The paper examines the cause of the economic depression in the American history and why itlasted for long. In the analysis, the paper will explain how America decided to extend it regime beyond its limits and some of the policies it campaigned for in order to promote peace. In addition, In addition, it will examine why the United States positioned itself against the countries at war in defending its economic allies. America suffered personal loss and financial crisis which lead to the persistence of the great economic depression(Walton & Rockoff, 378).

Causes of the great economic depression

When the civil war and First World War ended in1914-1946, it brought about rise in the cost of labor, capital and human suffering the industrial nations. These wars resulted from the obsession of the Europeans to own more of the land in Africa. By the 19th century, the US remained somewhat neutral to acquire colonies in some parts of the world. However, the American began to develop sympathy for the Cubans revolutionaries who were fighting for their independence from the colonial rule of the Spain. The United States was concerned with peace initiative to continue doing business with its allies but it did not want to engage in the war (Walton & Rockoff, 378).The US financial and business communities opposed this move since they held Spanish securities and had an interest in the Cuba, in the sugar industry. They viewed the civil war would cause inflation and degrade the American Commitments to the Gold standards. All this changed when they attacked the US battleship ‘Maine’ ((Walton & Rockoff, 378).

The American government decided to extend their limits beyond their continents (Walton & Rockoff, 378). The Americans had expectations that spreading to the other continents would boost their stock market, but there was a great crash in 1929 that caused severe economic contractions. The result was a great depression of unparalleled magnitude such as the collapse of the banking systems, fall in farm prices and reduced production and high rate of unemployment to the workers. As a result, government began to concentrate on recovering the economic crisis. They started to regulate the private sector and the expenditure of the social welfare increased. In 1929, the government spending increased to 15% of the gross domestic product. Although the American’s engagement in the world war only lasted for 19 months, at that time, they quickly mobilized more labor and capital into the armed forces (Walton & Rockoff, 384).

They increased the army from 179,000 to almost 3 million in 1918. The government struggled to regulate, new prices, allocate resources and setting priorities. In order to pay the raised war taxes, money supply increased by selling bonds worth billions of money to the public. As noted by Walton & Rockoff, (378), the national debt which at the start of the war was 3% of the GDP, had increased up to 32% of the GDP by the end of the war. At the start of the war high concerns to uphold, United States’ economy was rising rapidly due to the free international trade and industrialization. Unfortunately, the fruits of the progress were destroyed by the assassination of Australian Archduke on June 28, 1914, by a Serbian revolutionary (Walton & Rockoff, 384).

The result was that it erupted in the bloodiest war ever seen in Europe and 20 million people were wounded and 10 million died. The effect was the financial panic in the economy of the US. They closed the stock markets for four months and banks experienced pressure as many people wanted to convert their money into gold (Walton & Rockoff, 384). The US refrained at the start of the war, but in the end, many forces and events pushed the state to join the war by supporting its allies. The crucial involvement was when the Germans destroyed the British submarine ‘Lusitania’ and caused los of 1,198 lives, of which 124 were Americans. The state increased contracts to supply more labor by drafting more men and women into the army. Real earnings increased way above the level compared to being the stability of the economy (Walton & Rockoff, 384).

It was an American tradition to compensate families for veteran who had lost their lives during the war. However, the amount was very high due to the heavy psychological costs and shell shock since the war affected the veterans to the extent that they did not have a normal life. In addition, the veterans started calling for bonuses to compensate for their losses. In 1931, the cost of the war was to an estimate of 31 billion US dollars which included, wages of men drafted into the arm that was higher than the market wage price, and money that was lent to the allies and was not expected to be repaid. This increased the government’s wage bill and reduced the economic growth rate. The result was an average of 44% of the GDP during that time, when compared to the current US GDP of about 66.8trillion dollars (Walton & Rockoff, 395).

Why the great depression lasted for so long

During the period of neutrality, the government continued to allow inflow of gold, and the federal reserves fluctuated considerably from a minimum of 2.4 billion to a maximum of 3.4 billion. However, this drop was not connected to the reasons of monetary policy or it factors, but was due to fluctuations in expenditure, tax receipts and floatation of the government securities. (Friedman, Schwartz, 553). In addition, the increased federal spending on the national debt, benefits of the veterans and other long term costs contributed to the lasting economic depression (Walton & Rockoff, 395). Like Friedman, Schwartz, (556) explained, the banks made no attempt to release their excess reserves; instead, they were after the reserve increase of 1936 and 1937. It was ironic that even though the government decided to peg a rate increase in the treasury bills, it resulted into sharp restraining influence on bank’s liaison abilities(Friedman, Schwartz, 553).

Another factor was the expanded defense program the government initiated in 1949 and the land lease in 1941. As a result, tax rates and tax revenues increased for a time. The debt rose sharply. In 1941, the cash operating outflow was higher than the cash operating inflow by 10 billion US dollars. The result was nearly half the expenditure of the state and later, it tripled to 50% in 1943, to a peak of about 95 billion US dollars (Friedman, Schwartz, 556). There was intensive transfer of economic resources from peace to production of war which forced the government to give out more money than it was generating. In 1941, there was price control mechanism; however, price increases continued to happen in concealed form such as poor quality services offered, elimination of discounts on sales and production of goods that were relatively close to the price ceiling(Friedman, Schwartz, 556).

In addition, where the price controls were successful, there was a shortage of goods such as gasoline and meat followed by acute government rationing. After the civil war and the world war one, wholesale prices doubled to more than half and the implicit price deflator declined. During 1946, the wholesale prices increased at an average rate of 8.2% while the implicit price deflator increased at a rate of 5.2%, and price velocity fell at a rate of 1.7% per annum (Friedman, Schwartz, 546). The decline in velocity and increase in output explains why the prices increased at a slow rate that the money stocks during the wartime deficit periods.The rate of growth in the money stock was unusually high that also contributed to the widespread inflation in the midst of large scale unemployment(Friedman, Schwartz, 556).

After cessation of the war time, there was the production of automobiles and other durable goods. The government prevented consumers and private companies create producing these good. While the consumers channeled their incomes to increase their wealth, the spending absorbed a large fraction of increases in income in particular, a large fraction of transitory increases. After the state had decided to close these channels, the consumers and businesses started to increase the stock of other assets, to a much higher level than the money and the securities the government held, compared to its real income (Friedman, Schwartz, 546).Deposit currency ratio was another factor that led to economic depression. As explained by Friedman, Schwartz, (564), this decline was as a result of increased income tax levies, black market activities, and high mobility of civilians’ population and expansion of the army(Friedman, Schwartz, 556).

Floatation of government securities through war loan drives also contributed to the irregularity in the money stock, for instance, the Seven War Loan Drive and the Victory Loan. There was occasional transfer of security deposits to war loan accounts which were maintained at the Treasury controlled by a commercial bank. The effect of this action was a reduction in state reserve, which contributed to increased economic depression (Friedman, Schwartz, 573).

Works cited

Friedman, Milton and Anna Jacobson Schwartz. A Monetary History of the United States, 1867

1960. New, York, NY: Princeton University Press, 2008

Walton, Gary and Hugh Rockoff. History of the American Economy. Natorp Boulevard: Cengage

Learning. 2013

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