The great depression

Thegreat depression

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Abstract

TheGreat Depression was the notable crush of economies, that hit NorthAmerica and other industrialized nations of the world in 1929,lasting up to 1930s. This inter-war global phenomenon is the longestand the severest economic depression experienced by the western worldto date. The depression was first experienced in the United Statesafter the catastrophic collapse of the American stock market in theNew York stock market, and later spread to other parts of the world.Impacts of the depression were felt all over the world, with notableeffects being felt by the industrialized countries, such as the NorthAmerica, Canada, Netherlands, Britain, France and the Nordiccountries. During the depression, the global gross domestic product(GDP) reached the lows of fifteen percent between 1929 and 1932. Thedepression was severe and shorter in countries such as the Britain,Canada, and the Nordic countries since they had no banking andfinancial crises. In other countries, such as Canada, Britain andFrance, the depression ended by 1931, unlike in the US, where thedepression progressed up to to the start of the Second World War in1939.. The US had various financial and banking challenges, which sawto the longevity and severity of the depression.

Thegreat depression commenced in 1929, leading to economic depressionamongst industrialized nations, such as the US, the Britain, Franceand the Nordic countries. In the US, the great depression startedmuch earlier, and its start was marked by the catastrophic decline ofthe stock market in the New York stock market on October 1929, knownas the Black Tuesday. The subsequent years after the collapse of thestock market, the US plunged into a series of economic depression,characterized by reduced GDP, unemployment, and inflation (Crafts &ampFearon 56). By 1932, the US GDP had reached the lowest values oftwenty percent of their total value, with the abrupt decline in thevalue of economic assets. The depression ruined the lives of manyinvestors and strained banks and monetary institutions, especiallythose that held stocks in their portfolio. Consequently, many bankswere rendered insolvent, individuals lost confidence in the economy,plunging the country to the highest inflation rates ever experiencedin the country. There was reduced spending, leading to reducedproduction, aggravating the situation since the reduced productionmeant slicing down the workforce hence unemployment. By the end ofthe depression, production from the manufacturing sector had fallento fifty-four percent, and unemployment risen to maximums oftwenty-five to thirty percent of the total workforce. Additionally,the GNP fell to thirty-one percent, the wholesaling and consumerprices fell to thirty percent and twenty-five percent of the totalcost respectively. The effects of the depression were worse in the USthan in any other country and were felt in all aspects of life,social, political and economical (Robbins 39). Though the US economyhad begun to recover from the second half of 1933, the process wasslower in 1934, becoming more rigorous in late 1935. The rigorousrecovery process continued through 1937 when a new depression and theeconomy had not fully recovered at the onset of the Second World War.The agonizingly slower recovery process, the widespread, and thefar-reaching impacts of the 1929 depression led to its name, theGreat Depression (Young, William &amp Nancy 160). This paperexemplifies the Great Depression in the US, detailing the causes, thesocial economic and political impacts as well as the factors that ledto the economic recovery.

Causesof the Great Depression

Thoughthe onset of the great depression was marked by the collapse of theUS stock market on twenty-ninth of October 1929, that singleoccurrence cannot fully explain the depression. There were underlyinglong-term factors that sent the US into a downward spiral of despair,plugging the economy further into the depression, and recovering at aslower pace than other countries. Combinations of these factors wereresponsible for the depression. Among these factors include thecollapse of the stock market, the economic cycles of boom and recessand bank failures. Others include the reduction of the purchasingpower across the board, the US economic policy with Europe as well asthe drought condition in the US (McElvaine 69).

Collapseof the stock market

Priorto the depression, there was increased prosperity and optimism in thegrowth of the economy. Many people invested in the stock market sincethe economy was growing hence were assured of increased returns.After decades, the engendered optimism and prosperity was thrown intodespair on October 29, 1929, commonly referred to as the BlackTuesday. On this day, the US stock market in New York crashed,marking the start of the depression. Stock prices tumbled with nosigns of recovering, frightening the masses, especially those thathad invested in stock (Young, William &amp Nancy 167). The peopletried to sell their stock to at least salvage the least from theirstocks, but the panic stricken masses were not buying stocks, even atthese low prices. The stock market, which was initially viewed as thesurest way of investing for maximum wealth became the surest waybankruptcy. Individuals and institutions, especially those that hadinvested in stock became bankrupt as their investment returns hadplummeted, hence huge losses (McElvaine 74).

