The Great Depression “In other periods of depression, it has always been possible to see some things which were solid and upon which you could base hope, but as I look about, I now see nothing to give ground to hope—nothing of man. ” – Former President Calvin Coolidge, 1932 The 1920s was a time of roaring prosperity marked by booming business and negligible unemployment. Even during the October of 1929, the thought of poverty was close to an end.
In fact, in 1928, President Herbert Hoover stated, “We have not yet reached the goal, but given a chance to go forward with the policies of the last eight years, and we shall soon with the help of God be within sight of the day when poverty will be banished from the nation”. The prescience of the end of poverty became known as the ‘American Dream’. However, this foresight was shortly lived. On Tuesday, March 26, 1929, the Hoover Administration saw the largest stock market crash of their administration to that date.
Several months later brought Black Monday, the largest stock market crash in American history and the cardinal cause of what is now known as the ‘Great Depression’. The Great Depression was an economic deficit with worldwide effects that began with the stock market crash of October 1929. The most profound effect of it was the highest rate of unemployment in American history as banks, factories, and stores closed, leaving millions of Americans jobless with no money. Without money, many Americans had to rely on either the government or donations from charities to obtain food.
As the depression continued, however, the Roosevelt administration created government agencies to aid in supplying Americans with food, relieving the effects of the Great Depression but leaving an irrevocable mark on the United States economic outlook and indeed, that of the entire world. The causes of the Great Depression are still a matter of active debate among economists, and are part of the larger debate about economic crises. However, it is important to note that it was caused by the interplay of a number of factors as opposed to one single event. Many believe erroneously hat the stock market crash that occurred on Black Tuesday (October 29, 1929) is what caused the Great Depression. Agreed it is what triggered the Depression but was definitely not the only factor that caused it. Two months after the original crash in October, stockholders had lost more than $40 billion dollars and even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough. This is when America truly entered the Great Depression. Secondly, throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings.
Even the surviving banks, unsure of the economic situation and concerned for their own survival, stopped creating new loans. This exacerbated the situation leading to less and less expenditures. To make matters worse, with the stock market crash and the fears of further economic woes, individuals from all classes reduced purchase expenditure. This in turn led to a reduction in the quantity of goods and services produced and consequently a reduction in the workforce. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed.
More and more inventory began to accumulate. The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation. As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help protect American companies. This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation. Another cause of the Great Depression is what was nicknamed “the Dust Bowl”.
For years, American farmers overplanted and poorly managed their crop rotations, and between 1930 and 1936, when severe drought conditions prevailed across much of America’s Plains, Dust Bowls were created. Soil turned to dust and large dark clouds could be seen across the horizon in several states. Topsoil was carried by the ton from barren fields, across hundreds of miles of Plains in the driest regions of the country. The agricultural depression was a major factor in the Great Depression, as bank loans went bad, credit dried up, and banks closed across the country.
Throughout the 1930s, more than a million acres of land were affected in the Dust Bowl. Thousands of farmers lost their livelihoods and property and mass migration patterns began to emerge as farmers left rural America in search of work in urban areas. This migration added to Great Depression unemployment woes, stressed relief and benefits programs, and created social strife in many large American cities. The group of people most affected by the Great Depression and the events it instigated were the American stockholders.
Thousands of stockholders lost large sums of money due to the rapid decrease of stock values caused by the crash of Black Monday. Although this was a huge loss, the average stock price of a common stock on the New York Stock Exchange more than doubled, causing many people to make large investments in the stock market in hope of making large profits. Even people who had no prior knowledge of the stock market or how it worked attempted to invest in anticipation of profits. Economists, such as Irving Fisher, assured stockholders that they were “dwelling on a permanently high plateau of prosperity”.
This, along with the assurance of many other reporters and professionals, cause the popularity of being a stockholder to skyrocket. In 1920, there were only 29,609 stockholders in the United States but a mere ten years later, there were 70,950. Stockholders’ ignorance of how the stock market worked soon turned against the thousands of investors in America and spread throughout the rest of the United States, halting economic flow. Although the Depression had a remarkable effect on the United States, it was not the only country to feel its consequences. Canada too was also profoundly affected.
Previously, Canada’s economy relied on the export of grain and other raw materials. The people who exported these goods suffered huge losses after other countries increased tariffs on imported products. Following the closing of many Canadian companies, the unemployment rate in Canada rose from 3% in 1929 to over 23% in 1933. Other governments were affected by the Depression as well. Approximately six million individuals in Germany, the only country hit as hard as the United States, were left unemployed. Many aspects of German life led to these despondent times.
Most prominent were the reparations Germany was still paying from World War I. Chaos arose in Germany after the war, causing hyperinflation and the stock market to crash in 1923. Another factor in the economic downturn was the German government. Germany suffered a series of poor leaders such as the chancellors of 1932 who were unable to deal with the effects of the deepening Depression. On January 30, 1933, Adolf Hitler became the chancellor of Germany. The leadership of Hitler, one of the key figures in the relief of the Great Depression both in Germany and worldwide, marked the foundation of the collapse of the Great Depression.
The actions beginning in 1933 aimed at relieving the Great Depression in the United States and Germany had a major influence on other nations, particularly Great Britain. Great Britain, unlike the United States, had a declining economy prior to the stock market crash of October 1929. However, the British economy did not suffer a morbid crash, as did the economies of the United States and Germany. Britain did, however, suffer declines in both imports and exports during the Depression. In comparison to other thriving nations during the time of the Great Depression, the United Kingdom remained in a fairly stable economic condition.
