Causes of the Great Depression

When we think of the Great Depression, it is so easy to think that business caused it and the government corrected it. However, the truth about the Great Depression is that it was the government that allowed it to continue for much longer than it needed. Because of policies enacted by President Hoover and then Roosevelt’s New Deal policies, the Great Depression, which should have only lasted for a couple of years, lasted for far longer. The big question is: what individual policies caused it?

Monetary Contraction

Because of a one-third drop in the money supply from 1929 to 1933 and then bank failures in the early 1930s, many people suddenly were afraid of an economic crisis. That drop in the money supply was caused because of an error by the Federal Reserve. The bank failures, though, was caused because of a bank’s inability to diversify their portfolio and branch out.

Tax Hikes

During the 1920s—otherwise known as the Roaring 20s—we had an economic boom. But, what people don’t notice is that there were also incredibly low income taxes. The income tax dropped from 73 to 25 percent. In 1932, President Hoover signed the Revenue Act of 1932. This was a massive increase of the income tax from 25 to 68 percent. When money is taken out of the hands of the consumer, they are unable to buy goods which means that businesses don’t get revenue.

When Roosevelt entered office, he increased the individual and corporate tax even more. The highest rate reached up to 79 percent. Add on the fact that states were suddenly starting to add an income tax as well and suddenly, the incentive to work and invest died away. When entrepreneurism was so desperately needed, there was no money to invest in the economy of the country.

Trade Restrictions

As trading became easier and ships became more powerful around the world, the United States began to increase the amount of trade they sent overseas. In an effort to promote American goods being sold in America, Hoover signed the Smoot-Hawley trade law. This raised the import tax up to 59 percent. When this happened, the governments of other countries raised the import tax on goods that came from America. In other words, we lost out on a huge business because we became too protective.

High Prices

The National Industrial Recovery Act of 1933 created codes that were meant to reduce competition between businesses. Specifically, it was a law that told businesses to cut output and keep prices and wages high. Any businesses person that tried to lower prices was fined, harassed and sometimes even arrested. This was meant to keep big business strong.

The next thing that they did was create the Agricultural Adjustment Act of 1933. This meant that extra crops were destroyed to ensure that the prices didn’t plummet. While people starved, food was destroyed. Welcome to America.

Employment Costs High

Many New Deal policies made it even more expensive to hire employees. The NIRA codes required high wages. Businesses had to keep high wages on employees and that meant that they were unable to hire more employees. As businesses were unable to make enough revenue because there were not enough people working to make money, they were forced to keep wages high. That did nothing but further perpetuate the problem.

Conclusion

It is so easy to think that government is the save all when it comes to the economy. By creating “jobs” and creating public works programs, President Roosevelt got us out of the Depression. At least, that’s what we’re taught in school. The truth is so far from that myth. In actuality, the policies of Presidents Hoover and Roosevelt allowed a simple recession to turn into the Great Depression.

When the government tries to do what business is best at, things only get worse for the economy. Yeah, it made sense politically. Yes, people “felt” good because there was this mysterious Social Security Act. But, the problem was, this did nothing for the economy. It just made things worse for the country. When a recession hits—such as the one we’re trying to recover from—it is important that government intervention can only perpetuate a recession. If we want to get out of it, let the businesses and let entrepreneurs take control.