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The Great American Depression - Causes, Consequences, Facts

In this article, we will talk about the Great American Depression, which erupted in 1929-1939. Could an economic collapse, a stock market crash be foreseen? What are the real reasons for the economic decline that has begun and how have they been resolved?

1. What is the Great American Depression in simple words

Great American Depression (from the English. "Great American Depression") - an economic crisis in the period from 1929 to 1939, which began in the United States and flowed to the whole world. Its scale was so large that in fact the state was on the verge of a recession.

The official start date is October 24, 1929. This day was nicknamed Black Thursday. The markets turned red and the stock market crashed. In one day, 12.9 million shares were sold, the stock index fell 11%.

It was the first strong bell that the long-term bull rally that began in 1921 came to an end. But then there was no Internet and few who knew what was happening at all. Stock exchanges fell both on Friday October 25th and on Monday October 28th.

October 29 was nicknamed Black Tuesday. That day the fall was even stronger (16.4 million shares were sold in the amount of $ 10 billion). In total, a record 30 million units were sold over the past few days.

In general, 1920-1929, euphoria reigned in the United States. This can be easily tracked by the dynamics of the Dow Jones stock index rate. So, in 1921 it was - 63, at the peak of 1929 - 381, and after the October collapse - 198. After 3 years, it fell below 1921 - 41.

A huge number of ordinary townsfolk were attracted to that euphoria, who invested all the money they earned on the exchange. And it worked perfectly. The market grew, money increased day by day.

But the problem was not in the fall of the stock market, but in the fact that a rapid decline in production and a crisis in the banking system began. This has led to the rapid growth of the unemployed. For the first time, the free market needed the help of the state.

2. History of the Great American Depression

The first signal for the onset of the crisis was the fall in property prices in March 1929.

In October 1929, many brokers prohibited taking long-term loans and leverage.

For the first three years of the Great Depression, Hoover was president in the United States. He did not take any decisive action and therefore the population remembered him as far from the best presidency.

Settlements appeared, which became known as the “Hooverville”. They consisted of frail buildings. Residents of these settlements ate in free canteens.

In 1932-33, the unemployment rate reached 25%. At the same time, the distribution among the population and the states was extremely uneven. Somewhere the level reached 30-80%. However, most of the unemployed were women.

In 1932, the election was won by Franklin Delano Roosevelt, who proposed a series of tough and decisive reforms to get the country out of the great depression:

  1. Dollar devaluation. Due to the eruption of price deflation, it was necessary to motivate people to make purchases, and not to keep their savings.
  2. Temporary closure of all banks. Due to the massive withdrawal of funds, banks simply did not have enough reserves.
  3. Created an economic plan for large enterprises. This allowed to revive production.
  4. Cancellation of the Prohibition
  5. Support for agriculture. Most farmers could not harvest due to lack of money for gasoline.
  6. Continued labor mobilization of the unemployed. Job creation in the form of community service

Roosevelt's slogan was:

"The country looks with satisfaction at the present, and with optimism - into the future."

Only with the beginning of full-scale military mobilization in the summer of 1940 did the economy cease to stagnate and began to grow.

3. Causes of the Great American Depression

The causes of the crisis in the United States 1929-1939 became a number of factors, each of which played a role. Let's look at each of them individually.

Reason 1. Crisis of overproduction of goods

The rapid growth of industrial production due to the automation of many processes, the emergence of new machines, the use of conveyor technologies have led to the appearance of many products on the shelves.

Money supply was strictly tied to gold, as the United States supported the gold standard. An increase in the mass of commodities without an increase in money supply led to a fall in prices and deflation. As a result, there was a lot of goods, and the population simply did not have money to buy goods.

Salaries were also reduced, and the working day increased.

Reason 2. The end of the First World War

Defense orders accounted for a large share of cash proceeds. After lowering orders, there was a sharp decline, which led to stagnation in the production of defense enterprises, of which there are many in the United States. As a result, the crisis in the military-industrial complex also contributed to the decline in production.

