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The Causes and the Consequences of the Great Depression

At the end of 20-ies – beginning of 30-ies of the 20th century the American economy was in the profound crisis. Especially crisis has affected most developed Western countries, including USA, Canada, UK, Germany and France, but also touched upon other states. Industrial cities suffered the most, construction virtually stopped in some countries. The lowest point of recession and economic development was registered in 1933, when GDP decreased in almost 2 times in comparison with 1929. There were 17 million unemployed in the USA. More than 5 thousand banks closed. The stocks depreciated by $40 billion; the inflation and price increased; the industrial production decreased by 2 times, car production fell by 5 times. And more than 5 million U.S. farmers have lost their lands for debt. According to some indirect estimates, natural population growth in the United States fell sharply during the Great Depression.

The History of the Great Depression

Crash of the U.S. stock market in 1929 preceded the Great Depression. A collapse in stock prices that began on the “Black Thursday” of October 24, 1929, took catastrophic proportions in the “Black Monday” (October 28) and “Black Tuesday” (October 29). October 29, 1929 was the day of the stock market crash on Wall Street. That crash of the stock market, also known as the collapse of Wall Street, was the beginning of the Great Depression.

The collapse was preceded by the speculative boom of the mid-1920s, during which millions of Americans have invested their money in stocks. Growing demand for stocks inflated their prices, which attracted more investors who wanted to get rich investing in stocks. That vicious cycle led to the formation of economic bubble. Besides, many investors bought shares on credit, taking the necessary funds in banks. On Thursday, October 24, 1929, when the DJIA Dow Jones Industrial Average stood at 381.17, the bubble burst, and there started a panic sale of shares. That day trying to get rid of their shares before they were completely worthless investors sold 12.9 million securities (Eichengreen, 2003, pp. 34-36).

During next days around 30 million stocks were sold, and prices collapsed, ruining millions of investors. In general, during the week of panic the market lost in the cost of about $ 30 billion – more than the U.S. government had spent on the First World War. Banks that previously financed the purchase of stocks by their loans were not able to repay their debts and declared bankruptcy.

When millions of people lost on the stock all of their livelihood, the companies lost their credit lines and closed, causing a rise in unemployment. Market crash in 1929 had a dramatic impact on an already bad economic situation and served as the weightiest cause of the Great Depression. The collapse in 1929 served as a good lesson for the financial world, and since then many stock exchanges suspended trading in the case of a too rapid fall of prices. Through that practice, the consequences of the stock market crash in 1987 were significantly lighter compared to 1929 (Rezneck, 1933, pp. 36-38).

The Causes of the Great depression

It appears that a combination of factors have played their roles in the emergence of the economic crisis. One of the reasons was the lack of money. At the time the money was tied to gold reserves, it limited the money supply. At the same time production grew. At the turn of the century there appeared new kinds of goods such as cars, airplanes, radio. The number of goods, gross as well as the range, increased in many times. Limited money supply and growth in strong commodity mass caused deflation – falling prices, which, in turn, caused financial instability, the bankruptcy of many enterprises, non-payment of loans. A powerful multiplier effect hit even growing industries.

The crisis of overproduction inherent in capitalism was another cause of the Great Depression. Stock bubble, investment in production in excess of real need caused such consequences (Matziorinis, 2007, p.1).

The rapid growth of population; large number of children per family was typical of the old agrarian mode of production (an average of 3-5 children per family), also severely decreased natural decline from disease due to the progress of medicine and the temporary rise in living standards.

Another factor that caused the Great Depression was the adoption of the law of Smoot-Hawley in 1930, which injected high customs duties on imported goods. Attempting to protect domestic producers, the government with its protectionist measures raised the price on cheap imports. That in turn reduced the already bad purchasing power, and forced other countries to apply counter-measures, which harmed U.S. exporters. Only in the mid-30s after the entry into force of the agreements on mutual trade, which drastically lowered tariffs, international trade began to recover, providing a positive impact on the global economy.

