Possibly the greatest crisis faced by the United States since the Civil War, the Great Depression completely changed the nature of American government. It is easy to trace the development of the national government as a guarantor of public welfare and defender of not only our lives but our well-being. Though the Great Depression allowed the government to take a more active role in what were once private matters, I do not feel that it helped to create a “modern welfare state”.
Many of the problems that led to the Great Depression and the actions of FDR pre-dated the stock market crash that sank the US into economic crisis.In the long-term, a mixture of international and United States policy mistakes created an atmosphere of instability that exacerbated a pre-determined depression. One can say it all began with World War I, but even pre-1914 cyclical economic conditions set the world stage for a slight depression in 1920-21. This made it even more difficult for the European countries to recover from the devastation they encountered in the Great War.
Europe was already falling behind the United States, and the war greatly accelerated this trend.During WWI the US and the USSR became self-sufficient, and other markets were closed to Europe because the customers had shifted to more reliable suppliers. This made world growth in the 1920s slower than before the war, decreasing European demand for imports that in turn decreased demand for European exports. The United States also had an edge in emerging industries.
The American economy was more dynamic, embracing the fast growing industries such as automobile production. Europeans were heavily committed to older, declining industries, and it was difficult for them to shift to new ones.Political factors caused by the war also hurt Europe’s ability to recover. The redrawing of political boundaries created new states with little regard to economic viability.
These small states attempted to be self-sufficient by increasing exports and setting high tariffs, but they had to borrow heavily to do so. Increasing population was another factor to contend with, forcing these countries to spread out their already low incomes. Finally, increased trade and population movement barriers caused by the war compounded Europe’s economic problems.World War I itself was not actually responsible for declines in economic productivity.
The industrial countries were already poised for a recession due to the cyclical structure of their economies. The war did, however, make recovery from this recession more difficult by depressing productivity. This meant that the world, especially Europe, was suffering from lower than normal levels of productivity when the next cyclical depression struck in 1929. A more important factor of instability brought about by the war was the reversal of the change of capital flows.
Before WWI, the United States was a debtor nation. We owed vast sums of money to Europe, especially Britain. During the war Europe was not only forced to liquidate their U. S.
investments, but to take on debt as well. This established the United States as the prime creditor in the world. In fact, we financed eighty percent of the post-war relief. After the war, the European countries had a heavy trade deficit, making it impossible for them to pay us back.
As a creditor, we should have imported more than we exported, allowing these nations to reduce the debt.We had become self-sufficient, however, and maintained an isolationist stance, allowing very few imports. This forced countries to develop a surplus in trade with other nations before they could pay us back. Since very few countries could do this we had to continually loan out money to help them rebuild their economies to pay us back.
The destabilizing effect of this loan cycle will be discussed later. The United States wasn’t the only one to make mistakes, however. The self-serving political interests of the world also precluded any possibility of solving the problem.For one, Europe, especially France, insisted that already overburdened Germany pay reparations.
John Maynard Keynes supported eliminating reparation payments, at least until Germany was stabilized, but no one listened to him. The United States ended up supporting Germany, so it could pay back France who could then pay us back. Since everybody owed everybody else money, collective debt reduction could have helped alleviate the pressure in Europe. The United States, however, refused to help this process, and it was impossible for any of the European countries to do it on their own.
The weakness of the agriculture industry, a basis for the economies of most of the world, was another major source of instability. Since so many countries depended on a small number of primary products a decline in their price would severely increase the country’s debt and decrease its ability to repay loans. Prices were declining, and attempts to stop this only worsened the situation. Rather than reducing output, these efforts encouraged producers to keep producing, oversupplying the market and forcing prices down.
Many countries stockpiled their extra reserves, and although this may be seen as waiting for higher prices in a period of economic growth, it definitely indicates a volatile food market. The nature of the primary products trade system also made it prone to a difficult to escape cycle of decline. When the manufacturing countries of Europe stopped expanding there was a decrease in demand for primary products. That, in turn, decreased the ability of primary product producers to purchase manufactured goods, which meant industrial countries purchased less primary products and so on.
