Great Depression - Explained
What is the Great Depression?
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Table of ContentsWhat is the Great Depression?Why is the Great Depression Significant?The Reason Behind the Great DepressionEarly Federal Reserves: Novice MistakesMistakes of President Herbert HooverPresidents Franklin Roosevelts New DealThe Failure of the New DealWorld War II: Its Impacts on the Great DepressionAcademic Research on the Great Depression
What is the Great Depression?
The Great Depression is unarguably the longest and largest economic recession to ever occur on modern times. The Great Depression typically started in 1929 following the crash of the United States stockss market and ended after World War II in 1946. According to economists and historians, the Great Depression is the most destructive economic event to ever take place in the 20th century.
The Great Depression was ignited due to a combination of unlucky factors such as the two-sided action of the Fed, protectionism, and inconsistently applied government policies and efforts. If any of these factors were changed at any point, the Great Depression would have been avoided when it was just an economic recession. Different debates are still popping up concerning the New deal, Social Security, unemployment insurance, and agricultural subsidies till this day, and different questions are being asked on whether these programs really helped during the Great Depression. The Keynesian theory which states that government should stimulate the economy during a financial crisis is now widely accepted by economists in the nation. The effects of the Great Depression is one of the numerous reasons why it is termed one of the seminal events to ever occur in modern-day America.
Why is the Great Depression Significant?
The United States stock market started its fall during the Forgotten Depression, an economic event which started from 1920 and ended in 1921. During this period, the stocks market experienced a 50% decline in value, and the profits generated by corporations declined by an enormous 90%. While this fall can be said to have caused harm to the economy in general, the US surprising enjoyed robust economic growth through the rest part of the decade, i.e. from 1922-1928. This decade was also the period where the American public discovered the stocks market and was granted access to it, thus becoming known as the Roaring Twenties. The discovery of stocks during this period led to a large number of investors, as people saw it as an opportunity of wealth creation. During this period, there were a lot of speculations, and people seemed to follow these speculators because they rarely possessed adequate knowledge of how the market worked and believed these people (speculators) to have vast experience in the market. These speculative frenzies had great effects on the New York Stocks Exchange market as well as the real estate sector. A great amount of investment and margin levels coupled with leverage by investors contributed to an undeserved increment in the prices and values of assets and other securities. Before October 1929, the price of equities and securities reached an all time high of more than 30 times their initial earnings, making it a good investment for people who would have jumped right of the market at that point. This increase seemed to multiply numerously in the Dow Jone Index as it reached an outstanding 500% growth in a minimal period of 5 years. However, on October 24, 1929, the New York Stocks Exchange experienced a bubble burst, and this led to that day being called Black Thursday. Following this downturn, a brief rally took place during the subsequent day which was Friday and during the half day trading session of Saturday. However, the next week held a different story as Monday 25th October came to be known as Black Monday and Tuesday Oct, 25, was renamed Black Tuesday due to the high crashes that occurred back-to-back during these trading sessions. During these two days, the Dow Jones Industrial Average (DJIA) declined by over 20%, and the stock market fell by over 90% from its peak before October 24th. These declines affected the full American economy and even spread to Europe, thus triggering another financial crisis which led to the collapse of Austrias biggest bank which was the Boden-Kredit Anstalt. While these declines generally had an effect on the economy of both America and Austria, both continents did not feel the full impact of the Great Depression until 1931. Here are some important details about the Great Depression:
- The Great Depression is the largest and the longest financial recession and crisis that occurred in modern times
- The American public after discovering the stocks market in the early 1920s hopped on a speculative frenzy with a large amount of speculators not knowing the real basics before the stocks market
- The 1929 financial crisis had a great effect not only on the American economy but also on wealthy individuals and and businesses as it eliminated a large number of wealths during this period.
- The Great Depression was further strengthened by different activities including the Federal Reserves inactivity and overreaction.
