At the end of the second decade of the twentieth century, countries were hi t by a staggering depression in their economies.
The severity of this depression was particularly pronounced in the United States. In 1929, October, there was a serious fall of the values of common stock which caused crash of the stock market. In this situation, politicians tried to remain calm and exercise optimism but this was to no avail. The situation worsened and people lost their confidence in the government as they bid the last dollars of their savings goodbye.
By the year 1932, an approximate quarter of United States population was unemployed. Factories had been shut down due to the harsh economic climate, banks had failed in their operations and businesses had been closed. As 1933 approached, stock exchange in New York was barely a fifth of its 1929 peak. The Great Depression, as this is what it was called, had a number of causes and a lot of effects on American economy and the world as a whole (Smiley, 2008, p. 1).
Causes of the Great Depression
The main problem behind the stated Great Depression experienced in the United States in 1929 was the mismatch between the consuming capacity of the population of the United States and the production capacity of the country. After the WWI, the country had undergone a serious revolution in innovative production that had seen its output surpassing the purchasing capacity of the people of the U.S.
at the time. The inadequate demand of products was the one that led to closure of businesses and the subsequent failing of banks (Temin, 1991, p. 41). Another contributing factor was the investment habits of Americans at the time. The middle class and the wealthy had actively invested in stock market speculations and real estate. With the collapse of the stock market, the middle class and the wealthy lost billions of dollars to their investment naivety (Amadeo, 2010, p.
1). Analysts have attributed the crash of the stock market and the Great Depression that followed to tight monetary policies instituted by the Federal Government at that time. Some of the mistakes that the Federal Reserve made include the following.
The federal government raised their funds rate in1928, in August of the year 1929, the rate was still raising. This culminated in the crash in the stock market that occurred in October the same year. Another mistake was the preservation of the gold value of the dollar by the feds by an increase of interest rates.
This is discussed in detail below (Amadeo, 2010, p. 1). Prior to 1929, the Franc and other currencies ware undervalued after adopting floating rates for some time. At the end of WWI, countries with devalued currency wanted to return to the gold standard. On the other hand, courtesy of holding on to a fixed gold value for the dollar, a large number of gold deposits had been made to the United States by investors from a number of countries. With this situation the Great Britain and the United States offered to redeem gold for t pounds and dollars respectively. This led to an increase of gold demand. In the year 1928, the French government lowered interest rates which increased interest rates in America.
This led to more gold being shipped to the U.S. Other countries initiated policies aimed at lowering economic activity through deflation and reducing price levels. This started the Great Depression. This cause of the Great Depression explains why the United States was among the countries that were affected the most by the depression (Smiley, 2008, p.
Effects of the Great Depression
The most profound and lasting effect of the Great Depression is the way it changed the involvement of the federal government in economic matters. It occurred due to public demand ignited by the dissatisfaction of the public towards the extent to which the Depression had affected the United States and the fact that recovery was painfully slow. This was despite the fact that people with business interest resented the involvement of the government in these matters. The response of the federal government was the creation of compensation for the unemployed as well as Social Security for the elderly (Amadeo, 2010, p. 1). The depression also brought a revolution in labor laws. The Wagner Act was introduced which introduced the safeguarding of the interests of employees.
This was achieved by its intervention in labor negotiations and the promotion of unions. This necessitated an expansion of the federal workforce which also created employment (Smiley, 2008, p. 1).
The Great Depression had an impact on the philosophy of economics. This is due to the fact that scholars and economists had associated the Great Depression with the inadequate demand that prevailed in the period. There was, therefore, the need to look for scholarly solutions to avoid the occurrence of such depressions in the future. This was responded by the development of the idea that governments should control demand in a bid to prevent occurrence of such depressions in the future. This was summarized as the Keynesian theory (Smiley, 2008, p.1).
The end of the Great Depression
With the election of Franklin Roosevelt as the president of the United States, in 1932, a new chapter in the efforts of ending the Great Depression was opened. Roosevelt got most of his votes due to his policies regarding the creation of programs with the Federal Government to help in fighting the depression.
