Economic Problems and Solution in the USA Report (Assessment)

Great Depression of the 1930s

Great Depression is considered a term that describes those economic and psychological crises in the United States and some other European countries in the 1930s. The definition is commonly used for describing the events in the United States because the period of depression affected not only the financial systems but the moods of the entire American nation. The bug urban cities suffered from the Great Depression the most; however, it should be noted that the rural area was affected as well.

There is hardly a country in the world that did not face crises; however, the Great Depression is believed to be one of the most protracted crises in the history of the United States. The primary purpose of the paper is to examine the problem of the Great Depression of the 1930s, the Stagflation of the 1970s and 1980s, and provide the Keynesian and monetarist solution.

Definition

The experts state that the Great Depression was a consequence of the stock market crash in a Black Thursday, namely on the 24th of October, 1929, when there was a sudden decline in the stock prices¹. Later, on the 28th and 29th of October, the situation got worse, and the Black Tuesday is considered to be the day of the stock market crash. The price on the stock declined by 90% by the 29th of October. It consequently led to the fact that small investors have lost money, and it influenced the trade and industry segment in a great way. These events impacted the life of the entire American nation. By noon of Black Tuesday, eleven American investors committed suicide because the news was shocking and they could not overcome the collapse of the fiscal system.

Reasons for the Great Depression

The crises in the United States affected other countries as well. However, there is the question of why the stock market crashed in 1929? Experts developed several theories that provide an answer to this question. First and foremost, the industry segment manufactured more goods than the American people could purchase because they did not have enough money for it. The amount of money in the country is related to the gold reserves².

However, economists argue that this reason was a fundamental one for the Great Depression to emerge. The commodities could be exported to other countries that needed these goods. When there are more goods in the market than the population can buy, it does not mean that people will start buying everything. In the majority of cases, people will buy only the things they need. Other researchers state that rapid population growth can be considered as another reason. However, this theory is commonly criticized. Smooth-Hawley Traffic Act led to the increase in price on the imported goods and reduction in the consumer demand³.

Some researchers state that the government of the United States had to take appropriate measures and limit the flow of imported commodities for American enterprises to give a chance for development. However, the issue is rather complicated because high taxes on imported goods affected American industries that negatively needed imported raw materials. The garment industry suffered the most because they needed imported fabric.

Stock Market

The stated above theories explain the reasons for the Great Depression; however, one should take into consideration that the fundamental aspect that caused the crises can be found in the dimension of production. In the 1920s, a lot of people were engaged in the stock market game. Instead of the development of the industry segment, people took credits from the bank hoping that the stocks would increase in price, and they would make money on selling the stocks. However, with a sudden drop in price, the banks went bankrupt. In other words, the lack of governmental regulation consequently led to the stock market crash.

The Great Depression was related to the historical events that the United States experienced in the 1920s. The roaring twentieth were characterized by the development of the stock market speculation⁴. The economy was developing; however, the stocks were the guiding power. The stocks were bought and invested in the industry not to foster the process of production but to make money on selling them. During the First World War, tremendous sums of money were invested in the military sphere. When the war ended the military plants shut down and several people became unemployed.

The unemployment rate increased because of the development of the machinery as well. The technologies were more effective and productive than workers, and thus, some employees have lost their job. The inequality grew, and people who belonged to the lower class were losing their revenues, however, rich people doubled their income. The number of millionaires grew every year. The stock games were attractive to Americans because in the case of successful selling person could become rich. It was easier to buy and sell stocks than work on the plant or grow crops. According to the research, almost half of the American population lived in poverty.

The Keynesian Theory

The Keynesian theory explains the crises by the fact that there was a lack of the money quantity in the industrial economies of the 1930s⁵. The currency was tied to the gold reserves. However, at the beginning of the century, the system changed. The usage of machinery in several countries fostered the progress in the sphere of industry. From that point, the production grew faster than the gold extraction. There was less gold in comparison to the number of manufactured goods. Not having enough gold reserves the country should not print more money as stagflation influences the economic situation in a negative way.