- Presidents Hoover and Roosevelts tried to reduce the effect and impact of the Great Depression during their presidential administrations via implementation of different government policies and regulations.
- While the Great Depression ended after the Second World War, it is impossible to credit the effect or result of the war with ending this recession. However, it is also impossible to credit the different policies set by both presidents with the end of the Great Depression.
- During the World War II, trade routes stayed opened and this helped with the recovery of the market. These trades routes were also left open after the war ended thus boosting the recovery time of the American economy.
The Reason Behind the Great Depression
The reason behind the Great Depression cannot specifically be pinned on one event or even on a series of event, as most of the occurrences before that period could be easily reversed. The 1929 stock market crash wiped out a great deal of wealth from private individuals and corporations and this sent the US economy into a period of recession as the economy was mostly based on product spending (otherwise known as GDP). In the early periods of the 1920s, the United States had an unemployment rate of 3.2%, and this number soared to 24.9% by the 1933. Although both Presidents Hoover and Franklin Roosevelt sought to reduce the number by increasing government spending, the number still remained above 18.9% in 1938. The real per capital gross domestic product (GDP) was actually below its 1929 value by the tine of the bombing of Pearl Harbor by the Japanese in 1941. The stock market can be said to be one of the main factors that triggered the economic tantrum, however, economists and historians believe that this is true but not necessary correct. They argue that aside fro the stock market crash, other factors came into play to trigger the financial recession which later turned into the Great Depression. This argue is based on the fact that the stock market crash was not responsible for the resistance of the recession as well as its severity. Knowing that the Great Depression lasted through the 1930s, it is only natural to say that the cause of its persistence can be attributed not only to the crash, but also to a number of factors.
Early Federal Reserves: Novice Mistakes
The Federal Reserve was created in 1913, and they were generally inactive during their first eight years of existence up till 1921. After the American economy recovered from the 1920 to 1921 recession, the Federal Reserves allowed substantial monetary expansions. The total money in the economy grew by a whooping 61.8% from 1921 to 1928, thus resulting in an addition of $28billion to the nations circulated wealth. During this period, bank deposits increased by 51.1%, loan shares and savings gained by 224.3% and life insurance policy reserves gained by 113.8%. These increases occurred due to the implementation of a 3% cut in required reserves by the Fed. Gold reserve gains and Treasury profits were at $1.16 billion at that time. While from a laymans view these percentage increases are great and profitable, they only paved the way to the doom of the United States economy. But increasing the money supply in the nation by $28 billion and reducing the interest rate during the 1920s, the economy expanded rapidly and crashed when it could no longer handle its own inflated success. A great deal of the surplus money growth had great influences in the stock and real estate bubbles via unnecessary inflations. After the bubbles bursts in the latter parts of the decade, the Federal Reserve flipped the other side of the coin and reduced the money supply by nearly a third of what it was before. Since there was not enough money to handle the expansion, liquidity became the last option for most firms and many small banks which were unable to recovery quickly put off all hope for a future recovery. Stingy in the 1930s In a remark by Bernanke in a November 2002 address, he stated that bank panics were typically resolved within a matter of weeks before the Feds existed. This was possible due to the fact that larger corporations were able to bail out smaller banks by issuing the loans to maintain the integrity of the financial sector. Similar cases of these bailouts occurred during the Panic of 1907, which was just two decades before the Great Depression. JP Morgan, who was an investment banker at that time rallied towards Wall Street for bigger corporations to move money towards smaller banks when frenzied selling started occurring in the New York Stocks Exchange which eventually led to an unstoppable bank run. However, it was this panic that made the government establish the Feds, which ironically was put in place to prevent individual financiers such as JP Morgan to take proper actions in financing the economy. After October 24th, which was Black Thursday, many owners and head managers of New York banks tried to instill confidence in the general public by purchasing large volumes of blue chip stocks at prices that were above the current market value. This action helped a little bit as it stirred a rally on Friday, but was however overrun by panicked selling which occurred during Black Monday. Since 1907, market movers in the stock markets were no longer individuals, and even a combined effort by individual investors to rally the market proved insignificant. At this stage, it was only the Federal Reserves which was inaugurated by the government that was able to move the stocks market and the United States financial system. At the point, while it was expected of the Feds to take action, they were unable to through 1929 to 1932 via cash injections. This resulted to a major crash in the United States economy and eventually this action sunk many small banks. Smaller banks typically failed not only because the Feds folded their hands to the issue, but because there existed different banking regulations which restricted banks from operating in different sectors and diversifying their portfolios, thus making them over-dependent on deposits. Thus, when withdrawal of deposits came in full force, they were forced to fold up as they had no other income source to run on. There are different debates on the Feds reaction during this period as some believe that it decided not to bailout corporations due to the possibility of future mistakes by the same firms and establishments. Some historians and economists however argue that the Fed was one of the major causes of the Depression, and when it was time to correct their mistake, they restrained, thus leading the economy into a deeper financial tantrum.
