculate about stock market shares because they had high value (43).

Thornton (2008) argues that the 1920s saw a rapid technological revolution. Automobiles and airplanes went into mass production. Telephones and the radio were invented. Motion pictures and electric household appliances were also invented. Manual power decreased as electricity and petroleum products were used in mass production. The decade was referred to as the roaring twenties because of the economic boom. The main cause of the boom was the way in which the Federal Reserve managed the nation’s resources and banking system. The best explanation of the great depression can be attributed to Federal Reserve policy (234).

Chandler and John (2001) posit that the 1929 Wall Street crash did not cause the depression but was part of the problem. However, they assert that factors such as weak Republican administration, laissez-faire policies, and U.S tariff policy are responsible for the crisis. The situation could have been controlled if the government had encouraged overseas nations to buy U.S products (55). American tariffs were very high. The amount of credit that the stock market allowed to speculators was not regulated. Global economic volatility was also the cause of the depression. The First World War left France and England heavily indebted to America. In order to save the situation, American investors poured loans to aid the recovery.

Livingston (2009) believes that The Wall Street crash was the major cause of the 1929 economic depression. The stock market boomed because the speculative bubble developed. The stock business became the essential vessel of the redundant capital generated by an influential shift of income shares away from wages to profits brought by the stock exchange market. The process was ongoing throughout the 1920s but by 1929, 70% of the proceeds from IPOs were spent ineffectively. The stock market crashed because non-financial firms suddenly pulled $6.6 billion from the loan market as they experienced a relative decrease in the demand for consumer durables. Demand for the stock was high and banks decided to offer loans using stock value as security. When the value of the stock decreased, banks were holding valueless security. Investors defaulted on loans. This crippled the economy leading to the great depression (38-39).

 

 

  1. Conclusion

The collapse of the New York Stock Exchange was the cause of the economic Depression in the U.S in 1929. On the other hand, the causes of the Depression cannot be limited to the Wall Street crash alone. WWI events were one of the causes of the depression. The U.S used many resources to support allied forces with American banks offering loans to European countries. After the war, the American government did not write off the debts, and banks were forced to lend more money to the affected governments in order to repay their debts. Furthermore, in the 1920s, America had protective tariffs, which barred the country from exporting its products. The republic policies were weak, as it did not control business activities. Speculation in stock shares forced banks to lend money to people to invest in the stock market. The number of speculators in the market increased and the value of the shares decreased. Many shares were exchanged in a short time leading to a collapse of the stock market. In essence, the Wall Street Crash was one of the causes of the Great Depression nevertheless; there were other factors.

 

Works Cited

“Chapter 15: The Great Depression.” Growth of the International Economy 1820-2000. 226-234. n.p.: Taylor & Francis Ltd / Books, 1999.

Chandler, Malcolm, and John L. Wright. Modern World History for Edexcel Specification a. Oxford: Heinemann, 2001. Print.

Gjerstad, Steven, and Vernon L. Smith. “Balance Sheet Crises: Causes, Consequences, And Responses.” CATO Journal 33.3 (2013): 437-470.

Livingston, James. “Their Great Depression and Ours.” Challenge (05775132) 52.3 (2009): 34-51.

Robbins, Lionel. The Great Depression. Auburn, Ala: Ludwig von Mises Institute, 2007. Print.

Thornton, Mark. “The Great Depression: Mises vs. Fisher.” Quarterly Journal of Austrian Economics 11.3/4 (2008): 230-241.