During the World War I, United States and European countries economies had forged an intimate and unique relationship and owing to this, the Great Depression spread to these countries. After the World War I, United States emerged as a major financier and creditor of postwar Europe. The national economies of European countries were greatly weakened by World War I and the war debts (McNeese, 2010). In particular Germany and other countries that were defeated were expected to finance war reparations. The United States Economy slowly slumped after the World War I and the American investment credits flow to the European countries dried up consequently causing prosperity to collapse in these countries, as well.
The Great Depression affected many countries not only United States and European countries, but, in fact, it did spread to other continents. It was severe in Europe and United States, but Latin America countries and Japan were also affected however mildly. In late 1928 and some early 1929, Latin America countries slipped into depression (Romer, 2004). Brazil and Argentina experience mild downturns compared to other less developed countries that experienced severe depression. In Japan, the depression began in early 1930 and by comparison, was mild. In United States, the recovery started in 1933 stabilizing in 1942, in Britain 1932, Germany and Japan, fall of 1932, France in 1938 and Latin American countries recover from Great Depression in the fall of 1931 and some early 1932.
Great depression is an economic meltdown that that struck industrialized countries in 1929 and persisted until 1939. The great depression caused much human sufferings, affected financial institutions and affected various individual investors. The timing of the high depression varied across countries. In addition, the severity and recovery also vary across the countries affected. The Great Depression causes are attributed to many factors such as 1929 stock market crash, bank panics, reduction of the international trade and use of the gold standard are some of the factors. The Great Depression caused much human sufferings causing financial collapses leading to massive unemployment in the United States. The federal Government has an oversight authority over the performance of the currency in the economy. During the great depression, this was not different, and those charged with responsibility of maintaining balance of payment had to get things in order. They tried all that within their power to maintain the currency using monetary policy measures but this did not work. This was really hard time for the U.S economy. Lack of capacity within the monetary policymakers was also a factor that contributed to worsening of the economy. They did not have the capacity and the knowledge on how to use the monetary tools. Although the monetary policy that was in place was fairly supportive, the Federal Government action and response was not substantial. This essay will critically analyze the causes and consequences relating to the Great Depression had on the United States people and its economy and the recovery mechanisms.
Causes of the Great Depression
Stock Market Crash of 1929
The United States October 1929 stock market crash is considered as the real reason behind the happening of Great Depression. In October 1929, a severe downturn in equity prices occurred in the United States. The crash was spread over a two week period. It all began on October 24 usually referred to as “Black Thursday” and continued for a period of two weeks (Rosenberg 1). During this period, benchmark Dow Jones Industrial Average dips more than twenty percent (20%). The stock market eventually fell almost ninety percent (90%) in 1929. Dow Jones Industrial Average had risen by five hundred percent (500%) in five years and equity prices had risen earning more than thirty times (Rosenberg 2). The events leading up to the stock market crash in 1929 and subsequent Great Depression could not have been predicted by any economic analyst.
After World War I had ended, an era of optimism, enthusiasm and confidence was heralded in the United States. Although the stock market is seen as a risky investment, more people in the 1920s continue to invest their money and resources at United States stock market. The prices at the United States stock market bubbles throughout 1925 and 1926, it rises and falls in 1927, it maintains an upward swing. A strong bull market, where the stock market prices are rising, encouraged more individuals to invest and a stock market boom was realised by 1928 (Wiegand 125). The interest accruing from the stock market was high and people were allowed to buy stocks on margin. In 1920s, a stock market investor was only needed to raise a minimum of 10 percent of the total cost of stock and borrow 80 to 90 percent of the total money needed. During this period, many speculators were buying stocks on margin oblivious of the high risk.
Signs of Trouble
In early 1929, people in United States scrambled to get stock market shares and even more companies and banks get involved in the stock market; others even using customer’s money. The stock market prices maintain its upward trend until March 25, 1929. The stock market prices began to drop and margin calls issued by the lending institutions. Signs of a major stock market crash were now imminent as house construction business slowed; steel production dips; and car sales declined (Ushistory.org). The stock market prices grew again in the 1929 summer reaching its highest levels in the history of United States stock market. On 3 September, 1929 the industry closed at a rate of 381.17. The market prices then begins to drop again throughout September and continued to October until the October 24, 1929 when the stock market finally crashed.
