Reasons for Great Depression

The Great Depression of 1929 was mostly due to international factors rather than domestic factors. However, when over viewing the prime causes of the Great Depression one must distinguish five- the conclusion of World War I, the decline of international trade due to high tariffs, monetary policies (in particular the gold standard), the slowing of the American economy in 1929, and the stock market crash. Clarence L. Barber in his Origins of the Great Depression emphasizes international factors and is supported by Robert McElvaine in his Encyclopedia of the Great Depression. Meanwhile, Christina D. Romer attributes domestic causes as the source of the Great Depression and is supported by John Findling in his Events that Changed America in the 20th Century and in An Eyewitness History: The Roaring Twenties by Tom Streissguth. However, it has been concluded that the origins of the Great Depression were mostly due to the international factors which Barber states in his argument.

Clarence L. Barber in his On the Origins of the Great Depression argues that the Great Depression is attributed to international causes, predominately three- the end of World War I, monetary policies, and international trade. He is then supported by Robert S. McElvaine in his Encyclopedia of the Great Depression, who particularly places much importance on the end of World War I and claims it is a primary cause of the Great Depression. Before analyzing their claims, both Barber and McElvaine must be viewed as sources. Clarence L. Barber has numerous journal publications and is well-known for his contribution in the work entitled The American Economic Impact in Canada. Therefore, one may assume he is a knowledgeable source on the subject of American economy. Meanwhile, Robert S. McElvaine is the chairman of the history department at Millsap College; he also has written books entitled The Depression and the New Deal and The Great Depression: America 1929-1941. Therefore, one may assume that McElvaine is a knowledgeable source on the Great Depression.

Barber claims that the conclusion of World War I had three effects which influenced the cause of the Great Depression in the United States- a post war deflation, an agricultural depression, and a prominent downfall in labor markets. In most instances, World War I had stimulated and distorted the economies of not only the smaller nations of Europe, but also the super powers. Wartime inflation was then followed by a postwar deflation because Europe was in a state of economic chaos since British and French administrations had accumulated massive war debts to the American creditors, as was the huge reparation payment the powers demanded from Germany . By 1929 Germany was unable to pay its debts, relying instead on high inflation to keep its economy running. Unable to collect from Germany, France and England were unable to repay the US. McElvaine later discusses that an agricultural depression shortly followed in European countries, as well as in the United States. Demand for American farm products (particularly grain) soared, and then, so did the price. Such profitable conditions led American farmers to go deep into debt when purchasing additional land and machinery. When the other European countries recovered rapidly after the war, the demand for the expanded production of American farms plummeted, helping to carry the economy into a sharp recession in 1920 and 1921 . In fact, agriculture was to remain in depressed conditions throughout the period of more general prosperity from 1923 to 1929. Furthermore, the death toll for the Americans for World War I was relatively small. Upon return, veterans flooded the labor market. At the same time, jobs were being eliminated as a cost saving measure due to a less desire for American products . This culminated in a slowing of new investment and business activity.

The second part of Barber's claim expresses that the conclusion of the war radically altered international trade for two specific reasons- it transformed the US into the worlds' largest creditor and a cycle of war debts ended in the US' downfall. Perhaps more significant, in its adverse effects on the worlds' economy, was the war's establishment of the United States in the role, previously held by Great Britain, as the world's banker. This position carried with it responsibilities for which the Americans were ill prepared and that they were disinclined to shoulder . In particular, American political leaders of the twenties (Presidents Woodrow, Warren, Calvin, then Hoover) were committed to maintaining a favorable balance of trade. This meaning they wanted the nation to export more than it imported. This stance was, in the long term, incompatible with America's assumption of the position of the world's leading lender. Other countries had to sell more to the US than they bought from it, if they were to have the funds to repay the debts they owed to American creditors . Massive war debts had been accumulated and were owed by the British and French to American creditors, as previously mentioned. Yet, since Germany was unable to repay the war debts to these two super powers, and France and England were unable to repay the US, none of these three was able to buy American goods; in a cycle which ultimately led to the American collapse.

There were three monetary conditions which were significant during the time of the depression- Germany's inflation, the reaction to this hyperinflation and thus deflation, and the gold standard. Allison states, "...In the late 1920s and early 1930s, the most notable and recent example of the potentially catastrophic consequences of runaway price increases was the hyperinflation that had gripped Germany in 1922 and 1923..." (Allison 3). The exchange rate between the German and American currencies went, in less than two years, from 192 marks to the dollar to 4.2 marks to the dollar. By November 1923, German money was essentially worthless. Germany's horrible experience with hyperinflation contributed to the coming of the Depression in two manners. First, it terribly weakened the German economy and those of several other central European countries, and they never fully recovered from the effects for the remainder of the decade . Second, the German disaster caused other nations to be unduly concerned with avoiding inflation, when the more dangerous economic factor was actually deflation . McElvaine adds, "The Bank of England in September of 1929 had raised the discount rate of interest, primarily to stabilize England's economy by restricting the flow of gold into the US. British investors saw an opportunity in the US stock market and the Bank of England wanted to stop the outward flow of gold" (McElvaine 153). In the US, President Hoover encouraged the Federal Reserve Board to raise its interest to 5% in June of 1929, then