Banksand monetary institutions which had invested large amounts of theirclients’ funds in the stock markets were declared insolvent, andhad to close down. Closing down some banks increased panic amonginvestors, who rushed their money from other banks prior to theirclosing. The massive withdrawal from banks forced other banks toclose individuals and businesses that did not get their savingsbefore bank closure also became bankrupt. Businesses that lost theircapital either as investments in the crashed stock market or bankclosures reduced salaries and wages to reduce costs (Watkins 94).Some firms adopted more drastic actions, such as lying off someworkers, to cut costs of production. Consumers reduced theirspending, reducing the total demand, which made producers reducetheir output levels while others dropped out of business. Morebusinesses were closed down due to insolvency, reduced productionlevels that could not break even, rendering more people jobless. Themass bankruptcy and reduced salaries, and unemployment reducedpeoples’ purchasing power, reduced production and raised theunemployment rates, the spiral characteristics of the greatdepression.

Bankfailures

TheUS banking system was ridden with fundamental structural weaknessesthat propelled and worsened the depression. The US banks wereoperated without a set of guarantors such as credible insuranceagencies, creating platforms of panic in times of adversities. Whenbanks lost client`s savings in the stock market, they were forced toshut down due to insolvency. Banks had not adopted alternativeguarantors, to reimburse them back to their financial positions.Additionally, there were few regulations governing the lendingpractice hence banks lent out their resources even to the recklessspeculators in the stock market, which was seen as more profitable.When the stock market crushed, over nine thousand banks closed downthose that survived were unsure of the economic situation since theyalso had held uninsured deposits. The surviving banks were hesitantof creating loans as clients withdrew they money exacerbating thesituation further (Robbins 49).

Reducedpurchasing power

Afterthe crash of the stock market, investors lost their savings directlyin the stock market or indirectly after banks and monetaryinstitutions closed. Institutions sliced the salaries and wage oftheir workforce, with others laying-off some workers to reduce costsof operational, a situation that reduced disposable income among thecitizens. Reduction of disposable income led to reduced purchasingpowers as individuals and institutions controlled their expenses toconform to their economic predicaments (McElvaine267). Reducedpurchasing powers resulted in reduced production levels, hence theneed for reduction in workforce, creating a spiral wave of economicwoes. People were unable to pay for items bought through hirepurchase hence repossession by producers, reading to accumulatedinventories. More than a third of U.S resources were held by therich, who represented less than one percent of the population.Instead of investing their wealth back into the economy to promoterecovery, the wealth panicked, reduced their spending to bracethemselves for uncertainties. The reduced purchasing power led toreduced production that further translated to increased unemployment,reaching the maximum of twenty-five percent by 1932 (Gunderson 54).

Economiccycles

Normaleconomic cycles are characterized by booms and recess, with the boomsignifying economic prosperity. This is followed by recess,signifying economic deficiencies, characterized by reduced productionand increasing unemployment. The 1920s represented a decade ofeconomic prosperity, with the stock market quadrupling from 1921 to1929.Though there were mild recessions in 1924 and 1927, the decaderepresented an exceptional boom period the high-interest rates ledto increased expenditure in the construction industry. By 1929,companies had reached the peak profits skyrocketed leading tincreased salaries and widened wealth distribution. After reachingthe peak, workers could not continue fueling growth the recess wasinevitable hence the depression (Young, William &amp Nancy 157).

Asbusinesses began failing, the US federal government enacted theSmoot-Hawley tariff, aimed at protecting local industries from unduecompetition by European industries. The tariff charged higher tariffson imported goods, reducing trade between the two trading blocks.This attracted economic retaliations, which exacerbated thedepression (Gunderson 34).