The First World War also served as one of the causes of the Great Depression – the American economy was at first “pumped” with the military orders of the Government, which, after the First World fall sharply, leading to a recession in the country’s defense industry and related sectors.

Margin loans also were a big reason of the crisis. The essence of the loan is simple – you can buy shares in companies, paying a total of 10% of their value. For example: shares, which worth $ 1,000 can be purchased for $ 100. Such type of loan was popular in the 20s because everybody was playing at the stock market. But this loan has a trick. Broker at any time may require the payment of the debt and it must be returned within 24 hours. This is called margin requirements, and usually it is the sale of shares purchased on credit. On October 24, 1929 New York brokers, who gave out margin loans started massively demanding payment for them. Everybody wanted to get rid of the shares to avoid paying for margin loans. The need to pay for margin requirements caused a shortage of funds in banks for similar reasons (because the banks’ assets were invested in securities and banks were forced to quickly sell them) and led to the collapse of sixteen thousand banks, which allowed the international bankers to not only buy up the banks of competitors but for mere pennies to buy large U.S. companies. When a society was completely ruined, the U.S. Federal Reserve bankers decided to abolish the gold standard for the United States. They decided to collect the rest of the U.S. gold. Thus, the confiscation of gold in the U.S. population was carried out under the pretext of combating the effects of depression (Bernstein, 1989, pp. 45-48).

The consequences of the Great Depression

The set of the above factors has led to very serious consequences for the United States. During the first month of the crisis shares traded on the New York Stock Exchange, fell by a third, which amounted to 32 billion dollars. Falling of stock prices continued non-stop for three years: shares of «United Steel» fell by 17 times, «General Motors» – 80 times, «Chrysler» – 27 times. Unemployment in 1933 reached the level of 25% of the workforce (about 13 million Americans lost their work). The income per capita fell by 45%. At the end of 1930 banks’ depositors began a run on of deposits, which led to a new wave of bank failures. GDP in the years 1930-1931, respectively, decreases by 9.4 and 8.5%. In 1932, GDP declined by 13.4% in just three years of crisis – at 31%. Industrial stocks compared with 1930 year lost 80% of its value, the prices of agricultural products fell more than doubled in 1929. For three years 40% of banks went bankrupt, the money supply declined at face value by 31% (Anari, 2005, pp.63-68).

All countries have experienced the crisis:
– The level of industrial production was dropped to the level of the early 20th century, that is, 30 years ago;
– In the West, there were about 30 million unemployed people;
– Farmers, small traders, middle-class’s state were deteriorated. Many people appeared below the poverty line;
– Number of a left extremist (communist) and right-wing extremist (fascist) parties supporters increased (for instance, in Germany, the National Socialist German Workers’ Party came to power) (Romer, 2009, pp, 3-4).

The worsening of political situation in the capitalist countries, both within these countries, and between them has been the result of a protracted economic crisis.
The intensified struggle for foreign markets, destroying the last vestiges of free trade, prohibitive tariffs, trade war, a war of currencies, dumping, and many other similar activities that demonstrate the extreme nationalism in economic policies, have exacerbated the extreme relations between the countries, have created a way for military conflicts and put on the order of the war as a means to a new division of the world and spheres of influence in favor of more powerful states…

The Great Depression in Britain
England was one of the countries that most urgently felt the crisis itself. The crisis in the economy of England was recorded in early 1930, i.e. somewhat later than in other countries. In the initial period the ruling circles of the country had no unity on anti-crisis program. The Labour government seeking to fulfill campaign promises, it tends to increase fiscal spending to alleviate the plight of the general population, the poor and unemployed people, mainly through increased tax burden on the wealthy. This policy has met resistance from the later and in August 1931 J. Macdonald had to form a new cabinet with the conservative majority.

 

Turning to the anti-crisis policy was substantiated in the report of the Royal Commission on the national economy under the chairmanship of financier J. Mey. The new British government, guided by the principles of liberal at first, tried to strengthen the indirect interference in order to maintain stability of the country’s financial system above all by ensuring the budget balance. While increasing direct and indirect taxes a sharp reduction of budget expenditures on social items, salaries to civil servants, the appropriations for public works, unemployment benefits has taken a place (Brunner, 1981, pp. 251-254).