Monetarist Theory

Milton Friedman, the supporter of the monetarist theory, claims that no matter the reason for the Great Depression, the stagnation of the 1930s would not be so difficult in case the Federal Reserve Bank would support the stock market. At the beginning of the 1930s, the economic situation became worse and millions of people who had deposits in banks aimed to get money back⁶. Deflation could be omitted in case the Federal Reserve Bank would take appropriate measures and prevent the collapse of the banking system. However, Keynesian supporters claim that the monetarism system did not have many chances to improve the situation.

Conclusion

In conclusion, it should be pointed out that the Great Depression was caused by some factors. The lack of production, high taxes on imported goods, and games on the stock market stimulated the crises. The fiscal system collapsed, and it affected everyone not only in the United States but in Western Europe as well. The Federal Reserve Bank could soften the situation; however, the collapse of the system was inevitable.

Stagflation of the 1970s and 1980s

The majority of economists of the last century, namely before the 1970s, we’re sure that the economic environment is stable, and the economic phenomena inflation and unemployment have an inverse relationship. The experts were sure that economic growth would be impossible without inflation; however, the unemployment rate would below. The fundamental belief of the experts could be found in the dimension of prices and demand. First and foremost, economists assumed that the increasing demand for the production of the commodities would consequently lead to an increase in prices. According to the experts, these two elements would positively affect the unemployment rate as the corporations would hire additional workers for the extension of their production.

Keynesian School

Taking into consideration the theory proposed by the experts in the economy, the conclusion can be drawn that they assumed that the increased money supply will consequently reduce the unemployment rate and would foster economic growth and development. Described above theories were described by the Keynesian school and were popular during the last century. However, in the 1970s, the theory was reconsidered because developed and industrialized countries experienced stagflation. According to economic theory, stagflation is considered to be an economic phenomenon when the country is facing slow economic growth and development coupled with high inflation.

Background Information

During the 1970s and 1980s, the United States had high prices on oil, high inflation rates, and the level of unemployment increased dramatically. Certain facts prove that the United Stated experienced stagflation in the 1970s. At the beginning of the 1960s, the rate of inflation was considered to be less than 2%. However, in 1965, it almost doubled, namely increased by 5%. It was one of the reasons the country entered the period of stagflation.

Moreover, the American government had to invest money in the war in Vietnam. In the beginning, the effect of stagflation was not evident because of the Bretton Woods system that tied the currency to the gold and dollar making other countries purchase the excessive number of dollars. However, the economy of Japan and Western Europe experienced rapid growth, and thus, was not satisfied with this system.

As a result, the system of Bretton Woods collapsed, and the world faced the transition to the new system free of the fixed exchange rate. In the next year, inflation in the United States reached 12,3%. The phenomenon of stagflation (low economic development combined with high prices) continued for a long time until Paul Volcker, the Chairman of the Federal Reserve did not stop it.

Reason for Stagflation

Several experts claim that the reason for stagflation was the OPEC embargo in 1973 and the rapid increase in price for oil⁷. However, the opposite opinion suggests that the low-interest rates made oil production not profitable and consequently led to the lack of production capacity. It allowed the cartel to dictate all the terms and conditions. The low-interest-rate was needed for the American economy to recover as it could not finance the war in Vietnam and provide people with social help.

The Washington Consensus

By the 1980s, the countries of Latin America found themselves in hopeless debt loans bondage of large American banks, which were issued under the guarantee of the International Monetary Fund, the World Bank, and the government of the United States. The loans caused the economic depression and recession. Washington aimed to undertake certain actions to improve the situation, for example, the Brady Plan.

The fundamental objective of the Brady Plan was to help the countries of the Latin America to overcome the crises by providing the governments with 80 billion of dollars, forgiving the parts of the debt, implementation of the trade privileges, which aimed to facilitate the access of the countries to the market of the United States. However, it is worth pointing out that nothing helped the courtiers of Latin America to overcome the recession.