Impactsof the Great Depression

Economicimpacts

Duringthe great depression, unemployment levels rose from three percent tothe heights of twenty-five percent by 1933 as industries laid-offworkers to reduce recurrent expenditures. Further, companies reducedthe wages of workers retained in employment, falling to lows offorty-two percent. The GDP plummeted from a103 to 55 US billiondollars, partly because of the deflation that led to the pricedecrease f ten percent per year. To protect local industries, thegovernment enacted the Smoot-Hawley tariffs, which led to twenty-fivepercent decline in traded units per year (McElvaine 269).

Thegreat depression and response policies had far reaching impacts onthe global economy, such as hastening the end of the internationalgold standard. World economies adopted the floating rates of thecurrency exchange rates, fearing the adversities brought out by thefixed exchange rate during the depression. The fixed exchange ratewas reintroduced during the Second World War under the Breton Woodsinstitution, and further abandoned by 1973 in favor of the floatingexchange rate (Watkins 114).

Theincreased unemployment heralded the substantive expansion of laborunions and welfare state in 1930s. Membership in labor unions morethan doubled in 1930s, a factor stimulated y the severe unemploymentand the ratification of the Wagner Act of 1935, which heartenedcollective bargaining (Santos 43). The Social Security Act was passedin 1935 respond to hardships brought out by the massive unemploymentduring the great depression. The act resulted to the establishment ofthe old-age and survivors’ insurance and the unemploymentcompensation insurance to respond to the hardships heralded by thedepression. The banking act was established in 1933 that establishedthe need for deposit insurance, additionally prohibiting banks fromdealing with securities. Additionally, the Securities and ExchangeCommission Act was established in 1934 to regulate the stock marketand new stock issues. These new laws were meant to resolve thestructural weaknesses of the banks that had propelled the depression.

Thedepression led to the development of the macroeconomic policies,intending at stabilizing economic adversities. Postulated by MaynardKeynes, macroeconomic policies aimed at using the fiscal policiessuch as the government spending and tax to counteract the depression.Fiscal policies are still utilized in modern economies to moderateand prevent recessions (Bernstein 45).

Social-culturalimpacts

Thegreat depression led to reduced incomes, unemployment as well asbankruptcy among the citizens, all which led to a reduction inpeople`s purchasing power. In addition, the US was faced with theworst drought that struck the Great Plains in 1934, impoverishing thefarmers (Doak 43). Increased poverty reduced the purchasing power ofthe citizens, affecting their social setups. Increased poverty led tothe inability to access basic human needs such as shelter, leading tothe creation of Hoovervillies, where the homeless sought shelter(Gunderson 73). Unemployment among the youth made them drifters, manyengagements and marriages were postponed or terminated as the economyworsened. Broken marriages led t reduced birth rates there wasincreased child mortality rate, while the children who survived wereforced to work in their premature ages, to support their families.More women sought employment to support their families,psychologically straining the American men, who were traditionalbreadwinner of the family (Doak 44).

Socialvices such as crime rates increased as the unemployed citizens soughteasier ways of getting their daily bread. Prostitution increased aswomen sought alternative ways to pay their bill. Suicide rates,alcoholism among other desperate behaviors increased as hopelessnessincreased as a result of poverty. Personal health and wellbeingdeclined since medical services were considered luxurious whilemalnutrition increased. Despite the increased social vices, manyfamily units were strengthened (Gunderson 76). To free from thedrought in the Great Plains, majority fled to California, reshapingthe American mosaic. Despite the collapse of many businesses, duringthe great depression, others businesses were formed, with others suchas the insurance becoming stronger (Bernstein 58).

