Causes of depression

Causes of depression


The Economist and historians have not yet been able to reach an agreement regarding the cause of the depression. Some say that  the depression was primarily an American phenomenon and the economic setback suffered by other countries steamed largely from the policies adopted in United States. They hold that the European depression was induced by American high tariff policies which made it difficult for the European powers to sell their goods in American markets. This was also aggravated by the American instance on repayment of war debts and curtailment of financial assistance to Europe at the time when it was badly needed.

The other group of Writers believe that the Great Depression in America was a part of world wide crisis which resulted from enormous devastation wrought by World War 1, and the unsettled conditions that followed it.


  1. Over-production of Agricultural products.


Both in United States and other countries the farmers produced more wheat, cotton, corn  and other commodities, than could be consumed. Due to this there was a sharp decrease in the prices and purchases of farm products. This affected the purchasing capacity of the farmers. The inevitably cut down the market for the manufactured goods and prevented the factories from producing to their full capacity and stood in the way of workers getting employment


  1. Over-production in industry.


After the World War I American manufacturers encouraged by high profits made too many goods which could not be consumed by the  home market. These manufacturers are compelled to cut down the production which meant dismissing a number of workers. The unemployed workers couldn’t find any job

And it was a hard time for them.  As the depression Guru this process continued. For some time the production of these merchants was consumed by the domestic consumers due to the system of installment buying. This plan of installment buying was dangerous as it

completely dried up the future purchasing power and increased the load of private



  1. Labour Saving Devices


The introduction of labour saving devices led to Greater production  with less labour. As a result of introduction of Machines a large number of men were thrown out of jobs and they failed to secure alternative jobs.

This meant diminishing capacity of the labour to purchase, which greatly upset the mass production of industry


  1. Concentration of wealth in fewer hands


The huge profits and prosperity of 1920’s went to the pockets of a small fraction of the total population (0.3%). The people had an Ultimate capacity of purchasing but there was a limit beyond which they could not consume the goods. If the profits had been distributed more evenly among the entire population the manufacturer’s would have been able to sell more goods. In 1929 the American industry was feeling that the American people could not absorb the huge quantities of goods being produced by American factories.


  1. Impact Of World War 1


The depression caused in America was a worldwide phenomenon. It was the outcome of the delayed results of the dislocation which great war had brought to the World Trade.


  1. Decline in American foreign trade


As a result of War the Economics of the European powers were badly shattered and they would use debts to United States. Most of the debtor nations made an effort to buy as little as possible and sell more to United States. But once when the borrowers reached the point where their capacity to repay ceased, the loans were stopped. The American government adopted high tariffs, which checked the inflow of European goods into United States. The European power retaliated by erecting tariff barriers against American goods, As a result the American exports to Overseas markets fell considerably


  1. Stock Market Speculation


The process of stock market speculation also contributed towards the  deepening of depression. In 1920 billions of dollars, which according to my Mellon’s theory of wealth should have gone into developing new products and creating employment were diverted to stock exchange markets


  1. Other Factors


  1. The increase in population rate was much less than the production rate,which reduce to consumers.
  2. The disappearance of the western frontier, which meant that American could no longer move into that direction during bad times.
  3. Political unrest in Europe, Asia and South America, due to inter-governmental depths, also post a threat to trade and international cooperation.