The Great Depression of 1929
The Great Depression began in the United States in 1929 where the world experienced a lot of economic hardships. The depression was the most spread, longest, and deepest global economic crisis that is used as a perfect example to show how the global economy can fall within a short period. The Great Depression started when the stock exchange market in the united states started to crash, and the gross domestic products reduced by fifteen percent. The depression had numerous effects on personal incomes, prices and profits reduced, tax revenues, and international trade also fell with almost fifty percent. The depression also affected both the poor and rich countries. Many businesses collapsed, and this led to increased unemployment globally. The cities that dependent on primary industrial sectors suffered the most, such activities included; mining, farming, logging, and construction. Both the urban and rural areas suffered as there were no jobs and the prices of products produced fell drastically. This paper will discuss most of the activities that led to Great Depression, and the effects it has on the society, and the economy.
The Great Depression was not the first capitalist’s economic crisis since another economic crisis had occurred in 1819, and it is referred as the Panic. The panic was the primary American depression that was attributed to economic problems that occurred in 1812 (Benguria & Taylor 2019). The panic depression was caused by a fall in the prices of cotton, and this led to a fall in the contraction credit that affected the young American’s market. The panic lasted from 1819 to 1821 and it affected the south and west that were bitter due to the economic hardships brought by the panic. It resulted to resentment that Andrew Jackson used to make his political base robust in 1820. The panic also led to establishment of political and government policies. There were other economic panics that occurred in the years that followed such as in 1837, 1857, 1873, and 1893, and they all had gross impacts on the global economy.
The Great Depression was the worst economic crisis that occurred in the world of industrialization that lasted from 1929 to 1939. During this time the spending of the investor’s consumers reduced, and this caused a deep reduction in the industrial outcomes, and employment as the affected industries were forced to lay-off their employees. The stock exchange market crashed that started by the investors selling their shares at an over price in what is called the black Thursday. On this black Thursday most of the shares were termed worthless and most of the investors were crashed financially. Consumers would no longer buy the shares, and investors could not invest in the factories, thus they had to close, and they closing the factories, and those that remained open they had to pay fewer wage to their employees. There were bank runs since the investors demanded their deposits in cash, and therefore, the banks had to liquidate loans to cater for the cash demanded by the investors. The Hoover administration tried to support the banks with loans, and the objective was that the banks would give loans to the businesses that would in turn provide employment to the people. Roosevelt was elected during this period, and after his inauguration, he declared as bank holiday for four days. During these four days the congress passed reform legislation, and the reopening of the banks was a sound decision. Roosevelt addressed the public directly through radio as away to regain their confidence that all would be well. During his first a hundred days in office several legislations were passed with an intention to revive the industrial sector. There were also financial reforms such as the Securities and Exchange Commission that regulated the stock exchange market, and Federal Deposit Insurance Corporation that protected the depositors’ accounts.
The Great Depression of 1929 affected the United States both economically and socially. It led to the economy shrinking and this was evident on the fall of the Gross Domestic Product. The international trade failed as countries closed bounders and created trade barriers to protect the local industries. Other countries created trade blocs depending in the trade currencies and their alliances. The stock exchange market lost its value by 90% and it did not recover till after twenty-five years later. The crashing of the stock exchange market affected both the investors and those who had not invested since the banks used their money to invest and the all lost their money. The banks also failed and most of the depositors lost their monies; it’s estimated that a third of the banks failed and the depositors lost about $140 million (Dinçer Yüksel & Şenel 2018). People learnt that the banks had used their savings to invest, and therefore, they rushed to withdraw their deposits. The huge withdrawals led to the runs in banks and affected them financially, and most of them collapsed. The Great Depression also affected people socially since it led to unemployment and therefore, they could no longer pay for their houses and cater for basic needs. It was during this period that the number of street families increased as people could not afford to pay for rent and they were kicked out. Those who were lucky to remain in employment experienced pay cuts and they received low wages that could not cater for their needs, and therefore, poverty levels increased during this period.
Before the Great Depression, the economy was booming, the stock exchange markets and industries were flourishing, the stock exchange markets attracted more people to invest in, and most saw it a short-term investment but not a long term one. There were mass and new production before the Great Depression, and many industries were established before the depression, therefore the rate of unemployment was lower. There was high consumerism due to new and mass production, and extensive advertising that encouraged more buying and selling (Green 2017). The administration adapted the conservative policies that encouraged the establishment of private companies and businesses. The economists predicted that there would be an economic downturn while others predicted that there would be a recession, but they did not tell the exact time when it would occur.
The economic theories responsible for the Great Depression include; common theory that states that the government is to be blamed for fiscal policy changes in all changes in the economy. The government should keep the money demand and supply to prevent the collapse of supply and demand of the money market. The theory blames the government as it was slow to react and in some cases it did not react at all. The Monetarists theory blames the banks and the Federal Reserve in United States for not taking the appropriate measure to prevent the depression (Coen-Pirani & Wooley 2018). The federal is blamed as it did not take the appropriate measure when the money started to shrink. It did not increase supply of money, lower the interests or add liquidity into the banking systems on time. The delay made the investors to panic and they sold off their shares, and the recession period developed into the Great Depression. Keynesian theory stated that the government was to keep employment at its highest during the recession by catering for the deficits. It was also supposed to either cut taxes or increase public spending something that the government of that time did not do.
The new deal is the legislative reforms that President Roosevelt took to help solve the depression crisis. The new deal catered for the needs of reforms, relief and recovery from the depression. The new deal programs aimed at benefiting the youths, unemployed, farmers, and elderly (Fishback 2017). The new deal included the creation of new safeguards and consultants to help revive the banking sector and the economy to help raise the prices that had fallen sharply. The programs focused on the reforms on the financial system to prevent the occurrence of another depression, relief for the poor and unemployed, and recovery of the economy to the way it was before the depression.
Economists have learnt a lot from the Great depression, and they are ready to prevent occurrence of another global depression. The monetary and fiscal policies can be used to prevent the occurrence of another depression. The monetary policies are now expansionary and they provide enough liquidity for the banks. The foreclosures and house rates a have stabilized, more investors are attracted, and the value of houses are continuing to rise (Benguria & Taylor 2019). The central banks have pumped enough liquidity to ensure that businesses are not affected in case of a depression. The measures will ensure that the government can control the economy, and thus preventing the occurrence of another depression.
References
Green, T. L. (2017). Explaining the perverse resilience of mainstream economic theory: Why does economics fail us in an era of climate emergency declarations?
Dinçer, H., Yüksel, S., & Şenel, S. (2018). Analyzing the global risks for the financial crisis after the great depression using comparative hybrid hesitant fuzzy decision-making models: policy recommendations for sustainable economic growth. Sustainability, 10(9), 3126.
Coen-Pirani, D., & Wooley, M. (2018). Fiscal centralization: Theory and evidence from the great depression. American Economic Journal: Economic Policy, 10(2), 39-61.
Benguria, F., & Taylor, A. M. (2019). After the panic: Are financial crises demand or supply shocks? Evidence from international trade (No. w25790). National Bureau of Economic Research.
Fishback, P. (2017). How successful was the New Deal? The microeconomic impact of New Deal spending and lending policies in the 1930s. Journal of Economic Literature, 55(4), 1435-85.