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At the beginning of the 20th century, the United States was one of the world’s leading and economically advanced countries. The US pace of growth was among the fastest as the volumes of production were large in the country. During the early 1920’s, the country’s position strengthened even more along with the development of the industrial output, the expansion of the fixed capital, and the increase in exports (Government Publishing Office). For this reason, the given historical period is named “the age of prosperity.” However, in 1929, the world economic crisis broke out and served as the beginning of an intense and protracted financial crisis throughout the capitalist world. The United States suffered the adverse consequences of the crisis most.
The Great Depression of the 1930’s is the most significant economic crises in the history of the modern world and the United States, in particular. As stated by Keynes, during those years, the world was “in the middle of the greatest economic catastrophe” (Crafts and Fearon 285). Keynes also correctly foresaw that the given economic downturn would be regarded by future economists as a mark of “one of the major turning points” (Crafts and Fearon 285).
If the beginning time of the Great Depression is known precisely, its ending is rather blurry. It is believed that the crisis ended in 1933, and the remaining years until the end of that decade were a way out of it. Therefore, many people consider the whole period during the 30’s as the time of the Great Depression. The victory over the crisis became possible due to a system of reforms implemented by the US government under Franklin D. Roosevelt, who came to power in the spring of 1933. The New Deal comprising a series of programs aimed to respond to the crisis is an excellent example of a successful exit from the deepest global financial turmoil. To understand why it was effective, it is essential to review the major causes of the Great Depression.
Causes of the Great Depression
Until now, economists have not come to a consensus on the origins of the Great Depression. Nowadays, a large number of theories on this subject exist. It is possible to say that the severe economic crisis emerged as a result of the combination of factors. They will be briefly discussed in the given paragraph.
Trying to identify causes of the crisis, many scholars make an emphasis on such a factor as the insufficiency of the money supply. During that period, the volume of printed money was correlated with the volumes of gold deposits, while monetary policies and interest rates were inseparably linked to the Gold Standard (Hermele 18). This correlation significantly limited the money supply. As a result of the given factor and the growth of the commodity mass, a strong deflation could be observed (Alcidi and Gros 677). The decline in prices, in its turn, led to the financial instability, the bankruptcy of enterprises, and the inability to pay on loans.
Secondly, the Great Depression could be caused by the stock market bubble and the widespread use of margin loans. During the 1920’s the share price index increased, and many people were interested in buying shares. The use of exchange credit was common at that time as well. Buyers of stocks could receive a loan from a broker to pay the value of these stocks. In the late 1920’s, the share that brokers lent to their customers comprised a more significant part of the total price, while buyers paid cash only a small value of total assets (White 74). Thus, many stocks and bonds, which were owned by clients, remained pledged to the brokerage firm. Since brokers did not have sufficient capitals to lend to their clients, they borrowed money from various banks on the security of the same stocks that actually belonged to their clients (White 74). The given vicious circle led to the formation of an economic bubble.
The United States During the Great Depression
Throughout the period from 1929 to 1933, the American economy broke all possible anti-records. The decline in industrial production from the peak to the bottom equaled 50% − more than in any other country affected by the crisis (“The Great Depression”). The import volumes decreased by 80% (“The Great Depression”). The rate of unemployed individuals reached the historical maximum of 31.4% in 1932 (Crafts and Fearon 286). Large numbers of people were unable to pay loans secured by their land and real estate. Homelessness and vagrancy became common phenomena among both children and adults (Smiley). Most of the enterprises across the states either significantly reduced production or completely halted it. The wave of strikes, demonstrations, and hunger marches rolled throughout the country. The horror and the fear of the future embraced even higher-income segments of the population.
The government was completely unprepared for the scale and nature of the crisis, which turned out to be not a regular cyclical downturn, but the first powerful systemic crisis. Before the Great Depression, it was considered that the economy can naturally recover without any governmental interventions and that the crises, in fact, destroy only weak and inefficient enterprises, providing more advantages for the strong and effective ones (Polanyi 242). The economic downturn of 1929 made economists and politicians revise their traditional strategies and change the perspective on the concept of self-regulating economy.
