Social and Cultural Effects of the Great Depression - Term Paper Example

The great depression refers to the global economic break down that shook financial markets, especially in North America, Europe and the rest of world’s developed economies. The great Depression occurred in the period right before the 2ndworld war around 1929 and extended into the century up to about 1939; this period was characterized by severe financial repercussions that had long-standing effects on individual investors, banks and other financial institutions. The great depression has always been linked to the infamous calamitous crumple of New York stock market prices in 1929, a trend that continued steadily three years on.1 By the year 1932, stock market prices in the New York Stock exchange had declined to a meager 20% of their previous value in 1929. Many banks and businesses went under as a result, and this instigated the fall in the economy potential, as there was reduced spending, low demand, low production and high unemployment accordingly.2 Even though, the great depression had its origins in America, all the European nations were greatly hit as they were heavily relying on the US for financial loans; the US had emerged as a great credit in the post world war one period. The complex financial relationship between the European economies and the US was inevitably the reason why the great depression could not be contained in the US, but later spread to the rest of the European nations. Nations were thrown into panic mode, most of them adopting restrictive measures, especially concerning foreign trade as mitigation to salvage their local industries.3 Discussions on the great discussion have yielded important information on the delicate financial market relationships, and this is a key area of concern especially in the view of contemporary global economic ties. This topic is relevant to global economies as it provides vital lessons that could help mitigate the risks of a future global financial slump.4 This paper will focus on various aspects of the great depression including, but limited to its causes, its effects in America, and the rest of European economies that were hugely indebted to the US at the time. In as much as the great depression was sparked by the great slouch in the New York stock market prices, there were other underlying factors that have been attributed to it. These factors are specifically weaknesses and imbalances that existed in the American financial system, but they had long been ignored due to the rapid economic growth, and the resultant speculative optimism. The onset of the great depression revealed the faulty premises of the American financial system, and its failure of America’s political and financial institutions to manage the economy. Concerning the causes of the great depression, five factors have been top on the list, the fall in stock Market prices, failure of the banking system, a decline in the purchasing power, the American- Europe economic ties, and famine.5 Prior to fall in stock prices, banks had been lending out large sums of money to businesses and investors, even way beyond their capabilities; this gave rise to debt deflation. After the crash in prices, great losses were incurred by stock investors as the value of stocks had gone down drastically i.e. stocks lost over 90% of their value, and stockholders incurred losses amounting to over 40 billion dollars. Many banks could not recover their loans as many debtors defaulted in payments, and as a result, many people withdrew their deposits. Rapid measures of self-preservation were taken by the surviving banks and this included cutting down on loans, a desperate move that resulted to further limitations to the economy. Bank's restrictive measures to limit lending, coupled by loss of jobs and the resultant unemployment led to harsh times in the history of the US economy; there was low output and low demand of products and as such, many businesses suffered insolvency. About 11,000 banking institutions had collapsed by the year 1933, as they could not tolerate the harsh economic conditions of the day. Because of this, many people lost their savings and the banks could not insure any deposits that were made due to the many economic uncertainties of the time. The fears of hard economic times to come instigated the low purchasing power of the economy as households were forced to cut their spending in self-preservation.6 This was also factored by other factors such low disposable incomes due to the high unemployment that was prevalent at the time- as high as between 25- 30%.7 Lack of jobs meant there was no money to spend, and as a result, there was low demand for products and services, a factor that led to low production. In a bid to salvage the local industries, the US government took sterner actions that restricted international trade i.e. taxes were increased on importation of goods in order to promote locally manufactured goods.8 Other countries also reacted in the same manner by raising their tariffs in order to protect their local industries and businesses; this eventually led to the breakdown of international trade, and it did not solve the economic problems. Famine that struck the Mississippi valley can be considered, as an