History of American Economy: The Great Depression

Jun 5, 2018
folder_opencategory: History

The Great Depression was a worldwide financial crisis that affected almost all developed countries throughout the 1930s. However, the first indication of its beginning was at the end of 1929. Some of the countries had not felt the influence of the Great Depression until 1930 or even later, and it was of different intensity from country to country. The first recovery indications became evident in the late 1930s. Nevertheless, in some countries, this process lasted until 1940 (Gorton). The Great Depression affected not only the USA but also many European countries and was a long-tem crisis that was not timely recovered.

The Wall Street Crash is often considered an interchangeable term for the Great Depression. It happened in 1929 and was one of the emanation causes from the US. It marked the global recession of the 20th century and resulted in the Great Depression (Walton and Ruckoff). In March 1929, many representatives of the middle class had invested much money into the market. However, they became nervous and irritated because of the situation with the banks and decided to sell their stock causing a mini-crash that caused the weak Wall Street foundations. In September 1929, the market recovered, but at the end of the month, the London Stock Exchange experienced the crash for the second time (Gorton). In October, society began to panic. People sold their stock on Black Monday and Black Tuesday. It made the market experience the loss of $30 billion; consequently, the stock market fell down. However, the global economy and the U.S. economy had been in a fuss for half a year before Black Tuesday.

False prosperity before the Great Depression is considered one of the causes of this financial crisis. In the 1920s, the US was extremely dependent on the automobiles and production. There was a great disparity between the rich and poor. More than half of the population was below the poverty level. Wealth was unevenly distributed. That period was characterized by the incorporation of almost all population. People could not cope with the unemployment and other economic problems during 1931-1932. Therefore, they required aid from the official authorities. It deepened the problem and caused the long-lasting depression (Gorton).

Overproduction was one of the major mistakes that resulted in the Great Depression as it was the problem of both agricultural and industrial manufacturing. In the middle of the 1920s, the farmers produced much more than people usually consumed. Consequently, the price for the farming products fell, and the land price dropped causing the increased unemployment. The economic crisis that soon would engulf Europe presupposed the prohibition of selling goods across the Atlantic.

It is believed that a weak banking system was another major issue with the U.S. economic system. There were too many small banks in the country, which were unable to cope with the increased demand of taking money out when the bank customers began to nervous due to the stock market issues. In 1930, the mid-eastern states experienced massive bank closures. Therefore, the banks failures were also blamed for the Great Depression (Gorton). As soon as the stock market crashed, numerous banks began to fail, and many people urged to withdraw their money. It put most banks in peril. Massive draws of the Great Depression caused the lack of available credits that resulted in the worsening of the general economic conditions. By 1933, almost half of the bank collapsed. The boom period of the US was substantially fueled by the fact that the banks had to sell assets; some of them shut down while credits and lending were drying up of. People did not buy products because they experienced lack of money and were unable to get credits. Many workers were sacked increasing the level of unemployment.

In the 1920s – early 1930s, the US experienced a boom decade that also influenced Europe that began to suffer similar economic problems (Walton and Ruckoff). Most economies were affected by the WWI. When the U.S. economy began to shatter and needed money to cope with the ongoing deflation, it asked France and Britain to return their debts. German was made to pay the war reparations, as well. However, many unstable economies of Western Europe could hardly survive; they were unable to provide the US with the required money. None of the countries were able to buy the U.S. consumer goods because the country raised the import tariffs. As a result, the European economies collapsed on the way of their struggle to raise the unemployment level, rebuild themselves, and decrease overproduction. It meant that the U.S. pattern had spread into the rest of the developed world.

The Great Depression has been a closed book for many decades. However, some studies have shown that there are some controversial views concerning the crisis. One of such controversial views is the fact that the Depression began as a set of recessions that were constantly developed through banking crises and an inability of the Federal Reserve Bank to expand the money supply. This fact also argues that the Great Depression recovery had lasted until 1937 (Gorton). It was a time when the Federal Reserve Bank raised the reserve requirements, and the U.S. President reduced the fiscal stimulus.

