The Great Depression: Causes and Impact

Case Background:

This case talks about the Great Depression of the 1930s, which is one of the most devastating
economic crises in the history of the United States. It is vital to understand the economic
conditions that preceded this crisis to appreciate its magnitude fully.
The American economy in the 1920s was marked by a decade of stellar growth and
prosperity. By the early months of 1929, there was widespread optimism about the strength
and growth potential of the economy. The stock market was performing exceptionally well,
and Secretary of Commerce Herbert Hoover declared that America was closer than ever to
overcoming poverty.
During this decade, the real GNP experienced an average annual growth rate of 4.7%, and per
capita income increased by 28%. However, this prosperity was unevenly distributed. While
some segments of society enjoyed significant economic gains, others, such as farmers,
struggled with income growth and rising debt.
There were also several structural weaknesses beginning to appear in the economic system in
the 1920s. This included an increase in speculative activities by middle-class savers, a
growing dependence on foreign trade, and fluctuations in construction expenditures.
By mid-1929, signs of economic decline began to appear. Auto sales dropped and industrial
production also fell sharply by year-end. During the bull run, the stock market reached
unsustainable levels and showed signs of anxiety among investors.
The stock market crashed in October 1929, and this marked the beginning of the Great
Depression. However, this has not been mentioned as the root cause. The actual causes
unfolded in the preceding months of the Great Depression. The sectors that had been the
backbone of economic growth – Automobile and construction- started showing signs of
weakness. The inventories increased as demand dropped increasing the cost burden on
businesses. The traditional indicators of economic wellbeing, such as freight carloadings and
industrial production, were all declining.

Two key factors contributed significantly to the onset of the Great Depression:
1. Income Inequality: The distribution of wealth and purchasing power was highly
unequal in the 1920s. Despite the economic growth, many Americans especially in the
rural areas needed financial help to afford to participate fully in the consumer
economy. As factories produced more goods than consumers could purchase,
overproduction and underconsumption became apparent.

2. Government Policies: Government policies played a key role in exacerbating the

economic problems. Mistakes in monetary policy by the Federal Reserve,
disproportionate tax systems that increased income disparities, lax regulations which
played a part in irresponsible speculation by middleclass, high tariffs, and restricted
foreign trade all contributed to the economic downturn.

The response to the Great Depression was fraught with challenges. The existing public
welfare system was inadequate to handle the existing and continuing to surge in demand for
assistance. Although the private charities stepped in to fill the gap, it was still inadequate.
President Herbert Hoover's initial response emphasized cooperative individualism and
decentralized relief efforts. However, these measures proved ineffective as unemployment
increased. Eventually, he shifted towards a more direct intervention approach and he created
the Reconstruction Finance Corporation (RFC) to provide emergency financing to struggling
institutions to support the economy.
As the situation continued to deteriorate, Hoover lost the pivotal elections and Franklin
Roosevelt took office in 1933. By then, the economy had reached a critical point, there were
numerous bank closures and economic was in a downward spiral.
The Great Depression serves as a stark reminder of the complexities and consequences of
economic imbalance, government policies, and the need for intervention during times of
crisis.

Analysis:
The Great Depression was not a sudden event caused solely by the stock market crash in
1929; it was brewing due to deeper structural issues. The case highlights that increased
speculative activity by middle-class savers, dependence on foreign trade, and fluctuations in
construction expenditures were fundamental weaknesses. This suggests that economic
stability cannot rely solely on short-term indicators like stock prices but must address
underlying structural vulnerabilities that can make the economy more vulnerable to
unprecedented shocks.

The Great Depression was caused in large part by income inequality. A sizeable portion of
the populace couldn't afford the goods being produced despite the impressive economic
growth. As a result, there was an increase in production and a decrease in consumption,
leading to the deepening of the crisis. The takeaway is that equitable wealth distribution is
necessary for a sound economy to maintain long-term expansion. Every government should
focus on the inclusion of the underprivileged into the formal economy, this not only helps the
overall social well-being of the country and the individual but also shores up the economy to
face sudden shocks that might appear in the future.
The case underscores the impact of government policies on economic crises. The Federal
Reserve's monetary policy mistakes, along with the tax system's role in widening income
disparities and lax regulations, all exacerbated the severity of the Great Depression. This
emphasizes the critical role of prudent government intervention and effective regulation in
stabilizing and safeguarding the economy against financial and economic setbacks.
The case demonstrates the challenges in responding to a severe economic downturn. Initially,
President Hoover's emphasis on individualism and decentralized relief efforts proved
inadequate when faced with a nationwide crisis. This highlights the need for coordinated
government-led efforts during economic crises to prevent widespread suffering and
containment of the issue. It also highlights the importance of learning from early responses,
staying agile and iterating strategies as needed.
The shift from Hoover's conservative approach to Roosevelt's more interventionist approach
represents a crucial moment in American economic history. Hoover's reluctance to expand
government intervention hindered early recovery efforts, while Roosevelt's New Deal marked
a significant shift towards a more active government role in managing economic crises. This
demonstrates that government policies can influence the trajectory of economic recovery and
highlights the need for adaptable governance during emergencies.