Politicalimpacts

Thedepression led to the realignment of the political scene in the US,leading to the coalition of the southern Democrats,African-Americans, organized labor unions and big-city ethics. Thecoalition spawned innovations such as the pension schemes, whichstrengthened the presence of the federal government in the Americanlives (Bernstein 47). Additionally, it led to the acceptance of thegovernment as the agency of reforms and actions to protect thewellbeing of the US citizens. To date, the government is mandatedwith the role of enacting and implementing appropriate laws toprotect citizens from social, political or economic adversities(Watkins 112)

Theend of the civil war

Onthe service, it seems that the Second World War marked the end of theGreat Depression. The onset of the Second World War saw to the uptakeof more than twelve million Americans to serve in the military, withalmost a similar number being absorbed in other jobs related to thewar. Jobs related to the war absorbed more than eighteen millionunemployed individuals by 1939. Additionally, the war led toincreased expenditure, which helped the economy to recover from thedepression (Crafts &amp Fearon 58). Despite the noteworthycontribution of the Second World War in ending the economicdepression, the war is not the only factor that led to economicrecovery. There were other underlying factors that combined, endedthe war, such as the Roosevelt deals to recovery christened the FDRdeals and the various laws enacted among others (Gunderson 102).

Duringthe Second World War, the US president, Franklin D. Roosevelt,revealed a new set of deals, the FDR new deals aiming at improvinglives of American. These presidential packages included the rights toadequate medical care, proper housing and useful and well-payingjobs. These packages imposed all Americans to pay tax to promoteavailability decent housing and useful and paying jobs among all UScitizens. However, his death in before the war prevented him fromimplementing his new deals, leaving them to his successor, PresidentTruman to implement them(Crafts &amp Fearon 56). Though Trumanimplemented most of the FDR deals, the economy remained stagnatedsince the majority, republicans and southern democrats did notsupport the FDR deals. The government increased its expenditure inimplementing the new deals, which increased the circulation anddistribution of income, aiding in increasing peoples` purchasingpower. In 1945-46, the government amended the excess profit tax,cutting the top income tax rate to eighty-six percent and thecorporate tax to a maximum of thirty-eight percent. These repealsallowed businesses keep much of their profits, which could bereinvested to increase production. Increased production necessitatedhigher workforce hence more people taken up in employment.Additionally, corporate increased salaries, increasing the peoplespurchasing power, which aided in economic recovery (Gunderson 34).

Conclusion

Fromthe aforementioned, the great depression was the economic breakdownthat hit the industrialized nations starting on 1929 and ending in1930s. The longevity and severity of the depression varied among thecountries, with adversities being felt in the US more than othercountries in the world. In the US, the depression was marked by thecollapse of the stock market in New York on twenty-nine of October,otherwise referred to as the Black Tuesday. The collapse led to theloss of savings among investors, leading to collapse of banks whichhad invested in the stocks. This was followed by panic leading towithdrawals from banks further deteriorating the depression since thebanking system had huge structural weaknesses. Industries lost theirsavings hence reduced salaries and fired workers, which led toincreased unemployment and reduced purchasing powers. The impacts ofthe depression cut across social-cultural, political and economicdivides, and it was not until during the Second World War that theeconomy recovered after implementation of fiscal policies.

WorksCited

Bernstein,Michael A. TheGreat Depression: Delayed Recovery and Economic Change in America,1929 – 1939.Cambridge [u.a.: Cambridge Univ. Press, 1993. Print.

Crafts,N F. R, and Peter Fearon. TheGreat Depression of the 1930s: Lessons for Today.Oxford : Oxford University Press Oxford : Oxford University Press,2013. Print.

DoakRobin, S. Black Tuesday: Prelude to the Great Depression.Minneapolis, MN: Compass Point books, 2008. Print

Gunderson,Cory G. TheGreat Depression.Edina, Minn: ABDO Pub, 2004. Print

McElvaineRobert S,.TheGreat Depresion: America 1929-1939.New York:Crown Publishing Group, 2010. Print

Robbins,Lionel. TheGreat Depression.Auburn, Ala: Ludwig von Mises Institute, 2007. Print

Watkins,T H. TheGreat Depression: America in the 1930s.Boston, Mass: Back Bay, 2010. Print.

Young,William H, and Nancy K. Young. The Great Depression in America.Westport, Conn: Greenwood Press, 2007. Print.

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