In depth work – The Great Depression 

(«Great Depression», 2015a)

 “While they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings.”

-- Quote by Franklin D. Roosevelt, Nomination Address at the Democratic National Convention of 1932 (July 2, 1932) («Witty, Wonderful Quotes from President Franklin D. Roosevelt», udatert)

Introduction

The great depression is one of the most impactful economic crisis in modern history in the US, but also the whole world. Rolling of the “roaring twenties” in the States where the economy was good and people most had a lot of buying power, people invested money in stocks and borrowed loans and credit in banks. However, the stock market could only take so much and in the autumn of 1929, the economic bubble burst and the stock market collapsed. This eventually led to an economic crisis affecting many western nations equally, if not worse, world trade as a whole.  The economic crisis was also the longest lasting in the modern western world, not resolving until the beginning of World War II. This economic crisis is important because economists try to use what happened to attempt to advert any other economic downturns, but still the 2008 economic recession happened.

Cause I – Stock market

People still debate on what the underlying cause of the depression was, but the fact is there are many reasons.  Firstly, the crisis had somewhat already begun in the 20’s, there was an oversaturated marked of agriculture, because of all the need for farmers during the World War I. Because of this, food prices dropped, this was a problem since farmers had taken out loans in the bank to pay for mechanised tools such as tractor for farming, and when they got lower prices for their food, they started having problems. The car-manufacturing sector had also seen a decline, the same with residential construction. Since people had money in the 20’s, they started investing in stocks and borrowing credit and loans in banks for their ventures. This was not only rich people, but also middleclass, who spend their savings in the gambling that was the stock market. Another problem was that banks gave huge loans to people that wanted to use it on the stock market and real estate investments rather than commercial ventures (this also happened in the 2008 recession) (CrashCourse,).

Now the stage is set for the stock market crash 29 October 1929 (also known as black Tuesday). What happened was that the economic bubble that had been building up, burst and the stock prices dropped, many started to trade their stock, when many people wanted to sell their stock, but no one wanted to buy, the prices continued to drop which made their stock virtually worthless(Cappelen Damm, Historie vg 2-3 Eittbandsutgåva, page 302).

However, the stock collapse is not direct cause for the crisis, because only about 3% of Americans actually owned stocks.

Cause II - American banking system

  A major reason lied in the American banking system, in 1930, when economic uncertainty was high, people wanted to take out money from the bank, in case of a crisis, so their money did not disappear. The problem was that most banks at the time were independent, which meant that when many people wanted to take out money at the same time, the bank did not have enough money to give out. This as you can imagine caused more people to rush out to try to take their money out, before the banks failed, which continued the cycle. The previously mentioned farmers defaulted on their loans, this caused the problem in the first place(«Great Depression», 2015a). Since bank failures at the time was considered normal, which meant the government did not give the banks money from the federal deposit. This worsened the crisis because banks had to take loan and liquidate assets, which in turn froze up credit.  A frozen up credit system meant that less money was in circulation in the economy, and this caused deflation.

 Since there is less money to go around, price deflation happen. That mean that businesses must sell goods for less, and the businesses must cut cost, often laying off workers (since they cannot take loans from the banks to pay them). In addition, people did not have enough money (since they did not have a job) to buy anything, so prices dropped even further and the economy stopped working. The result was massive unemployment, by 1933 when unemployment reached its peak, 25% (13 – 15 million)(«Great Depression», 2015b) of the working population was out of work and half of American banks had failed. People without money moved into shantytowns, called Hooverville’s (to show who they blamed for the problem, president Hoover).

 One thing that people point to that could have helped the economy is if the government had used the Keysian method of restoring it. This method, for keeping everyone from losing their jobs, makes the government spend more money to stabilize the economy. Examples of this is starting big projects in infrastructure, so people can get jobs and cut taxes. Many people criticize President Herbert Hoover for not doing infrastructure projects, but to be fair he did start the Hoover Dam project and in the end, thousands of workers worked on it. But the major reason they didn’t do enough of it, is because the book, The General Theory of Employment, Interest and Money(«The General Theory of Employment, Interest and Money», 2015), that detailed this idea, was not released by John Maynard Keysian(«John Maynard Keynes», 2015) until February 1936. This was just the American side of the problem; the economic crisis affected the whole world.