Reason 3. Monetary policy of the Fed

The US Federal Reserve System (FRS) did not have much experience in managing cash flows. Instead of increasing the money supply, on the contrary, they only seized it. This has led to an increase in key interest rates (refinancing rate).

New money went to the stock market, because there you could quickly earn. Every resident of the USA knew about it at that time. Everyone carried money to buy stocks, which at that moment were clearly overheated. But no one knew what this could lead to. The financial bubble inflated more and more.

Since then, the Fed has pursued a competent policy, supporting moderate inflation and thereby stimulating the economy to grow. Although, on the other hand, the money supply in the world is on the contrary in abundance.

Reason 4. Increase in import customs duties

The introduction of high import duties (40%) has led to retaliatory measures from other countries. Now, US products have become uncompetitive due to the high cost.

This document, called The Hawley-Smoot TariAct, was approved on June 17, 1930. After a couple of years, US exports fell by 61%.

4. Ten facts about the Great Depression

1 The board of Herbert Hoover of the US president at the beginning of the crisis remained extremely negative in the recollections of the then residents. These were the most difficult times when hunger and unemployment reigned.

  • "Hooverville" cities built specifically for the homeless
  • Hoover Stew Free Meals in Dining Rooms
  • "Hoover blankets" newspapers that hid impoverished Americans
  • "Hoover pigs" hares that were caught for food
  • "Hoover wagons" broken cars that harnessed horses

2 Gangster Al Capone opened a free dining room. So he made contact with the people.

3 In the "black week", investors lost $ 30 billion, which is more than all US military spending in the First World War.

4 There were many suicides in the early days of the onset of depression. This is probably due to the loss of savings.

5 At that time, Hollywood began to develop. Often new films appeared. Thus, they tried to distract the population from the plight of the United States.

6 About 50,000 were injured or died jumping from roof to roof of a train because there was no money for tickets.

7 The game "Monopoly" appeared in 1935 to remind people of the opportunity to get rich.

8 Disney cartoon "Three Little Pigs" filmed in 1933 taught the population to unite in difficult times to deal with the problem.

9 With job cuts, blacks were fired first.

10 At the collapse of 1929 there are those who have earned well. Co-owner of Merrill Lynch & Co. Charles Merrit advised selling stocks.

Joseph Patrick Kennedy sold shares before Black Tuesday

5. Reforms and actions to overcome the crisis

5.1. Banking Reforms

Temporary closure of US banks for six months from November 1932 to March 1933. This allowed freezing the outflow of money from banks.

There were also bans on commercial banks working with securities. In the early 2000s, this ban was lifted.

Lending to agricultural enterprises was increased. Their debts were restructured on favorable terms.

5.2. Gold removal

Under Decree No. 6102, all gold held by individuals and organizations was forcibly exchanged for paper money at a fixed price of $ 20.66 per ounce. Those who did not want to exchange were facing a criminal term.

After a while, gold sharply increased in price to $ 35. In fact, they devalued the dollar by 75%.

5.3. Jobs for the unemployed

Creation of public works on the construction of roads, bridges, airports and other infrastructure facilities important for the country.

In 1935, trade union rights were greatly expanded. By 1937, unemployment in the private sector returned to normal.

5.4. Military orders

With the outbreak of World War II, the United States had new orders. The economy has stepped up. Plus, capital escaped here from Europe along with prominent people. All this affected the further recovery and recognition of the dollar.

6. Consequences of the Great Depression

1. For the first time in the United States, people emigrated to other countries.

2. The Dow Jones stock index 39 years later (in 1954) exceeded its maximum value on September 3, 1929.

3. Industrial production decreased by 45% between 1929 and 1932 (this level corresponded to the level of 1911).

4. The number of unemployed at the peak reached 17 million people and about 2.5 million became homeless. The unemployment rate in Toledo, Ohio reached 80%.

5. 11 thousand banks, 135 thousand companies and almost 900 thousand farms went bankrupt.

6. House construction fell by 80%.

7. The average American family's income fell 40%.

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