The Necessity of Demand

The degree to which the Great Depression was caused by any one factor, is incalculable. However, historians have attempted to explain the failings of the people and institutions of that period, which led to the collapse of a powerful economic force. Certain theories abound, the Austrian, Monetarist, and many others; yet were a historian forced to express one theory over another, one might pick the Keynesian theory of demand collapse.

What is demand collapse? In simplistic terms it is a decline of individuals buying a certain item or service. For example, a businessman builds an industry selling an iconic shoe, for a certain period of time this man will make a healthy profit. However, if this individual does not progress or fails to maintain their significance, the demand for their shoes will fall off, potentially destroying the business. A secondary example, the same man with the same shoe business is the only provider of shoes for a period of time, thus maintaining a monopoly on the industry. However, after a period of time previous businesses who sold shoes were able to start producing again, and new ones were built by other individuals. The man, now having lost his monopoly, has over produced his shoe and with a reduced number of buyers due to the new competition, his business loses a large amount of money due to overspending. This in turn can cause the man to either sell off his business or close it in order to make up the expenditure or keep from hemorrhaging what remaining capital he may have.

The second example reigns more significantly in the discussion of the Great Depression. During World War I, European business, manufacturing and agricultural, were unable to produce due to the conflict. Men who would traditionally working the positions, were at war and the infrastructure necessary for production had been destroyed during the onslaught. However, in the United States, for the first few years of the conflict, manufacturing and agricultural industries skyrocketed in necessity to supply the war effort. Livestock became one of the largest commodities in the United States during the first world war and remained that way during the first few years of peace post war. The value of livestock coming from the United States between 1914 and 1918 increased by seventy-eight percent for cattle and fifty-three percent for hogs.[1] However, the growing necessity for U.S. crops and livestock created a brief supply deficit early on, which caused prices to soar.[2]

Due to an overall price increase and the unknowable future, regarding the war in Europe, U.S. farmers saw the potential to make large sums of money during the conflict. With this in mind, U.S. farmers borrowed extensive amounts from banks, credit agencies, or loan offices, in order to purchase more land, often at higher-than-average prices, around their preexisting farms, in the hopes of being able to produce more crops or livestock. The institutions that were willing to loan this money were often new banks, that marked loan repayment or the act of loaning, as the lion share of their portfolio.[3]

The agricultural boom of the period saw the rise of larger farms, new farms, and new banks, all relying on the continued wartime pricing of goods, even into interwar years. However, within an extremely short period of time, European agricultural production resumed and the demand for U.S. goods plummeted. By 1921, the price of crops decreased by over fifty percent in comparison to their price two years earlier, while livestock pricing decreased by sixty-one percent for cattle and forty-eight percent for hogs.[4] In response to the decreasing price for crops and livestock, the inflated value of the land purchased at exuberate prices fell off as well by an average of twenty-seven percent, with its peak at forty-three percent.[5]

These falling prices were in response to the increased number of producers after the war with the European economy returning to productivity, thus the demand for U.S. goods collapsed under the increased competition. As the prices of crops continued to decrease and the value of land along with it, the loan repayments to the newly established banks, who relied on loan activities for survival, grew to be nonexistent. The outcome for the banks who lent the money to begin with was equally as expected as for the farmers who borrowed the money. Over the 1920’s, five thousand banks failed across the United States, from failure to recover loans given to farmers during the agricultural boom of the war years.[6] The over production of goods, along with the over reliance on agricultural commodities by banks, saw the collapse of the farming industry overall within the United States and the closure of several banks. Ultimately, the farming industry would enter an economic depression far earlier than the rest of the world’s economies, with the former causing the latter.

Bibliography

“Chapter E. Agriculture (Series E 1-269).” n.d. https://www2.census.gov/library/publications/1949/compendia/hist_stats_1789-1945/hist_stats_1789-1945-chE.pdf.

Hall, Tom G. “Wilson and the Food Crisis: Agricultural Price Control during World War I.” Agricultural History 47, no. 1. 1973. 25–46. http://www.jstor.org/stable/3741259.

Jaremski, M. and Wheelock, D.C. “Banking on the Boom, Tripped by the Bust: Banks and World War I Agricultural Price Shock.” Journal of Money, Credit and Banking, 52: 1719-1754. 2020. 1638-1868. https://doi.org/10.1111/jmcb.12725

Tinley, J. M. “Behavior of Prices of Farm Products during World Wars I and II.” Journal of Farm Economics 24, no. 1. 1942. 157–67. https://doi.org/10.2307/1232301.

[1] “Chapter E. Agriculture (Series E 1-269).” n.d. 101.

[2] Hall, Tom G. “Wilson and the Food Crisis: Agricultural Price Control during World War I.” Agricultural History 47, no. 1. 1973. 25.

[3] Jaremski, M. and Wheelock, D.C. “Banking on the Boom, Tripped by the Bust: Banks and World War I Agricultural Price Shock.” Journal of Money, Credit and Banking, 52: 1719-1754. 2020. 1724.

[4] Jaremski, M. and Wheelock, D.C. “Banking on the Boom, Tripped by the Bust: Banks and World War I Agricultural Price Shock.” Journal of Money, Credit and Banking, 52: 1719-1754. 2020. 1724. See also; “Chapter E. Agriculture (Series E 1-269).” n.d. 101.

[5]Jaremski, M. and Wheelock, D.C. “Banking on the Boom, Tripped by the Bust: Banks and World War I Agricultural Price Shock.” Journal of Money, Credit and Banking, 52: 1719-1754. 2020. 1724.

[6] Ibid.