Effects – Internationally

 The economic crisis in America had effects throughout the world, especially Germany, France and England. In 1930 the United States to protect their interests, introduced the Smoot-Hawley Tariff Act, which raised the American trading tariff very high, in response, France did the same. This halted trade, it did not help that Germany owed France and England 33 billion dollars because of the Great War, which it could only pay because of money it borrowed from American banks. When the crisis happened, they could not get money from the States, this was a problem since both France and England owed America 10 billion. However, some used money they got from Germany to pay their debts. Another huge reason for the global depression was many countries’ insistency to keep the gold standard behind their money values. Money valued by gold; this meant that the money’s value varied with the value of the gold. It was the same for many countries, what the States could have done was abandon the gold standard. That way they could be more flexible with their money’s value and lowered it so more people would trade with America and the government pump more money into the economy. It did not help America that Britain in 1931, abandoned the gold standard (which was a good thing over all), this was not a good thing since the USA did not get their money from Britain in gold. Money exchange just does not work when one side need gold and another gives in money that has little value for them.

 In summary, all world trade grinded to a halt. Germany could not get money from the States to pay debt to France and Britain, who could not give money to the States. High tariffs between America and Europe caused trade to stop and not abandoning the gold standard, while some did, was catastrophic. This seen in China who had a silver system; they were not affected at all. Scandinavian countries for example, who also abandoned the gold standard in 1931 recovered much faster in the crisis, than gold standard countries. («Great Depression», 2015b) (CrashCourse).

 In addition to trade, politics were changing during the great depression. The United States had a policy of isolationism, which it continued throughout the 30’s, which made the US ignore problems brewing in Europe. Immigration to the States also declined, with fewer opportunities, it was not as attractive to come there as it once was, and the government started deporting illegal Mexicans. With the Immigration act of 1924(«Immigration Act of 1924», 2015), yearly quotas of immigrants decreased and flat out banned Asians from coming to the US(even people from Philippines, who were under US control at the time). One of the responses to the international depression, was militarism and fascism, the economy was hardly hit in Germany in 1929 and promises for a better economy was one of the reasons why the Nazi party got to power in Germany. (http://www.digitalhistory.uh.edu/disp_textbook.cfm?smtID=2&psid=3433)   (Not available in Zortero).

Consequences – F.D.R and the New Deal

In the election of 1932, Franklin Delano Roosevelt(«Franklin D. Roosevelt», 2015) won over president Herbert Hoover(«Herbert Hoover», 2015) in the presidential election and became one of the most famous American presidents of all time, being elected four times in a row. What made him so popular in the first place is how he handled the great depression; especially what he did the first hundred days in office. He had to take the consequences of the mediocre response Herbert Hoover had to the recession and he prepared for it.

F.D.R got congress to pass the New Deal(«New Deal», 2015), which he had campaigned for when he was running for president. The New Deal was a three-part government program that was supposed to help the recession. The first one was the relief program; it gave money to people in need. Second, the recovery program, intended to fix the economy short term by getting people jobs. Thirdly, the reform program, its purpose was to regulate the economy so future crisis were averted. These changes actually worked and when the economy reached its lowest in the beginning of March 1933, it steadily increased from that point on until 1937. Congress also passed the Emergency Banking Act(«Emergency Banking Act», 2015), its function was to reopen banks under the government supervision and giving loans to the banks if needed, it was important to make the banking function again after all the bank failures.

F.D.R became incredibly popular. He was revoking the probation on alcohol, helping the economy and is said to be one of the biggest reasons for his second re-election. The government also established the N.R.A (National Recovery Administration)(«National Recovery Administration», 2015), who oversaw industry standards for production, prices and working conditions. Nevertheless, these changes were not as effective as hoped and gave way for the Second New Deal (programs from 1935 onward).

One of the most important acts of the new deal was the Social Security Act ((«Social Security (United States)», 2015) of 1935 and gave universal retirement pension and unemployment insurance to people, it gave the framework to the modern American welfare system. This was a big thing since it was one of the last modern industrialized countries to get one and rather conservative compared to Europe at the time.

Another noteworthy act at the time was the National Labor Relations Act(«National Labor Relations Act», 2015) (also known as the Wagner Act), the act guaranteed workers the right to unionize into trade unions and make collective strikes if necessary. As quoted by Eric Foner(«Eric Foner», 2015), American historian, “CIO unions helped to stabilize a chaotic employment situation and offer members a sense of dignity and freedom”(CrashCourse).

The New Deal did not actually end the Depression, by 1940, 15% of the American population were in unemployment, but compared to when F.D.R was elected it was 25%. The Great Depression did not end until 1941, when America got involved in World War II and everyone got a job in the military-industrial complex (Military Keynesianism(«Military Keynesianism», 2015)). The consequences of The Great Depression for the future is a better understanding of economic crisis trying to prevent them in the future, and the first one that effected most western powers at the time. This showed how connected countries had become, and how much they became in the future and a crisis that big did not come until 2008, for semi-related reasons. The American people’s thoughts about how the government should react to a crisis changed from not expecting any help, to how the government should react when another one came.