Financial & Economic Crisis

Great Depression of 1929 in the USA

The Great Depression in the United States began on "Black Tuesday" when the Wall Street crashed in October, 1929 and rapidly spread worldwide. In the United States the market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation and lost opportunities for economic growth and personal advancement. Although its causes are still uncertain, the basic cause was a sudden loss of confidence in the economic future. The traditional explanation is a combination of high consumer debt, ill-regulated markets that permitted malfeasance by banks and investors, cutbacks in foreign trade, and growing wealth inequality, all interacting to create a downward economic spiral of reduced spending and production. The initial government response to the crisis exacerbated the situation; protectionist policies like the 1930 Smoot-Hawley Tariff Act, rather than helping the economy, merely strangled global trade. Industries that suffered the most included agriculture, mining, and logging as well as durable goods such as cow and automobiles.

The depression caused major political changes, the most notable among them being the New Deal, which instituted large-scale federal relief programs aimed to aid the agricultural industry and support labour unions. The formation of the New Deal coalition by President Franklin D. Roosevelt was another notable accomplishment. This disaster had a profound effect on the psychology of an entire generation and strongly influenced the development of post-war monetary institutions. The Great Depression remains a benchmark for evaluating financial downturns, such as the Economic crisis of 2008.

Current theories may be broadly classified into two main points of view. First, there is orthodox classical economics, monetarist, Keynesian, Austrian Economics and neoclassical economic theory, which focus on the macroeconomic effects of money supply, including mass production and consumption. Second, there are structural theories, including those of institutional economics that point to under-consumption and over-investment leading to economic bubble, or to malfeasance by bankers and industrialists.

There are multiple originating issues: what factors set off the first downturn in 1929, what structural weaknesses and specific events turned it into a major depression, how the downturn spread from country to country, and why the economic recovery was so prolonged.

In terms of the initial 1931 downturn, historians emphasize structural factors and the stock market crash, while economists point to Britain's decision to return to the Gold Standard at pre-World War I parities ($10.98 Pound). The vast economic cost of World War I weakened the ability of the world to respond to a major crisis.

Economists dispute how much weight to give the stock market crash of October 1929. According to Milton Friedman, "the stock market in 1929 played a role in the initial depression." It clearly changed sentiment about and expectations of the future, shifting the outlook from very positive to negative, with a dampening effect on investment and entrepreneurship, but some feel that an increase in interest rates by the Federal government could have also caused the slow steps into the downturn towards the Great Depression.

Hoovervilles

A Hooverville was the popular name for a shanty town built by homeless men in the depression years. The term was coined by Charles Michelson, publicity chief of the Democratic National Committee. Residents lived in shacks and begged for food or went to soup kitchens. Authorities did not officially recognize these Hoovervilles and occasionally removed the occupants for technically trespassing on private lands, but they were frequently tolerated out of necessity. Democrats popularized related terms such as "Hoover blanket", old newspaper used as blanketing, and "Hoover flag", an empty pocket turned inside out. "Hoover leather" was cardboard used to line a shoe with the sole worn through. A "Hoover wagon" was an automobile drawn by horse because the owner could not afford gasoline; in Canada, these were portrayed as Bennett buggies.

New Deal

From 1933 onward, President Roosevelt argued a reconstruction of the economy would be needed to prevent another, or avoid prolonging the current depression. New Deal programs, such as the National Recovery Administration (NRA), sought to stimulate demand and provide work and relief for the impoverished through increased government spending. Instituting regulations which ended what was called "cut-throat competition," which kept forcing down prices and profits for everyone. The policies included the following measures:
- Setting minimum prices and wages and competitive conditions in all industries.
- Encouraging unions that would raise wages, to increase the purchasing power of the working class.
- Cutting farm production so as to raise prices and make it possible to earn a living in farming.

The most controversial aspect of the New Deal agencies was the National Recovery Administration (NRA). It lasted less than a year between 1933 and 1934 and ordered: businesses to work with government to set prices; and to set labour codes and standards.

These reforms together with relief and recovery measures were called by historians the First New Deal. It was centred around the use of an alphabet soup of agencies set up in 1933 and 1934, along with the use of previous agencies such as the Reconstruction Finance Corporation, to regulate and stimulate the economy. By 1935, the "Second New Deal" added social security; the Works Progress Administration (WPA), a national relief agency appeared; and the National Labour Relations Board, a strong stimulus to the growth of labour unions. Unemployment fell by two-thirds in Roosevelt's first term from 25% to 9% between 1933 and 1937, but then remained high until 1942.

In 1929, federal expenditures constituted only 20% of the GDP. Between 1933 and 1939, they tripled, but the national debt remained at about 40% of GNP. The debt as proportion of GNP rose under Hoover from 20% to 40%; and during the war years of 1941-1945 it soared dramatically. After the Recession of 1937 and Republican victories in the 1938 elections, opponents of the New Deal, who called themselves conservatives, formed a bipartisan conservative coalition to stop further expansion of the New Deal and, by 1943, they had abolished all of the relief programs. Social Security continued. The labour laws were revised by conservatives in the Taft Hartley Act of 1947. The New Deal was, and still is, controversial and widely debated.

Recession of 1937

By 1936-1937 all the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high. In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. The Roosevelt Administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the depression, and appointing Thurman Arnold to act. Arnold was not effective, and the attack ended once World War II began and corporate energies had to be directed to winning the war. By 1939, the effects of the 1937 recession had disappeared.

Employment in private sector factories recovered to the level of the late 1920s by 1937, but did not grow much bigger until the war came and manufacturing employment leaped from 11 million in 1940 to 18 million in 1943. Another response to the 1937 deepening of the Great Depression had more tangible results. Ignoring the pleas of the Treasury Department, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, in an effort to increase mass purchasing power. Business-oriented observers explained the recession and recovery in very different terms from the Keynesians. They argued that the New Deal had been very hostile to business expansion in 1935–37, had encouraged massive strikes which fiscal stimulus required to end the downturn of the Depression, and it led, at the time, to fears that as soon as America demobilized, it would return to Depression conditions and industrial output would fall to its pre-war levels. The incorrect Keynesian prediction of a new depression would start after the war failed to take account of pent-up consumer demand as a result of the Depression and World War.

After the Depression

The government began heavy military spending in 1940, and started drafting millions of young men that year; by 1945, 17 million had entered service to their country. But that was not enough to absorb all the unemployed. During the war, the government subsidized wages through cost-plus contracts. Government contractors were paid in full for their costs, plus a certain percentage profit margin. That meant the more wages a person was paid the higher the company profits since the government would cover them plus a percentage. In 1941-1943, many factories took in unskilled workers and trained them, often at government expense. The military's own training programs also featured many new technologies, preparing soldiers and sailors for the post-war economy.

Structural barriers were lowered during the war, especially informal policies against hiring women, minorities, and workers over 45 or under 18. Strikes largely ended as unions pushed their members to work harder. Tens of thousands of new factories and shipyards were built, with bus service and nursery care for children's forecast making them more accessible. Wages soared for workers, making it quite expensive to sit at home. The combination of all these factors drove unemployment below 2% in 1943.

 

 
This article material from the Wikipedia article "Great Depression in the United States"

 

 

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