Introduction
The Great Depression is an economic crisis, which started in 1929 in the United States. The crisis almost immediately influenced Europe and the rest part of the world and therefore quickly becoming worldwide economic recession. The most dramatic and stressful part of the Great Depression started on October 24, 1929, when New York Stock Exchange index crashed. This day is widely known as Black Thursday (Romer 2003).
It was the most durable and the most painful economic crisis, ever faced by the countries of the West. The Great Depression lead to significant global decline of production volume, and severe level of unemployment. The crisis also had a great (mostly negative) impact on social and cultural life in the United States.
The Causes of the Great Depression
The economy of the United States came into a recession in summer 1929 due to decline in consumer spending and consequent accumulation of goods unsold, which led to production volumes decline. By contrast, stock prices were not influenced by these trends and kept rising. At the certain moment prices reached so high levels, that they couldn’t be vindicated by expected future earnings. Such futures earnings for the most part depend on the volumes of production and demand, which declined at that period.
This formed a huge stock market bubble, which burst on October 24, 1929, when traders started a massive stocks dumping. At that day (known as “Black Thursday”) stocks trading volume reached all-time record peaking at 12.9 million shares. Real panic began five days later on “Black Tuesday”, when trade volume reached 16 million. During those days the most part of shares showed vast depreciation (Mastracci 2011). The situation was compounded by the fact that there were a lot of investors, who bought these stocks on credit. The outcome for them was awful: besides that they didn’t return their investment in stocks, they also had to pay back to the banks the money they didn’t actually have. As such cases were widespread, banks immediately faced the problem of mass payment failures, which led to severe crisis in the banking system: the most part of banks either suspended their activity or had to close (McNeil 2003).
But in general, it would be too ingenuous to suppose that the stock exchange crash was the only reason of the Great Depression. In fact, the United States economy during 1920s could be characterized as disproportional. At that time there were systematic problems with overall demand volume. They were caused by the fact that 25% of national wealth was concentrated in the hands of the richest 0.1% of American citizen (Saez 2014, 1). As a result, economy comes to vicious circle, when economic growth slows down. This happens because people who own the most part of national assets see that demand and prices are low and therefore they tend to save money rather than invest it in economy, because investment return in conditions of low prices is a tough task. But such behavior in turn causes further demand decline, because investing always leads to demand rise, because significant part of invested money is used to pay salaries to employees.
And if talking about banks, they worked without guarantees to the clients, which became an additional panic factor when stock exchange crash happened. Banking operations were not regulated and it allowed to them to provide loans to traders, who specialized exclusively on stocks speculation. Besides that, banks practiced unlimited money lending to middle-class Americans. This was also a significant factor of creating the money not provisioned by actual production volumes (McNeil 2003).
Finally, the whole complex of causes mentioned above led to stock exchange market catastrophe and consequent crisis spread over all sectors of economy.
Effects of the Crisis on the United States
The stock market crash happened in 1929 had an exceptionally negative impact on people’s confidence in future. In this situation people wished to save at least part of the money accumulated before. That’s why the amount of spending and investment steeply declined. This in turn led companies to suspend or even close production and to fire employees or to significantly cut their wages in order to survive in such extreme conditions (Romer 2003).
Among other negative consequences, people’s income decline had a further bad influence on banking system, because before the Great Depression start a huge amount of loans was provided to people and now they had no money to pay them back. And in many cases people pledged their assets as the loan security, therefore in the situation of crisis banks gained a right to take away secured assets. Due to this the level of social strain in the United States rose drastically (McNeil 2013).
As for quick spread of the crisis to the whole Western world, the main reasons of this were tight economic and trading connections between all of them and commitment to so called gold standard, according to which a fixed exchange rate between currencies of different countries was used (Lewis 2012).
Over the next three years the situation was only getting worse. Unemployment rate was constantly rising. According to Stanley Lebergott’s index, before crisis it was 3.2%, in 1930 it reached 8.7%. During the next three years it was constantly rising and peaked 24.9% in 1933 (see fig. 1). And during the years before World War II it didn’t come back to the pre-crisis level (Margo 1993, 43).
Figure 1. Unemployment rate in the United States in 1930s.
In 1930 heavy banking system crisis started, at the moment when people lost their confidence in banks sustainability. They demanded getting their deposits back and thus forced the bank to intensify collecting loans given before in order to compensate losses in their cash reserves. By 1933 thousands of banks across the country had closed (McNeill, 2003).
In this situation President Hoover’s administration tried to support banks with government loans hoping that banks would provide loans to companies, which in turn would be able to stabilize their activity and to reinstate the fired employees in their positions.
Recovery from the Great Depression
After winning elections Roosevelt started acting immediately. His approach to solving the problem was different from his predecessor’s methods, who believed (according to free market theories) that it was not the task of the government to take part in the economic processes.
Roosevelt believed that the only way out of the crisis was deep economy restructuring. This would first stop the current recession and would ensure that such large-scale crisis would not happen again. The reforms package proposed by new President was called the New Deal program. The main goals were stimulating demand, creating new jobs and other means of support for unemployed citizen via increased government spending and financial sector reforms introduction.
The first thing done was announcing a “bank holiday”, which lasted four days, during which banks were closed in order to provide time for adopting new banking legislation. As a result, the Emergency Banking act was introduced, according to which banks were reopened after “bank holiday” only under Federal Treasury provision. Government loans were provided to the banks acknowledged as sound (Belkin 2012, 629).
The other important task was to stop panic and ensure people that government was doing everything possible to recover from the crisis. Roosevelt started directly talking to the people in the series of talks on the radio. These “fireside chats” made a positive impact on public confidence restoration (Belkin 2012, 629).
This was followed by passing legislation, which reformed the financial sector. Two new institutions were created: Securities and Exchange Commission (SEC), which established the stock market regulation norms, and Federal Deposits Insurance Corporation (FDIC), which dealed with providing government insurance of deposits in the banks.
The second part of the New Deal was connected with economy stimulation and fighting the unemployment. The Agricultural Adjustment Act was passed in order to cut production volume in agricultural sector, which led to rising the food prices and allowed farmers to increase their income (Belkin 2012, 630). By 1935 social security program was introduced (Belkin 2012, 635). Programs aimed towards employing people were the Tennessee Valley Authority (TVA, building hydroelectric infrastructure in the Tennessee Valley region to solve flooding problems and to generate additional electric power) and Works Project Administration (WPA, a jobs program, which gave jobs to more than 8 million people) (Belkin 2012, 635).
All the actions taken in 1932-1935 had a positive impact on American economy. Annual real GDP rate growth during these four years was 9% in average (Amadeo 2015). However, in 1937 Americans faced recession once again, which compensated positive effects gained in previous years. Therefore, the final recovery after the Great Depression was postponed until 1940, when production volume got back to pre-crisis level (Romer 2003). Unemployment rate was still relatively high, but at the same time significantly lower than in 1933, at the peak of crisis (Margo 1993, 43).
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