The stock prices plummeted on October 24, 1929 and majority of people begun selling their stocks. The drop in stock prices continued through October 28 and 29 when stock prices collapsed as no one was buying and the majority were selling. This drop continued throughout the years until July 8, 1932 when a low point of 41.22 by the Dow Jones Industrial Average was reached (Wiegand 127). In October 1929 stock market crash, and subsequently led to the Great Depression occurring. Overpriced stock caused the crash itself; a massive fraud and illegal activities such as insider trading; federal reserve policy of tightening monetary policy; and margin buying (Wiegand, 127).
A banking panic occurs when depositors demand their bank deposits in cash. This mainly happens when customers lose confidence with the bank’s solvency (Romer). The banks need to liquidate loans to pay the demanded cash and this hasty liquidation can lead to failure on the banking sector. During the onset of the Great Depression, United States banks experienced banking panics. This caused severe effect to the Banking system in United States. The nature of banking panics is itself inexplicable and largely irrational, but there are factors that contributed to it. In 1920s, there were farm failures as production was not good. In addition to that, prices of the firm products were not substantial. In some areas, the farmers opt to burn their crops. Due to the loss the farmers incurred, they were now in no position to pay their debts. Coupled with United States policies that encouraged undiversified, small banks created an ample environment in which bank panics could be ignited and spread during this time. The Federal Reserve spurred the bank panics by doing nothing (Romer). The currency to deposit ratio rose due to these panics and therefore, causing money supply to decline by 31 percent in the United States between the years 1929 and 1933. The Federal Reserve made the situation worse by contracting money supply and raising interest in September of 1931 thus reducing money supply further.
The money supply decline indicated monetary collapse hence severely affecting output by causing contraction. Money supply and output grew steadily in 1920s as but early 1930s they both dropped. The money supply decline decreases spending in various ways. The business people and consumers expected deflation because of money supply rapid decline and actual price declines. As a result of this, people feared borrowing because they expected future profits and wages would not be enough to cover loan payments even though interest rates were low. The banks panics resulted in fewer bank hence causing tighter credit, less money for employee salaries, less money for these employees to spend on goods and services (Romer). In addition, the failure of many banks caused disruption to lending, causing a reduction of funds available for financing investments.
The United States small banks overextended credit to rural farmers that they were unable to pay. In contrast to the small banks, big banks extended huge loans to different foreign countries. The bank panics sets in and United States banks discontinued lending forcing Europeans nation to default their outstanding loans. Several banks were closed as depositors withdrew their money that nearly ruins the country’s banking system.
In 1930s, the international trade volume greatly reduced due to restrictive measures of American and European countries about foreign goods. They impose tariffs, set quotas on imports and raise existing tariffs significantly lowering international trade (Ross, 1998). The value of international trade dropped by more than half in 1932 reducing the flow of foreign earnings resulting to a weak financial sector. The domestic production alone could not adequately gather for the whole economy leading to a strained and imbalance financial sector in Europe and American nations.
Gold standard was mostly used in the United States and European countries in 1920s. By using the gold standard, each country sets its currency value in gold terms and defended the fixed price by taking monetary actions (Romer).The use of the gold standard led to imbalances in trade giving rise to flows of international trade. Deflation in America made American goods desirable to foreigners and low income led to the reduction of foreign goods demand by United States. This lead to central banks around the world increase interest rates to counteract United States foreign gold outflows and trade surplus. The international gold standard could not be maintained causing a decline in prices and output hence financial crises in United States and European countries.
Consequences of the Great Depression
Social and Cultural Effects
The Great Depression causes great effects to the American society. Any society that emerges from a crisis always will have cultural and social changes. The story is no different to the United States who experienced great deal of cultural and social changes to its society. The crime rate rapidly rose because of the Great Depression (Ushistory.org). The unemployed workers now resorted to theft and suicide rates were reported to have increased. The social set up of many Americans homes was ruined as malnutrition, alcoholism; cigarette’s smoking and prostitution all take a toll of the Americans society. The education sector was nevertheless not left out as higher education became unaffordable for most Americans, but high school attendance amongst males increased. The public cut their spending on education consequently causing many schools to close because of lack of finance or open but understaffed (Rosenberg 2).