Within a period of less than three months, his policy was incorporated into law. This saw the creation of about forty-two agencies meant to create jobs. The agencies were also meant to provide insurance against unemployment and allow the formation of labor unions. A large number of the programs that were put in place this time are still in force today and they are very instrumental in protecting the economy against downturns.
Examples of the discussed programs include the Federal Deposit Insurance Corporation (FDIC), the Social Security and the SEC (Amadeo, 2010, p. 1). Despite Roosevelt’s efforts, the economy was faced with seemingly insurmountable problems that made the recovery process considerably long. For instance, the rate of unemployment was unbelievably high in the decade between 1930 and 1940. It remained more than 10% until the start of the Second World War when some jobs related to defense were created (Smiley, 2008, p. 1). President Roosevelt was, however, quick to react to these challenges in a constructive way. For instance, after the occurrence of a third banking panic in 1933 March, President Roosevelt announced a Bank Holiday that stopped a run for financial institutions after their closure.
This ensured that people did not withdraw and hold the finances they had in the banks and kept money in circulation. He also rejected Keynes’ idea of implementing heavy deficit spending and implemented his idea of wealth redistribution that was a great effort towards the fight against the depression (Temin, 1991, p. 39). With the start of World War II, the depression began to end as countries were concerned about the coming hostilities and they had to prepare.
Roosevelt adopted a strategy of deficit spending in a bid to arrest the economy. This had an enormous effect on the economy making the United States register record growth rates. This is evidenced by the fact that President Roosevelt achieved a higher economic growth than President Ronald Reagan.
Notable among the historic economic figures is the fact that the rate of growth during Reagan’s administration in the “Seven Fat Years!” (Temin, 1991, p. 23) was lower than the growth realized during the Great Depression. Although most of President Roosevelt’s policies and strategies worked for the economic prosperity of the United States, he also made some mistakes. An example is when he reduced deficit spending after the remarkable growth of 14% in the year 1936. His reason for the decision was because he thought that the economy could grow to be imbalanced and so he wanted to balance their budget. The effect of this decision was the recession that took place in the year 1938 (Temin, 1991, p. 32). The Congress also had considerable input to the end of the Great Depression.
It helped to foil coup de tat plans by the rich which were organized as a reaction to Roosevelt’s idea of wealth redistribution. It also passed several acts that made economic recovery easier. Examples of such acts are the 1935 Banking Act, the Social Security Act and the National Labor Relations Act (Temin, 1991, p. 11). The World War II was the greatest calamity the world has ever seen, it brought economic advantages to the United States. After becoming the world’s only superpower, America underwent a quick economic recovery registering more attractive ratio of debt as a percentage of their GDP after deficit spending. The tax rate was also significantly lowered with America experiencing an economic boom as from the year 1963 (Temin, 1991, p.
The Great Depression was inevitable with the limited monetary policies and non-coordination of countries in making economic decisions. There was also limited protection of the workforce which was the reason that the depression hit countries hard. Policies in one country were responded by other countries with desperate counter-policies like currency devaluation that left the latter countries in problems. These problems made them to make more economic mistakes in a bid to reduce the effect s of the mistakes they made earlier. This had a great effect on the world’s economy as a whole.
The most affected countries in such cases were the most developed ones. The occurrence of the Great Depression made the world learnt a very important economic lesson. Since then every country’s central bank, inclusive of the Federal Reserve in United States have been always aware of the essence of monetary policies in maintaining economic stability. Economists have over the years argued that it is impossible for a Great Depression of the same magnitude as the 1929.
This is because the world’s economy is unified and therefore the central banks of different countries coordinate their operations to make sure that such an occurrence does not happen again. We should thus be thankful that the Great Depression occurred this early because it is the reason we have commendably stable economies.
Temin, P. (1991). Lessons from the Great Depression. New York. Barnes & Noble. Smiley, G.
(2008). Great Depression. Retrieved July 6, 2010, from,http://www.econlib.org/library/Enc/GreatDepression.html Amadeo, K. (2010).
The Great Depression of 1929. Retrieved June 6, 2010, from,http://useconomy.about.com/od/grossdomesticproduct/p/1929_Depression.htm