The great depression started on the 4th day of September 1929. A month later, the issue became a matter of international concern when the US stock market crashed. It did not just involve the US, as several other countries were affected. Unemployment levels rose to 25%, worldwide production reduced by 33%, and almost half of the banks in operation were closed.
Why the depression started
Even though the great depression officially started in September 1929, a number of other long-term factors led up this dramatic turn of events. First, the government, and other stakeholders, believed in a non-interventionist economic policy. They thought that the economy had self-regulating mechanisms during recessions. At such times, if consumption decreased, then banks would respond by reducing interest rates and this would lead to increased production. However, adherents to this school of thought had forgotten that investors generally make their decisions on the basis of profit returns. If consumption is low, then investors will also reduce production, thus putting the country in a general slump. This mindset is exactly what led to depression. President Hoover and several others before him believed that the market would correct itself, yet this was not true. His government should have responded to the crisis by creating demand, but they chose to leave it up to private entities.
Problems in inequality may also have perpetuated the economic crisis of the early 1930s. In the early 1900s, many parts of the country invested in machinery and trade. Production levels reached enormous levels; therefore, the country needed to have consumers who could match this level of supply. However, the government failed to invest in the empowerment of consumers through high wages and favourable policies for small producers, so a mismatch emerged. The deficit between supply and demand propelled depression.
The decade just before the great depression was known as the roaring twenties. It was a time when many individuals had just discovered the stock market. A number of them rushed to make money in it without thinking about their choices carefully. There was an excessive level of money supply and low-interest rates at the banks, which created a boom that heightened inflationary pressures. These pressures would pave the way for a crash as manifested in September 1929.
Additionally, the central government, through the Central Bank (The Fed), failed to control money supply at the time. When the public realized that the country’s financial situation was dire, most of them held onto their money. This resulted in reduced money circulation hence contraction of production. Since employment relies on production, then diminished production levels led to a decrease in the number of employed individuals. It should be noted that there was a monetary crisis in 1907 when the US government had no central government. A banking group known as JP Morgan intervened by assisting banks with cash; they partnered with the government in this attempt. Their actions prevented banks from liquefying their assets at low prices. The government created a Federal Reserve that would perform the same function in the event of another crisis. However, The Fed failed to take charge when banking panics occurred in the depression. They should have replicated what JP Morgan did in 1907.
As the depression took effect, unfolding events seemed to reinforce the very nature of the depression. First, panic selling occurred when the stock market crashed. At the time, debtors were expected to pay off bank loans, although many of them were unable to do so. Depositors also withdrew money from banks thus causing many of them to close. Those that remained in operation continued to minimize spending practices, which fueled the monetary crises even more. Debt liquidation accelerated falling prices and this reduced production. Liquidation also created more pessimism among the public who lost confidence in the banking system as well as the government. Many of them began hoarding money thus decreasing money circulation. The country eventually trapped in a cycle of economic underperformance.
The government’s reaction to the stock market crash led to its spiral into a depression. Its economic policies made things worse by restricting the flow of imports through the Smoot Hawley Tariff Act. This eventually translated into similar legislation in other parts of the world, which suspended trade with the US. As a result, many farmers lost their incomes as they could not export, and other producers also suffered a similar fate. The New Deal legislation created by President Roosevelt caused many factories to close as they could not afford high labour costs.
Stakeholders involved in the crisis
The US was the key player in the great depression. Almost all parts of the country were affected or created depression. The government was a key stakeholder because its monetary and economic policies altered the manner in which money was spent by key players. Banks were also involved because their decisions and reactions prior to and during the depression affected their outcome. They had the ability to alter interest rates, give loans or invest people’s money. Their decisions affected investor’s choices to do business and their labour practices as well. The public was involved in the depression through its decisions as well as its ability to feel the effects of the crisis. Farmers, minimum wage employees, and middle-class workers needed to find work. They were also the key consumers in the market. Their choice to hoard money transformed the stock market crash into a depression. Industrial producers had a role to play because they paid wages, which drove demand. They also had the capacity to change output in accordance with demand levels.
Several other nations were affected by this depression and some of them included Germany, the UK, South Africa, Australia and Chile. Germany relied on US banks for loans after the First World War. When the US got into a depression, it demanded payments for its loans, and this facilitated the collapse of the German’s banking system. Countries such as Canada, Australia and Chile were immensely affected by the Great Depression because they relied on trade with the United States. The United Kingdom was also involved in the depression because it had worked alongside the US in strengthening the gold standard. It was the gold standard that perpetuating deflationary pressures and prolonged state of the depression. The UK was also affected by depression since it relied on international trade. Export values reduced by almost fifty per cent and unemployment soured. Numerous Latin American countries were also involved in the depression because they often partnered with the US in trade. They could not create new economic approaches in time to mitigate the effects of the depression.
Economists were also involved in the great depression because their decisions heavily influenced government decisions. Those interventions eventually stalled economic recovery or stimulated it, depending on the country under consideration. In countries such as the UK, which recovered from the depression at a much faster rate than the US, economists advised the government to come off the gold standard. Since this was a rigid system, countries that left the standard recovered at a faster rate than those that did not. Economists also directed government actions during the Roosevelt era. He hired a team of such professionals to create a strategy for recovery. The effect of this team on the economy is debatable with many arguing that they caused more harm than good.
Advantages of the depression
Regardless of the suffering and hardships encountered in the great depression, a number of gains also emerged from the phenomenon. First, the banking sector became heavily regulated. The government and the public wanted to ensure that they do not experience the same problem again. As a consequence, strong trading policies were put in place and reinforced by government bodies such as the Securities and Exchange Commission. A group was also set up to ensure the public’s deposits in the event of another fluctuation in the market.
The depression also illustrated that the market is imperfect and requires government intervention during downward cycles. In fact, government involvement in the economy became a common phenomenon in American economic management after the depression. The crisis, therefore, redefined the role of government in running a country; theirs was not just social or political. In Europe, a number of policies and plans, such as the Marshall plan, were driven by this kind of thinking.
The depression may also have perpetuated urbanization. At the time, farmers and residents of rural areas were quite impoverished. They looked to other parts of the country for employment, and most of these areas were slightly far from them. Mass migration from rural areas increased the levels of urban populations in the country and even caused such cities to thrive. A case in point was California, which became a successful and urbanized state.
After the stock market crash and the prolonged depression, several individuals realized that the stock market was fragile. They also learnt that banking institutions could let them down. As a result, many chose to diversify their investment portfolio by looking towards other forms of investment that did not directly depend on the stock market.
Soaring unemployment rates were one of the biggest casualties in that era. Families became impoverished. and could not provide food or shelter to their young ones. Many fathers ran away from their homes owing to increased frustration. Mass migration from rural areas led to the development of slums in some parts of the country. Individuals could barely afford higher education at the time. Crime rates increased to intense levels as many individuals had no other way of earning money. Prostitution and other social evils also heightened dramatically. Therefore, short term effects were deep-reaching and disturbing.
The great depression was a lesson to many stakeholders who learnt about the fragility of the free market. It is an illustration of the cyclical nature of the economy and the effect of politics on the economy, as well. Through this event, government interventions heightened and people’s trust in the banking sector reduced.