indirect caused of the great depression as many farmers lost their crops, and defaulted in loan repayments.9 As a result, these farmers were forced to sale off their property at no gains in order to pay off their creditors. Generally, the effects of the great depression were felt at all levels from public institutions to individual households. Many social problems such as crime rates emerged due to the high rates of unemployment and there was a massive migration of people in search of greener pastures in other places.10 The great depression instigated essential changes in the US economic system structure, for instance, the US government was forced to take deliberate economic interventions in ensuring economic stability.11 These were introduced in the form of social insurance, public works, social welfare services, deficit spending, industrial policies and taxation, and they later, these too were adopted by other major economies in Europe. Countries that were greatly hit by the great depression are those that hugely relied on America for financial stability, and these included France, Germany and United Kingdom. The UK relied mostly on exports to the rest of the European nations, and with respect to the international trade restrictions, the UK could not export much of its products as before. The breakdown in international trade had long lasting impacts on the UK’s economy, which hugely depended on exports, and as a result, there was high unemployment. Germany was still obliged to compensate other countries for damages caused during World War 1, and this meant that it had to dig deeper to meet its financial obligations. Germany’s currency was later devalued due to the harsh economic forces; many Germans lost their savings and there was low demand for goods accordingly. Even with the decision by Germany to stop compensations to other nations, there was widespread unemployment, as the economy did not recover until later during the reign of Hitler. On the other hand, France suffered immensely due to the great depression as its underdeveloped economy that was pegged on tourism and farming, and on top of these, the compensation from Germany. With the great depression, there was no more compensation from Germany and many people could not afford the luxury of travelling for amusement. France could not deal with the harsh conditions of the great depression, and as a result, it did not recover quickly until later into the century. Despite its global impact on world economies, the great depression was hardly felt in some of the economies such as Japan and the Soviet Union, and this is attributed to the brilliant intervention made by these nations. For instance, Japan was spared the devastating impacts of the great depression by its concept of deficit spending; this is where by a government expenditure exceeds its earnings. In addition to deficit spending, Japan devalued its currency so that its exports were relatively cheaper in comparison to those from Europe. Because of these economic interventions, Japans economy registered an exponential growth even in the face of the great depression. Soviet Union was largely unaffected by the great depression because of its disdain towards, and none involvement in the capitalist markets fashioned by the US- Europe economic policies. Having remained aloof and stuck to its socialist ideals, the Soviet Union was never affected by the great depression, as it was not in any economic ties with the US, unlike most of the European nations. The great depression had its toll on most of the world economies, and as a result, many changes followed that aimed to restore the global economy to stability. Some of these interventions were successful, but others resulted into a further slum into depression12; ironically, most of the interventions at economic recovery made the depression even great than it had been. For instance, it emerged clearly that restrictive economic and financial policies that were adopted by governments worked to the detriment of the economy other than for the intended purpose.13 Many lessons can be drawn from the great depression that might be of benefit to the modern capital market economies, especially in view of the eminent vulnerability in the global market stability. A good case in point can be drawn from the economic recession in 2000s, which was threatening future stability of global economies; many countries were able to avoid the eminent economic slouch by avoiding a repetition of mistakes made by governments during the great depression. Works Cited Taylor, Nick. “The Great Depression: A Short History of the Great Depression”. Topics.nytimes.com. 2012. Web. 17th Dec 2012. Howarth, David and Becker, Megan. “The Great Depression: Causes of the Great Depression”. Personal.psu.edu. 2009. Web. 17th Dec 2012. Smiley, Gene. “Great Depression”. Econlib.org. n.d. Web. 17th Dec 2012. Kelly, Martin. “Top 5 Causes of the Great Depression”. Americanhistory.about.com. n.d. Web. 17th Dec 2012. “The Great Depression”. History.com. (n.d). Web. 17th Dec 2012 “The Great Depression: Social and Cultural Effects of the Depression”. UShistory.org. n.d. Web. 17th Dec 2012. “Lessons of the 1930s: There could be trouble ahead”. Economist.com. 10th Dec 2011. Web. 17th Dec 2012. Read More