From 1928 until the beginning of World War II, the majority of the world was engaged in a severe depression. The economic slump, lasting approximately a decade for most nations, had a variety of causes and was responded to in an assortment of ways. Most countries saw an increase in unemployment, a decrease in production, sharp decreases in price levels, and many experienced political change to prevent such an event from repeating in the future. The United States, in particular, was faced with unprecedented numbers of unemployed workers and high levels of poverty.
The depression can be attributed not to a single cause, but, rather, to a mixture of economic, political, and historical factors. Most popularly examined, the stock market crash of 1929 played a part, not necessarily in the occurrence of the depression, but in the severity and longevity of it. In an event known as Black Tuesday, on October 29, 1929, the stock market took a sudden dive; in the few years preceding this date, Americans had been investing so heavily in the stock market that many had taken out loans in order to purchase more stock. Investors’ losses in stocks caused them to be unable, for the most part, to repay their loans without becoming bankrupt. Along these same lines, it has been speculated that a root cause of the depression was a surplus of production and a deficit of consumption throughout the 1920’s; companies tended to invest large sums of money in capital goods, yet they were producing at levels higher than consumers demanded. Much of this over-investing was done in large, industrial factories, rather than small, private firms and farms. Just as investors bought stocks that proved to be unprofitable, corporations and other large businesses purchased equipment and factories that provided little in returns. Because profits on these investments, both financial and capital, were practically nonexistent, investors and corporations defaulted on their loans; the sheer number of individuals and firms that could not repay what they had borrowed caused approximately a fifth of the banks in the United States to fail. This lead to an inability for many to withdraw the money that they had in savings accounts and checkable deposits at these institutions.
A contributing factor to the acuteness of the depression in the United States was deflation, or the contraction of nominal money, which was a policy mistake made by the Federal Reserve System. In a time where currency and checkable deposits were already in a shortage, the Federal Reserve failed to prevent a multi-billion dollar decrease in nominal money, making the Great Depression more dramatic than it may have otherwise have been. The British government was facing a similar problem, as the nation had just reverted back to the gold standard. While on the gold standard, where the value of currency is backed by gold, inflation in one country must be caused by inflation of the price of gold in others; the British government asked for help from America and other western European countries in bringing about inflation, causing an untimely boom in price levels and production that would lead to severe deflation in many nations within a few years.
Many factors in international trade during the 1920’s and 1930’s contributed to the Great Depression. First, in the late 1920’s, European nations began to import fewer United States goods, largely because of greater production capacities in European industry and agriculture. Additionally, many European countries were unable to afford large quantities of imports, as World War One was costly and countries were, for the most part in debt. The Smoot-Hawley Tariff Act of 1930, which placed or raised ta riffs on thousands of foreign goods, causing more Americans to purchase domestic goods. American goods. These factors all caused a decrease in net United States exports, which caused a decrease in total gross domestic product (GDP).
The Great Depression caused a huge drop in GDP, employment, price levels, and inflation across the United States. Unemployment reached a drastic low in 1933, with nearly one in every four Americans being out of work. Industries such as mining and logging were affected severely, although agricultural production took the hardest hit after a drought in the summer of 1930 magnified the economic environment of the time.
The slump was largely seen by governmental officials as a natural part of the business cycle and President Herbert Hoover did little to relieve the financial and economic pressures the country was facing. President Franklin Roosevelt took office in early 1933 and began restructuring the economy under a set of policies that he referred to as the New Deal. His intention was to both bring the economy out of the current recession and prevent a similar recession from happening in the future. To do this, he implemented policies such as minimum wage laws, stimulation of labor unions, and subsidies of agricultural products, which still remain in force today, although many economists feel that while they had their place during the 1930’s, these policies do more to inhibit the economy today than help it. Some of the most influential provisions of the New Deal involved bank reformation. The Federal Deposit Insurance Corporation (FDIC), which insures individuals’ savings and checking accounts up to $100,000, was started to prevent future bank failure. The Securities Act of 1933 and the Securities Exchange Act of 1934 (which created the Securities Exchange Commission) were passed to regulate the trade of securities in secondary financial markets. The National Recovery Board (NRA) was also set up in 1933 and regulated trade by setting national labor standards and monitoring the price levels set by businesses; as many felt that this hindered the free market economy, the NRA only lasted two years, long enough to help pull the country away from the recession without permanently implementing extreme governmental control on the economy. The policies and institutions of the New Deal were moderately effective, bringing unemployment down to 9% by the end of the 1930’s, but were costly, as their realization doubled the national debt.
The economy was boosted by the necessary hyper-productivity of World War Two. Over seventeen million men were removed from the labor force as they enlisted in the armed services, causing unemployment to drop to under two percent by 1943. Not only were there fewer people competing for jobs, but there was a rapid increase in positions available as new factories and shipyards were built to support the war. Government spending also increased exponentially at this time, causing a huge and sudden increase in GDP, pulling the economic situation further from recession.
The Great Depression, though a natural slump in the business cycle, was exaggerated by an array of factors, historical, political, and economic in nature. The United States was particularly affected with record unemployment and high levels of poverty across the country. The slump was ended, as it began, both by the normal business cycle and by varying policies and external factors that increased production and consumption and decreased unemployment.
References:
Blanchard, Olivier. Macroeconomics. Pearson Prentice Hall: Upper Saddle River, New Jersey. 2006.
“Causes of the Great Depression.” Wikipedia.com. http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression. Accessed December 8, 2007.
“The Great Depression.” Wikipedia.com. http://en.wikipedia.org/wiki/Great_depression. Accessed December 8, 2007.
“The Great Depression in the United States.” Wikipedia.com. http://en.wikipedia.org/wiki/Great_Depression_in_the_United_States
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“The Smoot-Hawley Tariff” Wikipedia.com. http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff. Accessed December 9, 2007.
“The Wall Street Crash of 1929” Wikipedia.com. http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929. Accessed December 9, 2007
