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Great Depression: The Hardest Time Period
The Great Depression was the hardest time period over to live which was an economic
collapse. The system of American capitalism stopped working in 1930. During the period of
1929 to 1940, the economy of the free market collapsed at a level that allowed Americans to
achieve economic success. All those individuals who have not lived through this toughest time
period cannot imagine the unprecedented events of social disarray and economic collapse that
slowed down American economic growth. The statistics were miserable, financial markets
showed poor performance and economic growth declined to the minimum. By the mid of 1933,
GNP of the country had fallen to almost half of the economic level of 1929. The construction of
new industrial plants has also reduced more than 90% with industrial growth dropped down to
more than half. Steel plants operation took place only at the capacity of 12% and auto mobile
production also reduced by two-third.
The rate of unemployment also rose and more than 13 million people in America lost their
jobs and were unemployed during the presidency of Herbert Hoover. 62% of those unemployed
individuals were out of work for more than one year. In addition, 42% were unemployed for
more than two years and 11% for more than four years. In 1933, the unemployment rate was at a
peak value of 24.1%. This rate has never dropped below the value of 14.3% before the World
War II. The Great Crash of Wall Street in 1929 was initiated by the financial meltdown and
resulted in billions of dollars to vanish into thin air. Those wealthy Americans who were the
owners of the nations’ stock during that period were walloped by more than 80% reduction in the
stock market value. The bank failures created more trouble for the entire population during the
years of 1929 to 1933. In American, two out of every five banks collapsed which evaporated the
hard-earned money of amount $7 billion of the customers. It was possible to see some solid
things and base your hope during other periods of depression, but the greatest depression period
gave no ground to hope. More than 100,000 Americans started applying for emigration to other
foreign countries in 1933 where they hoped to find better job opportunities (Bernanke, 1983).
The miseries of Great depression were so incomprehensible for those who suffered and it was
clear that the reason behind economic collapse was not the increased wants but the material
abundance. The supply rate was very high in the 1930s and the demand rate was not that high.
There were too many auto vehicles but not enough people who have affordability. Too much
beef, too much pork, too much cotton, too much wheat, too much corn but to not enough buyers
who can pay the price to make the crops worth harvesting. Too many people were unemployed
and looking for the job during that period, but there were not enough employers who could hire
them. The distress was the result of the failure of substance and was stricken by no plague of
locusts. The capital structure of America had never experienced such a long lasting and profound
market failure ever before in history (Cecchetti, Stephen, and Georgios, 1992).
Causes of the Great Depression:
The Great depression was the worst economic depression in the history of United States.
Garraty (1986) stated that the reason behind this depression was not just one factor rather there
are multiple reasons for it. It was the result of a combination of worldwide and domestic
conditions and its effects were detrimental worldwide. It brought New Deal in America and it is
considered to be the direct reason of the increase in extremism in Germany which resulted in
World War II. It is possible to find out as many reasons of the Great Depression as possible.
Below are listed top five causes of the Great Depression cited by economists and historians.
Crash of Stock Market in 1929:
The crash of stock market on Black Tuesday on October 29,1929, was similar to the Great
Depression. It was one of the major reasons of the Great Depression which brought the
stockholders’ loss of 440 billion dollars during first two months of the stock market crash. By the
end of 1030, the stock market started to regain few percent of its losses; however, it was still not
enough to eliminate the depression and the United States finally entered into the period of the
Great Depression.
Bank Failures:
More than 9,000 banks failed throughout the 1930s. People lost all their savings because bank
deposit was uninsured. All those banks who survived the toughest economic situations were so
much concerned for their survival that they stopped creating new loans. This made the situation
worst and resulted in less and fewer expenditures.
Purchase Reduction across the Boarders:
Individuals from all social status and classes controlled their purchasing items with the fear of
economic woes and due to the crash of stock market. This, in turn, resulted in the reduction of
the items production. Fewer items production means fewer workers in the workplace. People lost
their jobs and they became unable to keep up with the payments of items which were brought
through installment plans. Inventory accumulation increased and the unemployment rate rose to
more than 25%. Spending patterns reduced and could not help in alleviating the economic
situation.
Economic Policy of America with Europe:
The government started Smooth-Hawley Tariff program in 1930 when businesses failed to
help and protect the American companies. This includes the imposition of high taxes on imports
from other foreign countries. The consequences of this tariff were unintended as less import and
export occurred between foreign countries and America. Some countries also showed retaliation
economically against the United States.
Drought condition:
The drought was not one of the direct causes of the Great Depression, however, the
occurrence of drought in Mississippi valley in 1930 made the conditions worst. People had to sell
their farms because they were not profitable anymore. People were unable to pay their debts and
taxes during that period.
