GREAT DEPRESSİON (1929)
The Great Depression was an economic slump in North America, Europe, and other industrialized areas of the world that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world.
The Great Depression began in the United States but quickly turned into a worldwide economic slump owing to the special and intimate relationships that had been forged between the United States and European economies after World War I. The Great Depression of 1929-33 was the most severe economic crisis of modern times. Millions of people lost their jobs, and many farmers and businesses were bankrupted. Industrialized nations and those supplying primary products (food and raw materials) were all affected in one way or another. In Germany the United States industrial output fell by about 50 per cent, and between 25 and 33 per cent of the industrial labour force was unemployed.
Background To Great Depression:
- The 1920s witnessed an economic boom in the US (typified by Ford Motor cars, which made a car within the grasp of ordinary workers for the first time). Industrial output expanded very rapidly. Sales were often promoted through buying on credit. However, by early 1929, the steam had gone out of the economy and output was beginning to fall.
- The stock market had boomed to record levels. Price to earning ratios were above historical averages.
- Agricultural sector had been in recession for many more years
Causes of Great Depression
Stock Market Crash of October 1929
During September and October a few firms posted disappointing results causing share prices to fall. On October 28th (Black Monday), the decline in prices turned into a crash has share prices fell 13%. Panic spread throughout the stock exchange as people sought to unload their shares. On Tuesday there was another collapse in prices known as ‘Black Tuesday’. Although shares recovered a little in 1930, confidence had evaporated and problems spread to the rest of the financial system. Share prices would fall even more in 1932 as the depression deepened. By 1932, The stock market fell 89% from its September 1929 peak. It was at a level not seen since the nineteenth century.
- Falling share prices caused a collapse in confidence and consumer wealth. Spending fell and the decline in confidence precipitated a desire for savers to withdraw money from their banks.
In the first 10 months of 1930 alone, 744 US banks went bankrupt and savers lost their savings. In a desperate bid to raise money, they also tried to call in their loans before people had time to repay them. As banks went bankrupt, it only increased the demand for other savers to withdraw money from banks. Long queues of people wanting to withdraw their savings was a common sight. The authorities appeared unable to stop bank runs and the collapse in confidence in the banking system. Many agree, that it was this failure of the banking system which was the most powerful cause of economic depression.
- Because of the banking crisis, Banks reduced lending, there was a fall in investment. People lost savings and so reduced consumer spending. The impact on economic confidence was disastrous.
- Also there is no laws to determine the bank capital bases, reverse and loan rates. Because of that investors did not have enough information about the company which they are get shares.
With falling output, prices began to fall. Deflation created additional problems.
- It increased the difficulty of paying off debts taken out during 1920s
- Falling prices, encouraged people to hoard cash rather than spend (Keynes called this the paradox of thrift)
- Increased real wage unemployment (workers reluctant to accept nominal wage cuts, caused real wages to rise creating additional unemployment)
Unemployment and Negative Multiplier Effect.
As banks went bankrupt, consumer spending and investment fell dramatically. Output fell, unemployment rose causing a negative multiplier effect. In the 1930s, the unemployment received little relief beyond the soup kitchen. Therefore, the unemployed dramatically reduced their spending.
America had lent substantial amounts to Europe and UK, to help rebuild after first world war. Therefore, there was a strong link between the US economy and the rest of the world. The US downturn soon spread to the rest of the world as America called in loans, Europe couldn’t afford to pay back. This global recession was exacerbated by imposing new tariffs such as Smoot-Hawley which restricted trade further.
- CCC – Civilian Conservation Corps
The Civilian Conservation Corps was created in 1933 by Franklin D. Roosevelt to combat unemployment. This work relief program had the desired effect and provided jobs for many Americans during the Great Depression. The CCC was responsible for building many public works and created structures and trails in parks across the nation.
- CWA – Civil Works Administration
The Civil Works Administration was created in 1933 to create jobs for the unemployed. Its focus on high paying jobs in the construction arena resulted in a much greater expense to the federal government than originally anticipated. The CWA ended in 1934 in large part due to opposition to its cost.
- FHA – Federal Housing Administration
The Federal Housing Administration was a government agency created to combat the housing crisis of the Great Depression. The large number of unemployed workers combined with the banking crisis created a situation in which banks recalled loans. The FHA was designed to regulate mortgages and housing conditions.
- FSA – Federal Security Agency
The Federal Security Agency established in 1939 had the responsibility for several important government entities. Until it was abolished in 1953, it administered social security, federal education funding, and food and drug safety.
- HOLC – Home Owner’s Loan Corporation
The Home Owner’s Loan Corporation was created in 1933 to assist in the refinancing of homes. The housing crisis created a great many foreclosures, and Franklin Roosevelt hoped this new agency would stem the tide. In fact, between 1933 and 1935 one million people received long term loans through the agency that saved their homes from foreclosure.
- NRA – National Recovery Act
The National Recovery Act was designed to bring the interests of working class Americans and business together. Through hearings and government intervention the hope was to balance the needs of all involved in the economy. However, the NRA was declared unconstitutional in the landmark Supreme Court case Schechter Poultry Corp. v. US. The Supreme Court ruled that the NRA violated the separation of powers.
- PWA – Public Works Administration
The Public Works Administration was a program created to provide economic stimulus and jobs during the Great Depression. The PWA was designed to create public works and continued until the US ramped up wartime production for World War II. It ended in 1941.
- SSA – Social Security Act
The Social Security Act was designed to combat the widespread poverty among senior citizens. The government program provided income to retired wage earners. The program has become one of the most popular government programs and is funded by current wage earners and their employers. However, in recent years concerns have arisen about the viability of continuing to fund the program as the Baby Boom generation reaches retirement age.
- TVA – Tennessee Valley Authority
The Tennessee Valley Authority was established in 1933 to develop the economy in the Tennessee Valley region which had been hit extremely hard by the Great Depression. The TVA was and is a federally owned corporation that works in this region to this day. It is the largest public provider of electricity in the United States.
- WPA – Works Progress Administration
The Works Progress Administration was created in 1935. As the largest New Deal Agency, the WPA impacted millions of Americans. It provided jobs across the nation. Because of it, numerous roads, buildings, and other projects were completed. It was renamed the Works Projects Administration in 1939. It officially ended in 1943.
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