The New Deal
When Roosevelt won the election in 1932, he started to undertake actions to save the country from the crisis and its adverse consequences. With unprecedented speed, the Banking Act of 1933 was drafted and passed by the Congress. On June 21, 1933, it was signed by the president. This law is now the foundation of the US banks’ work. Its main provisions are aimed at strengthening the stability of the banking system and preventing banking crises. According to the act, commercial banks were prohibited from speculating with stocks, since such operations jeopardized the safety of depositors’ funds (Carpenter et al. 5). It meant the separation of commercial banks from the investment banks, which could issue shares for industrial corporations and trade them but could not accept deposits (Carpenter et al. 5).
The Fed was authorized to control banks and prohibited them from paying interest on current accounts. Moreover, the Fed set certain limits for the size of interest on time deposits. It severely limited the risk-taking behaviors of bankers willing to promise high interest rates for profitable speculation (Romer 765). Exchange credit was also subject to the regulation as it played a negative role in the stock market crash of 1929 (Romer 774). Additionally, in May 1933, the Security Act against dubious and fraudulent combinations exploiting the public’s confidence came into force. Companies issuing their securities to the market became liable to provide complete and reliable information about the state of their financial affairs (Kim 132). Later, these urgent measures were deployed into the system of legislation at the federal level and led to the creation of the Securities and Exchange Commission, which still plays the role of the state’s central instrument in controlling the issue and the securities market.
By 1938, the average annual increase in the national GDP was 8% (Crafts and Fearon 285). The statistical numbers make it clear that new reforms and measures undertaken by the US government to alleviate the negative consequences of the Great Depression were successful. The findings of the literature review and the evaluation of the economic crisis make it clear that the identification of the nature of economic crises is an important part of the economic analysis as such because it helps national authorities avoid mistakes committed by their predecessors.
The example of the Great Depression shows that during an economic crisis, many misbalances accumulated in the financial and economic systems during a boom period become escalated. It is apparent that measures, which monetary and fiscal authorities can undertake to overcome the crisis, largely depend on their economic views, as well as on the intellectual environment that supports these views. Moreover, the case of the Great Depression convincingly demonstrates that in addition to monetary, financial, technological and other factors, the expectations of the private sector regarding the success of the authorities’ policy to overcome the crisis have a significant influence on the dynamics of key macroeconomic indicators. The reduction in the uncertainty and the increase in the degree of trust to the authorities’ actions lead to a more rapid recovery of economic relations between economic entities and the resumption of economic growth.
Alcidi, Cinzia, and Daniel Gros. “Great Recession Versus Great Depression: Monetary, Fiscal and Banking Policies.” Journal of Economic Studies, vol. 38, no. 6, 2011, pp. 673-690.
Carpenter, David H., et al. The Glass-Steagall Act: A Legal and Policy Analysis. 2016, Web.
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Crafts, Nicholas and Peter Fearon. “Lessons from the 1930s Great Depression.” Oxford Review of Economic Policy, vol. 26, no. 3, 2010, pp. 285–317.
Government Publishing Office. “Chapter 3: From the ‘Golden Age’ to the Great Depression: 1900-1929.” Web.
“Great Depression.” Encyclopedia.com, Web.
Kim, Kab Lae. “A Study on Rule 145 of The Securities Act of 1933: How to Provide Clarity and Predictability in Rule 145 Transactions.” Akron Law Review, vol. 40, pp. 131-173.
Polanyi, Karl. The Great Transformation. Beacon Press, 1985.
Romer, Christina. “What Ended the Great Depression?” The Journal of Economic History, vol. 52, no. 4, 1992, pp. 757-784.
Smiley, Gene. “Great Depression.” The Concise Encyclopedia of Economics, Web.
White, Eugene N. “The Stock Market Boom and Crash of 1929 Revisited.” Journal of Economic Perspectives, vol. 4, no. 2, 1990, pp. 67–83.