Mistakes of President Herbert Hoover
President Hoover generally gained the title of a do-nothing president from the American public. However, reports showed that he happened to take several actions during the Great Depression, although these actions were not so successful in putting an end to the downturn. Increase in Prices President Hoover increased federal spending by 42% during 1930 through 1932 and engaged in several high public programs such as the Reconstruction Finance Corporations (RFC) and raised taxes to finance these programs. He also moved further to ban immigration in 1930 to prevent low-skilled workers from entering the labor market during the financial crisis. However, many of the implementations by this president as well as the Congress at that time did more harm than good to the country. A certain number of controls that were put in place during this time were related to price, trade, labor and wage. President Hoover was more concerned with the high paycheck of workers as he felt that workers wages might be reduced following the recession. To avoid this, he suggested that prices needed to stay high. However, for prices to stay high, consumers would be willing to pay more money and at the moment in the economy, people currently didnt have the money needed to pay high-priced goods and hire expensive services. To add to the matter, firms and multinationals were unable to depend on the international trades and revenues as most foreign nations were not willing to buy overpriced goods and services just like the American citizens. Protectionism President Hoover decided that the best method of increasing prices and subsequent wages was to eliminate foreign imports and competition. Hoover decided to follow the protectionists movement and was forced to succumb to the pressure of over a thousand of the countrys economist, thus leading to the signing of the Smoot-Hawley Tariff Act of 1930 and its enactment into law. While the original intentions of this Act was the protection of agricultural products, like all things new, it shifted to cover other industries and sectors thus prompting high taxes and import duties on more than 880 foreign goods shipped into the nation. The high duties lead to discontent on the part of over 36 nations, and the national imports of the nation decline from $7 billion in 1929 to $2.5 billion dollars in 1932. Two years later, international trade faced a drastic decline up to 66% and this led to major economic crisis around the world. While Hoovers desire to allow jobs flow and reduce layoffs was understandable and welcome, his methods of achieving these desires were quite unfortunate to the American public. Corporate income levels during his administration continue to decline as he focused on maintaining high prices of goods and services at a point where they shouldve declined. Previous depression/recessions periods have encountered same unemployment issues as well as low rates, but never has the prices of goods and services remained high even after a series of three years. While decline of prices wouldve ensured or at least helped with the recession, the Hoovers administration made sure that the cost of products were high, and this caused the US economy to deteriorate from recession to a full blown depression as it was unable to contain the artificial prices imposed on the national products.