However, the duration and depth of the Depression seem to be inconsistent with the traditional explanations. The Great Depression did not start as a variety recession. Its severity was immediate, and the manufacturing output fell down by 35% during the first year of the crisis before the money supply decline and bank panics (Walton and Ruckoff). In fact, the Depression had lasted for longer than it should have been. After 1933, the banking system was regulated and stabilized, the rate of the productivity growth was rapidly increasing, liquidity was plentiful, and deflation was eliminated. Moreover, the Federal Reserve Bank increased the monetary base causing the demand stimulus. Such situation had lasted until 1939; nevertheless, all these issues did not influence the Great Depression and its recovery. By 1939, the consumption had not recovered, and there had been only 20% recovery of the per-capita hours worked (Walton and Ruckoff). The investments also experienced some recovery, but it was insufficient.

The Great Depression had continued until the 1930s and experienced little recovery. However, there is a belief that the recovery failure was overlooked by some economists who based their judgments on the growth rate of the gross domestic product and unemployment changes. However, unemployment is a particularly misleading recovery indicator. It does not consider the growth of job opportunities, restored work, and measurement of hours per worker; moreover, it may be influenced by the long-term unemployed individuals who leave the labor force. The recovery required an output growth benchmarks. Therefore, the theoretical and empirical benchmarks that indicated the output growth could have been much faster than it really was. The rapid growth of productivity should have enhanced this process. Almost all output recovery happened due to the productivity rather than the increase of the working hours. The duration and the depth of the Great Depression were unparalleled.

A lot of research has been done in order to explain the long duration of the crisis. Much attention was focused on the labor market. It is explained by the fact that there was a little recovery in the working hours. The wages in the industrial economy sectors had been over 20% above the trend by the end of the 1930s (Walton and Ruckoff). The co-existence of such market wages and the Great Depression is considered to be pathological.

As a rule, depressions are the periods of low living standards and high level of unemployment. The usual demand and supply forces reduce the wages, lower business costs, and increase unemployment. However, something prevented the forces of supply and demand from usual working. The key reason was the government policies that substantially restricted competition. In 1933, the government passed the National Industrial Recovery Act (NIRA) aimed at restoring prosperity. As a result, the industry got the opportunity to collude (Gorton). In addition, it received arrangement sanctioning that might have triggered such an immense antitrust activity that included the formation of minimum prices and restriction of the capacity expansion within the industry. The NIRA enabled cartel granting in return for the industry sharing some of the newfound monopoly profits with the workers. It was done via the large increases of the wages.

The industries managed to pass the fair competition codes under the NIRA. At that time, the wages and prices within the industry jumped in accordance with the governmental approval. However, the wages and prices in the industries that could not come to an agreement on the code were low. The same happened to the prices and wages in the agricultural sector as it was not influenced by these policies. These policies had remained until the National Labor Relations Act was passed. It increased the power of the union bargaining, increased wages, and initiated other increases before the 1937-38 recession. The above-mentioned policies began to change at the end of the 1930s. In 10 years, the National Labor Relations Act was modified by the Taft-Hartley Act (Gorton). It made the industrial wages come back in line with the productivity. Moreover, per capita hours worked returned to their normal level.

The issue of the Greta Depression is discussed by many economists and historians around the globe. It shaped the period between the world wars. It still serves a valuable lesson on the global economic practices. The Great Depression was a period that had its roots in the US of the 1920s and early 1930s. However, it affected many European countries. The reasons are numerous; they are the essential factors that triggered and exacerbated the crisis.

Works Cited

Gorton, Gary B. Misunderstanding Financial Crises: Why We Don't See Them Coming. Oxford: Oxford University Press., 2012. Print.

Walton, Gary M., and Hugh Ruckoff. History of the American Economy. Boston: Cengage Learning, 2009. Print.

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