The demographic trends changed sharply due to the Great Depression as marriages were delayed as potential husbands chooses to wait until they were able to provide for the family before proposing to prospective spouses. Divorce and birth rates significantly dropped in 1930s as people avoided more children due to added expenses (Wiegand 127). Mass migrations were witnessed throughout 1930s, many citizens seeking opportunities elsewhere. The popular culture emerged with new trends as more Americans opted to watch a movie per week despite the costs.
Stock Market Regulation
The United States Stock market failed on 1929 and it was followed by the collapsing of 40 percent American banks by 1933 forcing the authorities to rethink about introducing new regulations. The Federal Deposit Insurance Corporation (FDIC) and Securities and Exchange Commission were formed to enforce newly introduce strict banking and trading regulations together with financial protections (Romer). The Banking Act (1933) established deposit insurance prohibiting banks from dealing in securities or underwriting. The role of the government expanded through Federal Reserve improving people’s lives in the United States.
The Great Depression caused human sufferings. The standards of living dropped and the world output. Many people were unable to find jobs. The policy response and Great Depression hastened consequently causing the international gold standard to an end (Parker 156). In 1930s, in the United States, labor unions were expanded and the membership of the unions doubled between the period of 1930 and 1940. This was achieved quickly because of 1930s severe unemployment and passing of the 1935 National Labor Relations Act, which promoted and encouraged collective bargaining. The Great Depression also gave rise to macroeconomic policies. The United States government established various macroeconomic policies intended to mitigate economic upturns and downturns.
Political and Social Changes
The Great Depression brought changes to the political structure in the United States. Political movements and political innovation were witnessed in this era, in the American society. Franklin D. Roosevelt administration enacted various reforms which attempted to cope with unemployment, disintegration and poverty problems facing the American economy (Romer). The Marxists movements and its ideas received support from a number of Americans during this time. Above all these, The Great Depression era witnessed cultural ferment, as American intellectuals, writers and artists experimented new and more socially aligned forms of music, painting, literature, mass entertainment and theatre.
The Great Depression brought lessons to all American society social classes about economic security value and the benefits of enduring and surviving during hard times rather than taking dangerous risks with money or one’s life. Moreover, Americans rediscover the democracy virtues and the necessary decency of the common citizen. The Global Depression decade thus ended with Americans reaffirming their traditional political ideals and its cultural past in a period that began with fundamental social change.
Great Depression Recovery
The great Depression undeniably caused much human suffering to the American people, disintegrating the many aspects of the economy by causing massive losses. The recovery was realized through a series of initiatives. The leading sources of recovery were monetary expansion and currency devaluations (Cole and Ohanian 16). Devaluation of the currency allowed expansion of money supplies, but output levels were not increased directly. In early 1933, United States embarked on monetary expansion and between 1933 and 1937; the money supply had increased by 42 percent. It lowered interest rates and credit availability was realized thus stimulating spending.
The fiscal policy played little role in recovering from the Great Depression. The 1932 Revenue act increased American tax rates thereby contracting effects to the economy and further discouraging spending. Franklin’s D. Roosevelt administration New Deal, started in early 1933 was intended to generate recovery. Through monetary expansion, currency devaluations, a little of fiscal policies and other federal government programs enabled United States to recover from the Great Depression reducing unemployment and returning the economy to the normal trend in 1942 and subsequent full employment.
There are various factors which lead to Great Depression happening, the major ones are: market crash, which happened on October 1929, and bank panics are the major ones. It caused financial collapses in the United States causing much human sufferings through severe unemployment.
In conclusion, the financial crises of 1930s in Europe and United States can be attributed to a series of events that started after World War I but key events in late 1920s and early 1930s are the main ones. Decrease in international lending and trade, the inability to maintain international gold standard, banking panics and monetary contraction and stock market crash are the major causes. The consequences of the Great Depression include massive unemployment, the enactment of stock market regulations together with political and social changes experienced in the American society and economic impacts.
Dow Jones Industrial Average from 1928- 1939
Source: US Department of Commerce
Source: US Department of Commerce
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