Unlike Great Britain, the Great Depression hit many other countries in Europe immeasurably. One of these unlucky countries was France, the last major nation to feel the effects of the Great Depression. The reason for this delayed impact was the undervaluation of the French Franc. France, as Great Britain, was impacted by the efforts of the United States to relieve the Depression. Finally, in 1932, the Depression brutally found its way to France as the number of tourists dropped and exports of perfume wine, food and other items fell. Even though the Depression hit France late, it came violently.
Unemployment rose fifteen percent and industrial production dropped twenty-five percent from their levels in 1929. In hope of a change, Andre Tardieu was elected to run a new French government in 1932 who gained popularity by aiming his campaign towards the threat of communism. Like many other countries, France eventually overcame the Depression through involvement in World War II, which created jobs and caused money to begin circulating once again. The Great Depression also hit Italy, with its highly regarded corporate-fascist government led by Mussolini.
Although the public saw the erratic policy changes Mussolini made as genius, these changes did not benefit the economy and even though Italy’s contribution to world manufacturing was down almost 3%, it rose from the depression in 1934. The overall course of the Depression in the United States, as reflected in per-capita GDP (average income per person) In most countries of the world, recovery from the Great Depression began in 1933. The U. S. , however, did not return to 1929 GNP for over a decade and still had an unemployment rate of bout 15% in 1940, albeit down from the high of 25% in 1933. At the forefront of this recovery was World War II since it increased manufacturing and created millions of jobs. In addition, aiding in the recovery were government agencies, such as the Tennessee Valley Authority (TVA) which was created in May 1933 to supervise the development of a 640,000 square mile area in the Tennessee Valley. This was a region in which sharecroppers and farmers were malnourished and soils were useless for growing agricultural products.
The TVA planned to help this region and restore a large amount of agricultural production to the United States. The common view among mainstream economists is that Roosevelt’s New Deal policies, a series of economic programs that focused on what historians call the “3 Rs”: Relief, Recovery, and Reform (i. e. Relief for the unemployed and poor; Recovery of the economy to normal levels; and Reform of the financial system to prevent a repeat depression) either caused or accelerated the recovery, although his policies were never aggressive enough to bring the economy completely out of recession.
Some economists have also called attention to the positive effects from expectations of reflation and rising nominal interest rates that Roosevelt’s words and actions portended. It was the rollback of those same reflationary policies that led to the interrupting recession of 1937. One contributing policy that reversed reflation was the Banking Act of 1935, which effectively raised reserve requirements, causing a monetary contraction that helped to thwart the recovery and GDP returned to its upward slope in 1938.
According to Christina Romer, Professor of Economics at the University of California, Berkeley and a former Chair of the Council of Economic Advisers in the Obama administration, the money supply growth caused by huge international gold inflows was a crucial source of the recovery of the United States economy, and that the economy showed little sign of self-correction. The gold inflows were partly due to devaluation of the U. S. dollar and partly due to deterioration of the political situation in Europe.
Current Chairman of the Federal Reserve Ben Bernanke agrees that monetary factors played important roles both in the worldwide economic decline and eventual recovery. Bernanke, also sees a strong role for institutional factors, particularly the rebuilding and restructuring of the financial system, and points out that the Depression needs to be examined in international perspective. Economic studies have indicated that just as the downturn was spread worldwide by the rigidities of the Gold Standard, it was suspending gold convertibility (or devaluing the currency in gold terms) that did most to make recovery possible.
What policies countries followed after casting off the gold standard, and what results followed varied widely. Every major currency left the gold standard during the Great Depression. Great Britain was the first to do so. Facing speculative attacks on the pound and depleting gold reserves, in September 1931 the Bank of England ceased exchanging pound notes for gold and the pound was floated on foreign exchange markets. Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931. Other countries, such as Italy and the U. S. remained on the gold standard into 1932 or 1933, while a few countries in the so-called “gold bloc”, led by France and including Poland, Belgium and Switzerland, stayed on the standard until 1935–1936. According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely.
The connection between leaving the gold standard as a strong predictor of that country’s severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies. The common view among economic historians is that the Great Depression ended with the advent of World War II. Many economists believe that government spending on the war caused or at least accelerated recovery from the Great Depression.
Although some consider that it did not play a very large role in the recovery, it did help in reducing unemployment. The rearmament policies leading up to World War II helped stimulate the economies of Europe in 1937–39. In fact, by 1937, unemployment in Britain had fallen to 1. 5 million. It seems as though the mobilization of manpower following the outbreak of war in 1939 ended unemployment. America’s entry into the war in 1941 finally eliminated the last effects from the Great Depression and brought the U. S. unemployment rate down below 10%. In the U. S. , massive war spending doubled economic growth rates, either masking the ffects of the Depression or essentially ending the Depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts. The Great Depression heavily affected the United States and the world as a whole for several years. The Depression has taught governments around the world how to deal with economic problems in hope that it will not happen again. The stock market crash of October 1929 and the ensuing depression alerted stockholders to how volatile being involved in the stock market without knowledge could be.
Even in the current recession, many world leaders are influenced by measures taken to end the Great Depression to revive economic conditions. Due to its tremendous effects in the United States and throughout the world, the Great Depression is known in history as a narrow escape from the downfall of the world economy. Hopefully, one day the world economy will be as rich and prosperous as the roaring 1920s, and America and the rest of the world will be chasing the “American Dream” once again, barring another unforeseen event such as the Great Depression. (2549 words)