In addition, the Conservative government managed to get a large external loan, in order to restore the balance of payments. The abolition of the gold parity of the national currency, resulting in a devaluation of the pound in September 1931 was an important measure.

Countries belonging to the so-called sterling block (25 countries – Scandinavia, Holland, Portugal, Argentina, Brazil, and others including the British colonies and dominions) that set the course of their currencies on the basis of the pound were forced to follow the United Kingdom. Members of the unit, focusing on sterling were forced to buy British goods and also to supply raw materials and food.

In relations with the countries-competitors, that preserved the gold parity of national currencies (the U.S., Germany, France, Italy, etc.) the UK gained an advantage by improving the price competitiveness of its products, what contributed to increased protectionism in these countries. In view of this fact the UK finally abandoned the principle of free trade by going to a policy of strict protectionism (Cole, 1999, pp 6-7).

In combination with other anti-crisis measures by the end of 1933 England achieved a stabilizing effect. As one can see, that mainly happened due to the use of existing UK benefits in relations with other countries, due to pre-emptive steps in the foreign market and sufficiently rigid internal economic policies that set its policy apart from the anti-crisis policy of Roosevelt’s New Deal. It should be noted that in the 1934 fiscal policy rigid economy begins to soften somewhat, as evidenced by the growth of wages, recovery of unemployment benefits, reduce the amount of income tax and other events that contributed to mitigating the social contradictions.

Recovery that began in 1934 was fortified by substantial government spending on development of industries related to weapons. In addition, the government measures to improve the health of the financial system, rigid protectionism contributed to the investment in a number of old industries, which, incidentally, did not significantly change the available farm imbalances, and the coal and textile industries continued to stagnate.

“The New Deal”

In 1932, the Democratic Party, headed by FD Roosevelt (1882-1945) won the president elections, offering the country a series of reforms known as “The New Deal”. The new U.S. President Franklin Roosevelt saw no other option but the implementation of the new economic and political course, the main essence of which was to increase state intervention in economic and social life of the country. Those measures of strict state regulation were the result of his return to the 1939 key economic indicators to pre-crisis level.

The economic situation in the country dictated the need to initiate reforms in the solving of credit and financial problems. On Roosevelt’s initiative, the Congress was proposed the “Emergency Banking Act”. The Federal Reserve provided loans to banks; finance minister got the right to prevent massive withdrawals of deposits. The law mandated that banks could be opened only when their condition was deemed “healthy”. The export of gold was prohibited.

The second most important banking law was the Banking Act, passed on June 16, 1933, which separated the functions of deposit and investment banks, and according which the Federal Deposit Insurance Corporation was established (Watkins, 1993, pp. 26-28).

An important law that promoted the recovery of the economic crisis was the Restoration Industry Law. According to it, the entrepreneurs in every industry were offered to unite together and create the “codes of fair competition”, which, firstly, would establish the size of production, secondly, would determine the level of wages and hours, and thirdly, would distribute the sales markets between individual competitors (Edsforth, 2000, pp. 287-288).

Restoration Industry Act affected the labor relations also. It gave the workers the right to participate in collective bargaining and unions. The Act identified three basic conditions: a) the minimum wage of $ 12-15 per week, b) the maximum working shift – 8 hours, c) the prohibition of child labor (Nocera, 2009).

“The New Deal” touched the sphere of agrarian relations also. In order to restore the purchasing power of farmers and support the price for agricultural products, the government offered farmers to reduce crop area and livestock, but guaranteed the payment of interest to farm debt in an amount not more than 2 billion dollars.

