Politicaland Economic Turmoil leading to Depression
The Great Depression was chracterized by the increased unemployment,reduced investments, decreased consumer spending as well as thediminished industrial output. In this case, the Great Depression wascaused by the political and economic turmoil that was experiencedbefore. For instance, the World War I was critical in causing theeconomic challenges since the nations were focused more on producingthe weapons as opposed to the industrial and the agriculturalsectors. The scenario led to the increased poverty, diseases andunemployment as their respective economies crumbled. The US, on theother hand, had the responsibility of producing a steady food supplyfor the larger European region since more people participated in thewar. However, after the end of the war, the demand for the foodreduced yet, the US still provided a huge amount of agriculturalproducts. In the process, the prices reduced and the farmers that hadtaken loans had to give up their homes and land that were part of thesecurities for the money. The poorly managed banks gave more loanswithout strict requirements since they wanted to get enough funds tosupport their expenses. In the end, they led to the crash of thestock market instead. The holding companies also invested nearly alltheir funds in the operating companies by purchasing larger stocks.When the operating companies could not have enough profits, theholding companies did not have enough to pay the public investorsleading to more losses instead. This paper will reveal how the WorldWar I, the agricultural woes, poorly managed banks, and the poorinvestment decisions by the holding companies led to the politicaland economic turmoil that led to the Great Depression.
The political factors played a huge role in leading to the economicdepression. More specifically, the World War I was one of thepolitical reasons since it had severe effects on the properties andthe lives of people. The nations were no longer focused on producingthe goods and services that will benefit its people but, they weremanufacturing the weapons that destroyed people and the properties.The poor were taken from their farms, and they were forced to jointhe military as opposed to the agricultural activities. The scenarioclearly created a low supply of the farm produces that supported someeconomies and provided enough food for a nation. The European nationsspent a huge amount of funds to support the military activities in abid to defeat their enemies (Jorda et al., 2016). As the governmentspent its funds overseas, its people were suffering in utter povertysince they did not have enough to feed themselves. In the process,the “economic war” resulted in the poverty, diseases andincreased rate of unemployment as well. Hence, right after the WorldWar, most European governments were focused on saving their peoplefrom the poverty and social destitution that had affected millions ofpeople (Jorda et al., 2016). Some of them even lacked enough funds tosupport their people and had to borrow huge amounts of loans fromother nations. The current poverty and the piling financial burdensfrom the loans are just some of the factors that made the scenariomore severe.
Agricultural woes are just some of the economic factors that led tothe Great Depression. In particular, during the World War I, theagricultural activities in the Europe were disrupted yet, thesoldiers wanted a consistent food supply. The circumstances gave theUS a chance to increase its agricultural production since they wantedto supply enough food for the forces fighting in Europe. The USfarmers even produced around 690,000 bushels of wheat in a year but,right after the war began, the amount went to 945,000 bushels in ayear (Magliulo, 2016). At that time, they favored the forces thatwere fighting the in Europe since they wanted enough food to haveenough energy to fight. The same period also saw an improvement ofthe farm technology since they devised new machinery to produce morefood supply. For instance, the tractors even became more common andagriculture even employed about 30 percent of the US workforce(Magliulo, 2016). The increased food exports to Europe provided alarge part of the income coming from the agricultural field. However,the end of the war brought immense challenges to the Americaneconomy. In fact, some of the European nations did not have enoughfunds to purchase the food supply from the US. Besides that, theywere trying to reestablish their infrastructures and the economy too.On the other hand, the American farmers were still producing around800,000 bushels a year yet, the European nations were unwilling topurchase the extra food (Magliulo, 2016). In the process, the marketwas filled with a surplus of agricultural products that led to anabrupt fall in the prices. Some of them failed to get enough profitsto support their activities. Some farmers were forced to borrow loansto purchase the seeds and equipment, and placed their homes and landas securities. However, the food prices fell even further, and thatled to the Great Depression as the nations kept suffering in the longrun.