It was the reason for the creation of the Washington Consensus that was designed by John Williamson. The Washington Consensus was originally intended to solve the problems of the countries of Latin America that experienced difficult times of hopeless debt bondage. The primary objective of the consensus was to stabilize the situation for the countries to be capable of paying the debt back to the banks of the United States. These countries were offered to accept the program, namely the Washington Consensus. The plan aimed to solve economic problems interfering into ten major elements, namely:

1. Privatization of state companies;
2. Fiscal discipline;
3. Redirection of governmental spending;
4. Reform of the tax system;
5. Liberalization of the investment process;
6. Liberalization of trade;
7. Reaching the competitive and stable exchange rates;
8. Price liberalization;
9. Providing legal security for people with property rights;
10. Reform of the system related to the consumer rights and market issues⁸.

Although the program was centered on the major aspects that were essential for regulation, it is worth highlighting that the Washington Consensus made the situation in Latin America even more complicated by the 1990s. The majority of countries experienced crises.

Monetarism

Money plays a fundamental role in the development of the economy. The supporters of monetarism are sure that money impacts the GDP and prices. To solve economic problems, the government can use an economic tool, namely the interest rate. Monetarism became popular during the 1970s because this phenomenon stopped inflation in the United States and the United Kingdom. Moreover, it beneficially influenced the work of the Central Bank of the United States in the crises of 2007. Milton Friedman, the owner of the Nobel Memorial Prize and the expert in economics, states that the role of monetarism in the history of the United States should not be undervalued. The Great Depression of the 1930s was related to weak monetarism politics.

Keynesian School

Although monetarism became an influential economic theory in the 1970s, it should be noted that it was criticized by the Keynesian school. The followers of the Keynesian school were sure that the demand for goods and services is a key factor that determines the amount of production. They claim that monetarism is not able to provide answers to many economic questions and cannot explain some economic phenomena. The major reason they rejected the Quantity Theory of Money is because of big swings in the economy and different and unstable velocity of money. However, the Keynesian school could not offer any other solutions, whereas Friedman and other supporters of monetarism were convincing in their statements regarding stagflation. A high level of inflation was caused by a rapid increase in the quantity of money.

Conclusion

In conclusion, it should be stated that stagflation influenced not only the United States but the countries of Latin America as well. The Washington Consensus did not help to solve the problem. The theory of monetarism explains the phenomenon of stagflation in a detailed way and offers the solution. The fundamental aspect of the economic policy was to control the quantity of money.

Bibliography

Heilbroner, Robert, and Aaron Singer. The Economic Transformation of America: 1600 to the Present. 4th ed. Belmont, CA: Wadsworth Publishing, 1998.

McElvaine, Robert. The Great Depression: America, 1929-1941. New York, NY: Times Books, 2010.

Footnotes

1. Robert Heilbroner, The Economic Transformation of America: 1600 to the Presen (Belmont: Wadsworth Publishing, 1998), 61.
2. Robert McElvaine, The Great Depression: America, 1929-1941 (New York: Times Books, 2010), 42.
3. Robert Heilbroner, The Economic Transformation of America: 1600 to the Presen (Belmont: Wadsworth Publishing, 1998), 76.
4. Robert McElvaine, The Great Depression: America, 1929-1941 (New York: Times Books, 2010), 56.
5. Robert Heilbroner, The Economic Transformation of America: 1600 to the Present (Belmont: Wadsworth Publishing, 1998), 99.
6. Robert McElvaine, The Great Depression: America, 1929-1941 (New York: Times Books, 2010), 76.
7. Robert Heilbroner, The Economic Transformation of America: 1600 to the Presen (Belmont: Wadsworth Publishing, 1998), 46.
8. Robert Heilbroner, The Economic Transformation of America: 1600 to the Presen (Belmont: Wadsworth Publishing, 1998), 76.