The essential problem with agriculture was the inescapable reality that, despite decreasing prices, aggregate quantity demanded stayed the same, or even decreased due to slowed population growth. The non-industrial, primary producing countries therefore were not only linked to this system of instability by their need of a market for goods, but were sources of additional volatility. The main problem with the re-stabilization was its haphazardness. At the Genoa Economic Conference in 1922 the world powers decided on an intermediate system to prepare for a final shift to the gold standard.
This program entailed no circulation of gold coins; instead they were to be kept in central banks. Also, nations could hold part of their reserve in foreign currency, since gold supply was limited. Although Europe had stabilized its currencies by 1928, the system was doomed from the start because it made no stipulations for the stabilization of individual countries. They all stabilized at different times and different rates, which put most currencies in disequilibrium.
Once again, self-interest in the short-term overcame long-term goals, and the individual economies worked against one another.The countries with overvalued currency refused to allow the required deflation and countries with expanding economies, like France and the U. S. , wouldn’t allow inflation.
This made equilibrium impossible. There is also some evidence that the controllers of the central banks worked more for the good of their own countries than for the good of the international system. A second weakness in the system was the fact that the U. S.
and France increased their gold reserves well beyond what they were liable for, whereas other countries had shrinking gold reserves and liability beyond their actual holdings.This maldistribution added even more instability to the system. A third weakness was each country’s ability to hold part of their reserve in foreign currency. This increased the short-term claims in New York, London, and Paris, and this “hot money” put multiple economies at the whim of any of the superpowers.
When added to the reliance of Europe on loans from the United States for rebuilding its economy, it can be seen that nearly the entire world hinged on the ability of the U. S. to continue loaning money. Interestingly, however, no one seemed to see this as a problemThe economic climate of the time was one of excessive optimism.
Most people, including investors that should have known better, felt that there would be no end to the expanding economy. Lenders in the U. S. actually went out and solicited borrowers.
They were ready to loan to anyone. One of the main short-term causes of the 1929 crash was overspeculation. The common trend was to throw as much money into the stock market as possible because it was a sure bet. Even brokers ignored the evident signs of slowing growth and a saturated market.
This created a very weak, but quickly rising bubble which popped at the first sign of panic. Even the Federal Reserve Board hurt the situation more than it helped. The saturation of the consumer market and a relatively high level of structural unemployment should have caused a natural decrease in prices. The FRB, however, didn’t want this to happen, so they expanded credit that ended up in a violent readjustment.
The actions of the FRB created a stock market and property boom that merely served to fuel speculation.It appears, that if the FRB had allowed deflation to occur the decline in prices would have allowed the standard of living to go up and might have increased consumption. Finally, after a peak in July of 1929, people began to realize to what extent they were overinvesting. They no longer saw assured profit and investment began to decline.
First on Black Thursday, October 24 and then on Tragic Tuesday, October 29, 1929 the nation suffered its most influential stock market crash in its history. It was the beginning of the longest and deepest depression America has ever suffered.The depression in 1929 was not simply caused by faulty policies and ignorance. Analysis of cyclical economic trends would have predicted a depression at that point in time.
The length and severity and global nature of the depression, however, can be traced back to specific actions. World War I was the first event to destabilize the world economy. Maybe the war could have been avoided, but more importantly, the United States could have been much more effective at rebuilding Europe’s economy (ie. the Marshall Plan).
This isn’t just hindsight, either. J. M. Keynes was already proposing better policies, but no one seriously considered them.
Agricultural weaknesses and the poorly established gold standard added to the instability of the world economy. Had the United States been isolated, the depression would not have spread to other countries, and the U. S. might have been able to save itself with the help of the world.
The system of capital flow at the time, however, put multiple countries at the mercy of the U. S. economy. This meant that the world system practically collapsed when ours did.
Cite this Great Depression in the United States
Great Depression in the United States. (2018, Mar 04). Retrieved from https://graduateway.com/great-depression-in-the-united-states/