In 1935, with the active support of Evelyn Burns the Social Security Act was adopted. It was the first general federal regulatory act of this kind in U.S. history. It was the beginning of whole new social policy that intended to change for better life of ordinary workers, disabled and elderly people.  For that Office of Social Insurance was created. Starting from that date the old age pension had be paid to U.S. citizens, who met certain residency requirements and had reached the age of 65, in case “… if his total earnings for the period from December 31, 1936 until he reached the age of 65 years did not exceed $ 3000. Then his monthly pension would be equal to 1/2 the amount of his earnings…” (Rauchway, 2008, p. 98). For the formation of the pension fund, in addition to other taxes, a new annual tax on personal income of employees in the amount of 1% with a subsequent increase in tax 0,5% every three years was established. For employers, in addition to the previously existing taxes, tax of 1% of the total wages paid to them was adopted. Every three years tax rose by 0,5%. In 1938 a law on equitable hiring labor, fixing maximum working hours for some groups of workers and minimum wages was passed.

Reforms of the New Deal laid the foundation of modern government regulation of working conditions and relationships of organized workers and employers. The norms of Social Security have constantly been changing since the 1930s, because they have to respond to economic worries and concerns over changing gender roles and minorities’ position. Much more has been done to protect women, than minority groups (Rosenberg, 2011). Social Security slowly moved toward more universal coverage of citizens. Before 1950 most of the debates were about the occupational groups of people that should be covered by Social Security. But in the 1950ies they moved to the issue of providing of more adequate coverage. Changes in Social Security policy have influenced a balance between promoting equality between different social groups and efforts to provide adequate protection for everyone.

For example, in 1940, benefits paid to Americans totaled $35 million. Already in 1950 this sum was $961 million, in 1960 – $11.2 billion, in 1970 – $31.9 billion, in 1980 – $120.5 billion, and in 1990 – $247.8 billion. In 2004, 47.5 million beneficiaries received $492 billion of benefits. And in 2009, $650 billion of Social Security benefits will be paid to nearly 51 million US citizens (Lawrence, 2010, pp. 6-7).

With the New Deal, centralization and bureaucracy became an integral part of American government. Although Roosevelt’s presidential power started out as an emergent extension of the Progressive presidents’ authority, it stayed the same even when the crisis was already over. Such programs as the NRA passed the responsibility for things that had previously been a part of the state or local government’s business (for example, economic regulation and welfare) to the federal government. Legislative branch lost almost all its power and responsibility; they were taken by President Administration. Even though Roosevelt’s power was checked when his court-packing scheme failed, he reorganized the executive branch to increase its power. Even today we can still see the results of these actions (Erenberg, 1986, p. 763).

Methodologies, strategies and tactics of reform within The New Deal demonstrated the special role of government regulation in the capitalist economy, and showed that a flexible and moderate regulation of the economy, social and political spheres, especially in difficult times of the country’s development, were vital.

Conclusion

The Great Depression was a prolonged economic crisis in the global economy that began in the U.S. in 1929, and later in other countries. Officially it ended in 1940, but in reality the U.S. economy began to recover only after World War Two. Definition of the Great Depression is usually used in relation to the U.S., the definition of the global economic crisis is used to other countries. This crisis has affected almost all the developed Western countries.

The Great Depression had important consequences both for the U.S. economy and the global economy as a whole. In the USA: a large number of banks closed, deflation appeared and real estate prices collapsed, the reduction of industrial production by 2 times, unemployment rose to 12 million people, many farmers went bankrupt, the harvest of cereals fell by 2 times. The Great Depression, in contrast to the financial crisis affected the real sector of the U.S. economy.

In Britain, the Great Depression contributed to the improvement of the economy and an influx of investment in old industries. France lost its position in the world markets (Irwin, 2010, pp. 19-20). In Germany, as a result of depression, the National Socialists led by Hitler came to power (Gates, 1974, p. 335-336). In Italy it initiated the establishment of fascism. Other European countries were also significantly affected by the global crisis. As a result, we can say that the Great Depression, which began in the U.S., led to World War Two, the results of which we all know.

The Great Depression was synchronized, comprehensive and touched all sectors of the global economy. In fact, it was the global economic crisis, but it received its name because of an emotional state of the whole society of that time. People were really plunged into a depressive state of torpor. The economic and political course of New Deal of Franklin Roosevelt helped them to get out of it. The main essence of New Deal was to increase state intervention in economic and social life of the country.

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