Great Depression

Causes

Mother with two children, who became
very  poor after that financial crisis.  

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 focuses 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 underconsumption and over-investment (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 as well as bank failures, 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.

Banks began to fail in October 1930 (one year after the crash) when farmers defaulted on loans. There was no federal deposit insurance during that time as bank failures were considered quite common. This worried depositors that they might have a chance of losing all their savings, therefore, people started to withdraw money and changed it into currency. As deposits taken out from the bank increased, the money multiplier decreased, which means that money circulation slowed down. This led to a decrease in the money supply, and an increase in interest rate and a significant decrease in aggregate investment.

The US government's commitment to the gold standard prevented it from engaging in expansionary monetary policy. High interest rates needed to be maintained, in order to attract international investors who bought foreign assets with gold. However, the high interest also inhibited domestic business borrowing.

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. Thomas Sowell, on the other hand, notes that the rise in unemployment had peaked at 9% two months after the crash, and had fallen to 6.3% by June – he blames the later unemployment rate on the tariffs that Hoover passed against the advice of economists in that same month, and says that six months after their implementation unemployment rose to the double digit figures that characterized that decade. Recent research has pointed to the effects of capital taxation on property, capital stock, excess profits, undistributed profits, and dividends on the severity of the Great Depression, noting such taxation's role in significant declines in investment and equity values and nontrivial declines in gross domestic product and hours of work.

The US interest rates were also affected by France's decision to raise their interest rates to attract gold to their vaults. In theory, the U.S. would have two potential responses to that: Allow the exchange rate to adjust, or increase their own interest rates to maintain the gold standard. At the time, the U.S. was pegged to the gold standard. Therefore Americans converted their dollars into francs to buy more French assets, the demand for the U.S. dollar fell, and the exchange rate increased. The only thing the US could do to get back into equilibrium was increase their interest rates.

Backgrounds:

Prosperity

An important reason for the Great Depression was the Treaty of Versailles. The Treaty of Versailles made the United States very rich. Britain and France both gave large amounts of money to the U.S., and Germany had to pay a great amount of money for the damage they had done in World War I. However, it was this wealth that began the stock market crash.

Even after the Wall Street Crash of 1929, people still had hope. John D. Rockefeller said that "These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity (wealth) has always returned (come back) and will again. But soon the bad effects of the depression grew worse and worse. People lost jobs, money, and homes. There were reports that in Germany and the United States, there was great hunger, disease, and even starvation.

Unemployment

By 1933 millions of Americans were out of work. Bread lines were a common sight in most cities. Hundreds of thousands roamed the country in search of food, work and shelter. "Brother, can you spare a dime?" went the refrain of a popular song.

An early step for the unemployed came in the form of the Civilian Conservation Corps (CCC), a program enacted by Congress to bring relief to young men between 18 and 25 years of age. Run in semi-military style, the CCC enrolled jobless young men in work camps across the country for about $30 per month. About 2 million young men took part during the decade. They participated in a variety of conservation projects: planting trees to combat soil erosion and maintain national forests; eliminating stream pollution; creating fish, game and bird sanctuaries; and conserving coal, petroleum, shale, gas, sodium and helium deposits.

Work relief came in the form of the Civil Works Administration. Although criticized as "make work," the jobs funded ranged from ditch digging to highway repairs to teaching. Created in November 1933, it was abandoned in the spring of 1934. Roosevelt and his key officials, however, continued to favor unemployment programs based on work relief rather than welfare.

More about this!

Results

Franklin Delano Roosevelt

New Deal of F.D. Roosevelt helped USA to overcome the crisis and unemployment.In the "First New Deal" of 1933-4, programs, such as the National Recovery Administration (NRA), sought to stimulate demand and provide work and relief through increased government spending. To end Deflation the Gold standard was suspended and a series of panels comprising business leaders in each industry set regulations which ended what was called "cut-throat competition," believed to be responsible for forcing down prices and profits nationwide.New Deal sponsored a remarkable series of legislative initiatives and achieved significant increases in production and prices -- but it did not bring an end to the Depression. And as the sense of immediate crisis eased, new demands emerged. Businessmen mourned the end of "laissez-faire" and chafed under the regulations of the NIRA. Vocal attacks also mounted from the political left and right as dreamers, schemers and politicians alike emerged with economic panaceas that drew wide audiences of those dissatisfied with the pace of recovery. They included Francis E. Townsend's plan for generous old-age pensions; the inflationary suggestions of Father Coughlin, the radio priest who blamed international bankers in speeches increasingly peppered with anti-Semitic imagery; and most formidably, the "Every Man a King" plan of Huey P. Long, senator and former governor of Louisiana, the powerful and ruthless spokesman of the displaced who ran the state like a personal fiefdom. (If he had not been assassinated, Long very likely would have launched a presidential challenge to Franklin Roosevelt in 1936.)

In the face of these pressures from left and right, President Roosevelt backed a new set of economic and social measures. Prominent among these were measures to fight poverty, to counter unemployment with work and to provide a social safety net.
The Works Progress Administration (WPA), the principal relief agency of the so-called second New Deal, was an attempt to provide work rather than welfare. Under the WPA, buildings, roads, airports and schools were constructed. Actors, painters, musicians and writers were employed through the Federal Theater Project, the Federal Art Project and the Federal Writers Project. In addition, the National Youth Administration gave part-time employment to students, established training programs and provided aid to unemployed youth. The WPA only included about three million jobless at a time; when it was abandoned in 1943 it had helped a total of 9 million people.
But the New Deal's cornerstone, according to Roosevelt, was the Social Security Act of 1935. Social Security created a system of insurance for the aged, unemployed and disabled based on employer and employee contributions. Many other industrialized nations had already enacted such programs, but calls for such an initiative in the United States by the Progressives in the early 1900s had gone unheeded. Although conservatives complained that the Social Security system went against American traditions, it was actually relatively conservative. Social Security was funded in large part by taxes on the earnings of current workers, with a single fixed rate for all regardless of income. To Roosevelt, these limitations on the programs were compromises to ensure passage. Although its origins were initially quite modest, Social Security today is one of the largest domestic programs administered by the U.S. government.