Friday, September 09, 2005

Main Causes of the Great Depression

Main Causes of the Great Depression - A short paper on the origins of the Great Depression. Discusses economic problems and policies that led to the American economic collapse in the 1930s. It includes a bibliography.

This paper was originally published in Gusmorino World (May 13, 1996).

One interesting quote from the paper, "The large and growing disparity of wealth between the well-to-do and the middle-income citizens made the U.S. economy unstable. For an economy to function properly, total demand must equal total supply. In an economy with such disparate distribution of income it is not assured that demand will always equal supply. Essentially what happened in the 1920's was that there was an oversupply of goods. It was not that the surplus products of industrialized society were not wanted, but rather that those whose needs were not satiated could not afford more, whereas the wealthy were satiated by spending only a small portion of their income."

Does a disparity of wealth cause an economic depression? If so, does this only occur when the majority of those on the lower end are poor? Does this apply if there is a large disparity but most of those on the lower end are middle class? These are interesting questions and we may see some answers in the near future in the United States if the concentration of wealth becomes more and more uneven. Yet, early 20th Century America is far different than early 21st Century America. I don't think the poor are as poor now as they were in the last century. And it has been argued credibly that the distribution of income in the USA is not as uneven as it is being portrayed.


hank_F_M said...


If the level of individual wealth is on a scale from 1 to 10; and there is a general increase in prosperity of 10%, the scale will now be from 1 to 11, on average every one will be better off except for those who started at zero.

If on the other hand there is a general decrease of prosperity the scale will change from 0 to 9,on average every one will be worse off except for those who started at zero.

While certainly not the whole story, all other things being equal, an increase in the difference between the rich and poor is usually positive; and a reduction in difference between the rich and the poor is usually negative, especially in a relatively modern economy.

Many other factors were involved but I think one of his major premises falls to 6th grade arithmetic.

The usual factors cited, intentionally deflationary monetary policy, the Smoot-Hawley tariff, and an excess of unsecured credit, in themselves and together make a good case the cause of the depression, and point to policies to advocate and avoid to prevent another depression.

Miland said...

Thanks for the comment. BTW, my name is Miland. :]

hank_F_M said...


Miland said...

No Problem. I only mention it because this is the second post you had called me Midland.

I will admit economics is not my strength as I also acknowledge the importance of economics to history...

But I still doubt an extreme increase in the difference between the rich and poor is usually positive. We will always have different economic classes (and should!) but how extreme should we be willing to go?

Mind you, I post this as a capitalist, not a communist or socialist.