The Great Depression: Hard Road to Recovery:
Programs of the New Deal such as Tennessee Valley Authority (TVA) and Works Project
Administration (WPA) were initiated with the aim to aid the recoveries from the severe impacts
of the Great Depression. It built hydroelectric projects and dams in order to control the flooding
and to provide electric power for improving the Tennessee Valley South Region. The purpose of
WPA program was to provide job opportunities and more than 8.5 million people got employed
from 1935 to 1943. The spring of 1933 showed few signs of recovery and the economy
continued to progress for the coming three years. The growth of real GDP was adjusted to
inflation and showed an increase at an average rate of 9 percent in one year. The year of 1937
was hit by a sharp recession due to the decision of Federal Reserves for increasing the money
requirements in reserve. The economic conditions got better again in 1983 and it brought the
reverse of many severe conditions. Production gains were obtained, the unemployment rate
decreased and effects of the Great Depression were prolonged by the end of that decade.
Jensen (1989) argued that the hardships of depression era had fueled the creation and rise of
extremist political movements in different countries of Europe. The regime of Adolf Hitler was
one notable extremist who showed aggression towards such conditions. German aggression
resulted in the war breakout in 939 in different parts of Europe. The attention of WPA turned
towards the strengthening of U.S military infrastructure despite the fact that country maintained
its neutrality. Defense manufacturing sector geared up and created additional private jobs when
Roosevelt decided to support France and Britain in their struggle against Axis powers and
Germany. America also declared war when Japan attacked Pearl Harbor in 1941 December. The
factories of United States went back in the full production mode. The expansion in the industrial
production and the widespread conscription began in 1942 reduced the unemployment rate back
to its pre-depression level.
Before the start of the Great Depression, the United States was the only industrialized country
in the world without the social security and the unemployment insurance. Congress also passed
the Social Security Act in 1935 that helped the unemployed, disabled and elderly
Americans. The Great Depression virtually affected almost every country in the world, however,
the magnitude and dates of the devastating effects were different in different parts of the world.
The Great Britain suffered from the recession and low growth in the second half of the 1920s.
Although Great Britain did not experience severe depression before the year of 1930, it had
experienced peak to trough decline in the industrial sector however, it was roughly one-third of
the happened to the industrial sector of the United States. The economy of France experienced
the somewhat short downfall in the start of 1930 and its recovery was also short lived. The prices
and industrial production of France suddenly fell between 1933 to 1936. The downturn of
Germany was slipped in 1928 which stabilized later before completely turning down in the third
quarter of 1929. The reduction in the industrial production of Germany was almost equal to that
of the United States. Many countries in Latin America struggled through depression in the end of
1928 to early 1929. Less developed countries were badly devastated by the severe impacts of the
great Depression. Some other relatively stable countries such as Brazil and Argentina struggled
relatively mild downturn. Depression affected Japan in a mild way and ended early.
The Gold Standards:
Economists believed that one of the reasons behind the economic collapse is the sudden
reduction in the American Money supply in order to preserve the Gold Standards. The purpose
of gold standards is to adjust the value of the currency with respect to gold and monetary actions
are taken in order to defend the fixed prices. The expansion of Federal Reserve was great as a
result of the banking panics and foreign lost their confidence in the economy of the United States
and its commitment with the gold standards. This could have resulted in huge outflows of gold
and it could have forced the United States to devalue. If the Federal Reserve had not tightened
the fall in 1931, it would have resulted in a speculative attack on the value of the dollar. Such
conditions would have forced the United States to abandon the standards of gold if the attempts
to control the great depression were not taken into account. The role of gold standards in the
limitation of US monetary policy is a debatable topic. Asset flows and imbalances in trade under
the gold standards gave rise to the gold flow at the international levels. In the mid of 1920, the
demand of the intense international trade of the American assets including bonds and stocks
resulted in huge gold inflows to the financial markets of United States. After the contractions in
the economy of US, the tendency of gold flow towards the United States from other countries
intensified. The deflation made American economy look good and desirable for foreign
investors. At the same time, the reduction in Americans’ income also decreased the demand for
foreign products. In order to counteract the resulting tendency towards the foreign outflow of
gold and trade surplus of America, the Central Bank raised the interest rates throughout the
world (Robbins, 2011).
Conclusion:
The devastating effects of Great Depression brought economic downfall not only in America
but also in all parts of the world. Trade reductions, stock market collapse, increased inflation and
unemployment rates and no loans by banks are some of the devastating impacts of the great
depression. People controlled their buying behaviors and spending pattern in order to adjust with
the difficult economic conditions. This Great depression affected everyone and people from all
social classes from business tycoons to the common man in America. The supply rate was high
compared to demand rate which ultimately brought the reduction in production. Different fiscal
and monetary policies were revised in order to deal with the devastating effects of the great
depression and it took years to come out of this traumatic event.
References:
Bernanke, Ben S. Non-monetary effects of the financial crisis in the propagation of the Great
Depression. No. w1054. National Bureau of Economic Research, 1983.
Cecchetti, Stephen G., and Georgios Karras. Sources of output fluctuations during the interwar
period: Further evidence on the causes of the Great Depression. No. w4049. National Bureau of
Economic Research, 1992.
Garraty, John Arthur. The Great Depression: an inquiry into the causes, course, and
consequences of the worldwide depression of the nineteen-thirties, as seen by contemporaries
and in the light of history. Harcourt, 1986.
Jensen, Richard J. "The causes and cures of unemployment in the Great Depression." Journal of
Interdisciplinary History (1989): 553-583.
Robbins, Lionel. The great depression. Transaction Publishers, 2011.