Causesand Effects of the "Great Depression".
Causes and Effects of the "Great Depression"
Causes and Effects of the "Great Depression"
In the 1930's the entire world economy was in a slump. It was one of the worst depressions the world had known. America, a world leader, was suffering right along with everywhere else. The depression had devastating effects on the country. The stock market was in shambles. Banks everywhere went under. Businesses couldn't continue to operate. Farmers fell into bankruptcy. A quarter of the working force, or 13 million people, were unemployed in 1932, and this was only the beginning.
During the previous decade, the nation had enjoyed a seemingly endless period of prosperity. The Great War ended in 1918 and then, following a brief post-war depression in 1920-21, the economy took off. Under the "bloviating" leadership of President Harding, taxes were cut and so was federal spending. The President then retreated to his closet with his mistress, leaving the economy to its own devices. Unfortunately for Harding, the strain of keeping his wife, "the Duchess," away from his mistresses became too much for him. Harding died in 1923 and his Vice President Calvin "Silent Cal" Coolidge took the wheel.
Coolidge was a tight-lipped but popular president. And it was a good thing, too, for, unfortunately for Coolidge, there was a lot more going on behind the scene besides Harding's shenanigans. The scandals of the Harding administration, such as Teapot Dome, became public and the job of restoring faith in government rested on his shoulders. The economy continued to grow like Topsy, however, and Coolidge was easily re-elected in 1924.
In his second term, Coolidge continued to be sympathetic to business. He appointed William Humphrey to the Federal Trade Commission, who systematically refused to investigate various monopolies. Cool Cal also passed the Revenue Act in 1926. This act chopped taxes on high incomes with very little cuts for middle incomes. In 1924, after a decline in business, the Reserve banks created over $500 million in new money. Because of the fiscal policies, banks could now lend out over $4 billion. The enormous credit expansion sowed the seed for the stock market crash in 1929, the depression, and the New Deal.
The theory was that an injection of money and easy credit stimulated the economy. In 1927, the Federal Reserve Board further inflated the currency by creating several more billion dollars. People went into debt, and the prices of real estate and stocks skyrocketed. The policies pursued by Coolidge made the later stock market crash inevitable and depression inescapable.
Credit expansion and inflation artificially reduced the interest rates, thus sending false signals to businessmen. Normally, declining rates would mean an increase in capital savings. Believing this to be the case, businesses increase production, leaving large inventories of unsold ...
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The theory was that an injection of money and easy credit stimulated the economy. In 1927, the Federal Reserve Board further inflated the currency by creating several more billion dollars. People went into debt, and the prices of real estate and stocks skyrocketed. The policies pursued by Coolidge made the later stock market crash inevitable and depression inescapable.
Credit expansion and inflation artificially reduced the interest rates, thus sending false signals to businessmen. Normally, declining rates would mean an increase in capital savings. Believing this to be the case, businesses increase production, leaving large inventories of unsold items. More money leads to an economic boom, which causes prices to increase. Each time prices increase for capital goods, used for business expansion, the costs of doing business increases. The prices continue to swell until businesses can't afford to remain in operation. In order to prolong the boom, more money may be injected into the system. This is exactly what occurred until 1929, when the Federal Reserve Board, scared silly of run-away inflation, scrapped its policy of easy money. All this after a failed attempt to do the same thing in 1928.
After a boom and a bust, it is normal for the economy to readjust itself. The recession is this period in which costs, wages, and interest rates are reduced until business recovers and the market economy purrs like a brand new Ferrari. The American economy was just starting to readjust in June of 1929.
When the Federal Reserve Board tossed its policy of easy money, it was only a short time before the stock market followed suit. Banks which had extended loans to brokers began to recall their money. The brokers, who had sold most of their stock on margin, were in trouble so they asked for more money from their clients. Many of the clients were unable to pay more money and lost their stocks. The brokers were then forced to sell the stocks. This, coupled with the recession, caused the prices of stocks to plummet. Soon everyone, in order to avoid getting burned, was selling their stocks at any price. On October 29, 1929, the stock market crashed.