Presidents Franklin Roosevelts New Deal
President Roosevelt was voted into power during the depression period and he promised massive changes to the general public. He initial a new Act known as the New Deal and it comprised of innovative and new developments and programs geared at bolstering the American economy, improving businesses, reducing unemployment and in turn protection the masses. The New Deal was partly based on the Keynesian economic theory, an economic theory which states that the government could and should stimulate the economy of its nation. This new Act had a series of goals which it set out to fulfill, and the methods of doing this included but were not limited to price controls, wages, and even production management. While there are different debates on how each administration operated during the Great Depression, many economists believe that Roosevelts New Deal was just a larger continuation of Hoovers actions during his administration. He placed emphasis on price and wages and he also removed the nation from the gold standard, thus restricting individuals to hold gold coins and bullions. He further targeted monopolies, as he banned all forms of monopoly and replaced them with competitive markets. He further targeted several business practices, instituted a number of new public work programs and also increased job creation in the nation. Just like how Hoover targeted agricultural products, the Roosevelt administration did likewise, but this time, they paid farmers to cut back on or fully stop production of agricultural products. The incessant destructions of plants and demolition of farmlands during this period caused heartbreaks among the masses, as most Americans were in dire need of affordable food during that period. From 1933 to 1940, Federal taxes saw a three times increase, as they were needed to pay for a number of the new implemented programs including the famous Social Security. These tax increments were not limited to just one income source, as there was increase in both income taxes, inheritance taxes, corporate income taxes, and even excess returns taxes.
The Failure of the New Deal
While the New Deal had a great effect on the confidence of the American public, it was impossible to call it a successful feat due to a number of reasons which we will discuss later on. The New deal helped with financial stability and reforms during the period of its implementation and this led to a lot of applauses from the public. In order to prevent the collapse of financial institutions due to excessive withdrawals, President Roosevelt declared an entire week in March 1933 to be a public holiday, thus making it impossible for citizens to log withdrawal requests. The administration also looked to make good its promise on increased employment by creating a number of programs and projects such as the construction of bridges, dams, tunnels, and roads, which in turn gave thousands of individuals jobs to support themselves. Despite all the programs that were put in place, the New Deal was unable to handle the crisis and the tantrum of the Great Depression, and this further led to a prolonged season of recession. Some Keynesian economists and several historians however beg to differ on the reason for the prolonged nature of the Great Depression. Keynesian theorists stated that the Roosevelt administration did not go far enough with their recovery plans. Other economists and historians however claim that the reason for the prolonged nature of the Great Depression was because President Roosevelt was looking for a fast way of pulling the nation off the crisis instead of waiting for the two years business cycle where the economy would hit a trough and then rebound. Thus, he is sometimes placed alongside Hoover when debating the reason for the prolonged recession. A study released by two economists at the University of California stated that President Roosevelts New Deal prolonged this period of recession by seven years. It was however possible that the quick recovery of the economy might not have rapidly occurred as it was the first time that the American public and not just Wall Street lost enormous amounts of money in the stocks markets. An American historian Robert Higgs argued that the New Deal was relatively faster than what businesses were willing to manage. Phillip Harvey, a professor of law and economics at Rutgers University however stated that the administration was determined on the social welfare of the public rather than on creating a Keynesian-style macroeconomic stimulus package.
World War II: Its Impacts on the Great Depression
GDP data and employment figures showed that the Great Depression appeared to stop suddenly before the United States participated in the Second World War. Unemployment Arte during this period fell from 8 million in 1940 to 1 million in 1943. However, it was stated that more than 16.2 million Americans were conscripted into the Military at that time. Unemployment however continued growing in the private business sector even during the war. The war also affected the standard of living of the American public and eventually led to increase in taxes in an attempt to fund the war. Private investments experienced a decline from $17.9 billion to $5.7 billion from 1940 to 1943, and this led to the fall of more than half of private sector productions. The war while it helped with the Great Depression cannot be credited with the end of the recession. Trade routes were opened during the period of the war and price as well as wage controls were reversed to pave way for international trades. The government also made sudden demands for cheap products and this led to a massive fiscal stimulus. The trade routes which were open during the Great Depression were left that way and this led to an increase from $10.6 billion to $30.6 billion in private investments during the next 12 months. The stock market also jumped into a bull run during the next few years.
Academic Research on the Great Depression