By 1900, the US had about twelve thousand commercial banks and theyengaged in activities such as deposits, savings and the loans too. In1920, the number had reached thirty thousand and that was clearly asign for problems in the future. Some of the banks simply opened inrural areas where they needed even a negligible amount of start-upfunds and little management supervision (Postel-Vinay, 2016). On theother hand, the prices for the US farm products kept increasing andthat was a problem for the farmers that were expected to make loanpayments. The defaults and the bank failures turned out to be aproblem, and some of the banks ran bankrupt. The few banks thatremained in the industry initiated ways to compete with each other toget more clients. The competitive strategies led to the banks havingsome aggressive approaches instead. For instance, the banks evenurged the businesses and individuals to make more deposits with thepromise of getting higher interests (Postel-Vinay, 2016). Based onthe higher interests, they also had to create ways to have moreincome to cover for such expenses. In the process, they had toencourage the customers to get more loans so that they might pay theexpenses. The banks decided to lend more loans to the real estates,investments in terms of the bonds and the stocks (Postel-Vinay,2016). However, the economy kept getting worse, and the businessescould not pay the loans. Some of them were even declared bankrupt,and that meant more problems for the bank system that was strugglingto survive. The economic problems intensified and led to the massivecollapse of the stock market. In particular, the poorly managed banksled to the loans distributed easily among the businesses and theindividuals.
The period also saw an industry where most of them were holdingcompanies. They managed the operating companies that are the onesthat produce the goods and sold them. On the other hand, the holdingcompanies were the ones that dealt with the services in terms of thedirection as well as the management advice but, they did not dealwith any production of goods (Postel-Vinay, 2016). At that time, theyhad fewer sources of income and they advised most Americans to buymore bonds and stocks as well. In fact, the holding companiespromised the Americans that they were making some of the soundestinvestments at that time. The holding companies even used the fundsfrom the sales to buy more stocks of the operating companies in theoperating companies. The holding companies also used their funds topurchase stock dividends and acquire enough interests on bonds aswell (Postel-Vinay, 2016). However, the number of the holdingcompanies increased in the area, and that worsened the situation.When the stock market crashed, it became much worse since the fewcash investors were not that helpful, and the people could notpurchase goods from the operating companies. In fact, the sameoperating companies did not make more profits to support the holdingcompanies, and that turned out to be a problem (Postel-Vinay, 2016).The public investors also suffered since the holding companies didnot get the profits to pay their dividends and the interests too. Inthe process, the huge number of holding companies that had investedin the operating companies collapsed. The scenario also underminedthe public investments, and the stock market crash made everythingworse. Clearly, the holding companies became a problem to the nation,and it led to the crashed economy in the end.
In conclusion, the World War I, the agricultural woes, the unsoundbanking system as well as the holding companies are the political andeconomic turmoil that led to the Great Depression. All the problemsaffected the economy, and that resulted in the challenges that mostEuropean nations and the US faced. For instance, the war diverted theresources to the manufacture of the weapons while they placed fewfunds in the industries and the agricultural sector. The agriculturalwoes also led to more economic problems in the future. The surplusagricultural products reduced the prices, and that affected thefarmers that had taken loans from the banks. Some of the farmers hadeven placed their homes and land as securities for the loans, andthey had to give up with the properties after they failed to keep upwith the payments. The unsound banking systems gave out their loansrecklessly without proper management. The failure of the farmers topay the loans led to bankruptcy and the crash of the stock marketinstead. On the other hand, the holding companies promised theAmericans that they would get the safe returns from theirinvestments. However, the holding companies took money from theAmericans by selling the stocks and dividends and invested the fundsin the operating companies. Instead, when the operating companiescollapsed, the holding companies also crashed, and such factors ledto the failure of public investment and paved way to the increasedeconomical challenges.
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Magliulo, A. (2016). Hayek and the Great Depression of 1929: Did hereally change his mind?. The European Journal of the History ofEconomic Thought, 23(1), 31-58.
Postel-Vinay, N. (2016). What caused Chicago bank failures in theGreat Depression? A look at the 1920s. The Journal of EconomicHistory, 76(02), 478-519.