In the election campaign of 1928, Coolidge had stated that he would not run again. A member of his cabinet, Herbert Clark Hoover nabbed the Republican nomination, and he easily captured the presidency. Hoover was anything but a laissez-faire president. He threatened business to get his way. He allowed for voluntary compliance, but always said that there would be government regulation if they didn't comply. When the nation went into a minor recession, the beginning of the readjustment, Hoover was strictly opposed. He asked businessmen to keep wages up instead of cutting costs. He did not understand the employment curve. In order to keep wages up, people have to be laid off, otherwise the business loses money.
Hoover felt the only way to save the country from depression was to have the government intervene. Hoover embarked on deficit spending, that is, spending more money than he took in. He requested that local governments spend their money on public works projects. He created the Farm Board in 1929 to help bolster the prices of wheat and corn.
When the farmers ran into trouble, the rural banks were not far behind. Since they were the primary lenders to the indebted farmers, they suffered when the farmers suffered. This led to panic throughout the worldwide banking system.
Meanwhile, Hoover laboured diligently to make businessmen promise to keep their wages up. He also created price stabilization policies for the struggling farming community. These created even larger crop surpluses, which actually drove prices down even further.
Then, when it looked like things couldn't get any worse, Hoover had another stroke of genius and doubled the income tax, siphoning off even more money from an already depressed economy. Exemptions were eliminated, corporation taxes were boosted, property taxes were increased, and gift, gasoline, automobile, telephone and telegraph, check taxes, and many other taxes were imposed. State and local governments soon did the same thing and levied more taxes.
Hoover overcame many obstacles, but he finally managed to destroy, not only the American economy, but also the worldwide economy. However, the economy would have eventually recovered by itself if there had been no more tomfoolery with the economy. Instead, Franklin Roosevelt was elected, with a whole suitcase full of government spending, regulation, programs, and wide-reaching intervention.
President Roosevelt did everything he possibly could to fight the economy, erecting more "prosperity boundaries" than his predecessor. He did his best to destroy the integrity of the dollar, injecting more money and then doing his darnedest to devalue it. He also commandeered the people's gold, even further devaluing the currency.
Roosevelt was completely unlike his predecessor. He believed the only way out of the depression was for the government to spend money (a little sarcasm). Roosevelt started more programs than I can count on all my fingers and toes. Each act he passed, it seemed, gave birth to another administration to create more public works projects and spend federal money. Some examples would be the CWA, PWA, and WPA. He set minimum wages and conditions and maximum working hours, making it tough on businesses. Then gave unions the power to get whatever they wanted, i.e. the Wagner Act, making it even tougher. His first AAA made farmers happy by paying them not to plant crops. This decreased the surpluses and therefore raised the prices. When the Supreme Court declared any of his acts unconstitutional, he simply changed them slightly and then passed them again. When the Court finally became too much for him, he attempted to reorganize it. Fortunately, he failed. He also passed social security and welfare legislation.
Hoover had started federal deficit spending, but Roosevelt perfected it. In 1934 he proposed to spend $10 billion when income was only at $3 billion. He was heavily influenced by the economist Lord John Maynard Keynes. Keynes believed that the more money the government spent, the better off the economy would be, and the faster the depression would be over. During the New Deal, Keynes wrote a letter to the President which said that he was doing great. The only thing he needed to do was spend more money.
Roosevelt handed out as much money as he could get away with. When his measures failed to bring immediate results, he spent more. According to Keynes, he was facilitating the economic recovery when in fact his actions prevented swift readjustment. If the government had simply let the economy alone, recovery would have been rapid.
The economy barely survived persistent attacks by both Republican and Democrat administrations. The seeds were sown during the administrations of the 1920s. A policy of easy money made a bust inevitable. The policies of the Hoover and Roosevelt administrations served to intensify the depression rather than alleviate it. The Great Depression was the greatest fiscal fiasco in this nation's history.