Role of Psychological Factors: During the Great Depression, psychological factors played a
notable role. The sudden loss of confidence in the stock market and financial institutions
contributed to the severity of the crisis. Understanding the psychology of market participants
and the public's perception of economic conditions is crucial in managing economic crises.
The Great Depression offers lessons for contemporary economic challenges. It underscores
the importance of proactive and coordinated government intervention during economic crises
to prevent the worsening of problems. Income inequality, speculative activities, and
economic imbalances remain relevant concerns today. This emphasizes the need for
continuous vigilance, formulation of inclusion policies and regulation to maintain financial
stability.
The case shows the complexity of economic crises. The Great Depression was not caused by
a single event but rather by a combination of factors that evolved over time. This complexity
emphasizes that economic problems are multifaceted and require multifaceted, adaptable
solutions. Policymakers and economists must consider a range of factors.

As a business manager, there are several key learnings from "The Great Depression: Causes
and Impact" that can help one navigate and address economic challenges effectively in the
future.
Economic downturns are a natural part of the business cycle. Understanding these cycles and
their historical context can help one prepare for and adapt to economic recessions.
Being familiar with macroeconomic indicators like GDP growth, unemployment rates, and
inflation will help one understand and monitor economic forecasts and stay informed about
the overall health of the economy.
Overreliance on a single product, market, or revenue stream can significantly expose a
business to various risks, especially during economic downturns. In this case, the economy
relied on two sectors- automobile and construction and any slowdown in these would impact
the economy, as can be seen in the case.
Similarly, when a business relies heavily on a single product or service for its revenue, any
fluctuations in demand for that particular offering can have a pronounced impact on the
company's financial stability.
Overreliance on a single market or customer base makes a business susceptible to external
market factors. Economic contractions may lead to decreased consumer confidence, reduced
purchasing power, and shifts in consumer preferences. If the business is heavily dependent on
one market, it can experience a severe and sudden decline in sales if that market is
particularly affected.

Economic crises can lead to disruptions in banks and other credit sources, and these can
reduce access to financing. A business with a healthy cash reserve is better equipped to
weather these challenges and maintain its financial stability.
Also, economic crises can present unique growth opportunities, such as acquiring distressed
assets or expanding market share. Cash reserves allow a business to seize such opportunities.
There can be many new avenues available in the market for the company with a healthy cash
reserve to capitalize on in economic downturns.
Unforeseen events, such as supply chain disruptions, changes in customer demand, or
regulatory changes, can occur during economic crises. Hence, companies should stay agile
and vigilant. They should continuously analyze the impact of their decisions, as seen in this
case. The policies and actions that were implemented by Hoover were not yielding positive
results, so a firm needs to stay flexible in these situations.

Balancing Short-Term Survival and Long-Term Growth:

Economic downturns often require immediate, tactical responses to address pressing
challenges like declining sales, disrupted supply chains, or cash flow constraints. However,
focusing solely on short-term survival without considering long-term implications can hinder
a business's ability to recover and thrive when economic conditions improve.
While addressing immediate challenges is crucial, a forward-thinking business manager
recognizes that economic downturns are temporary. Therefore, it's essential to strike a
balance between short-term survival tactics and long-term growth strategies. This approach
ensures that the business not only weathers the storm but also emerges more robust and
resilient on the other side.

Conclusion:
The case of "The Great Depression: Causes and Impact" provides invaluable insights and
lessons for business managers facing economic challenges. The Great Depression was not a
sudden event but a culmination of deeper structural issues, emphasizing the need for a
complete understanding of economic conditions.
Firstly, recognizing that economic downturns are an inherent part of the business cycle is
essential. Understanding historical context and economic indicators can help managers
anticipate and adapt to recessions.

The case highlights the dangers of overreliance on a single product, market, or revenue
stream. Diversification is crucial to mitigate risks associated with economic fluctuations, as
witnessed in the overdependence on the automobile and construction sectors in the 1920s.
Maintaining a healthy cash reserve is vital during economic crises when credit and financing
may become scarce. A robust cash position enables a business to weather financial storms,
seize growth opportunities, and navigate uncertainty effectively.
Furthermore, the case highlights the importance of agility in decision-making. Economic
crises can bring unforeseen challenges, and businesses must be prepared to adapt their
strategies and operations in response to changing circumstances.
Balancing short-term survival tactics with long-term growth strategies is a pivotal approach.
While addressing immediate challenges is crucial, a forward-thinking approach should also
be employed to consider how to emerge stronger from the downturn by capturing
opportunities as the economy rebounds.

Mohit Patil
B23086
Section - B