What Shaped the Economic Policy Reactions during the Great Depression 1929-1933 - Essay Example

Running Head: Great Depression 1929-1933? What shaped the economic policy reactions during the Great Depression 1929-1933? of the [Name of the institution] What shaped the economic policy reactions during the Great Depression 1929-1933? Depression, what does this word mean, not by dictionary but by our hearts? It can mean many things, most οf them being feeling words. Such as sad, alone, hopeless, and even suicidal. The Great depression was the most significantly horrifying economic crash in the history οf America. Everything hit rock bottom, including the stock market, banks and the most saddening οf them all was peoples moral. The Depression hit America hard and fast, it lasted about ten years from 1929 to 1940. Beginning this tragic era οf time was the famous stock market crash also known as black Tuesday. In the 1920s stock prices jumped a tremendous amount, to highs never seen before. Many people such as investors believed that stocks were a for sure thing. So they started borrowing heavily which would enable them to invest more money into the stock market. That was all about to end, for in 1929 the bubble was popped and stocks started to go down very quickly. By 1933 the market had reached its lowest point ever, down a total οf 80%. This hid the American economy hard; the strong demand for goods, such as major appliances went down, no more money to invest. The stock market had let many people down. During the history οf the stock market in the United States, there have been many days in which the market declined numerous points. This is referred to as a market crash. One is called "Black Thursday," which marked the beginning οf the Great Depressions. It was decades ago, when the roaring twenties came to a booming halt on October 24, 1929, as the stock market crashed. It is called Black Thursday because it was the first day οf panic and the start οf the Great Depression. Investors tried to sell stock as fast as possible on this day. Within the first twenty days οf the crash, the value οf stock held by investors in the United States fell thirty billion dollars. During the Great Depression, production and sale οf goods rapidly declined. Employment numbers dropped drastically. Many banks and businesses were forced to close their doors. Not only were jobs and savings lost for many people, but also their homes and farms. Thousands depended upon charity to survive. During the worst part οf the depression more than fifteen million people were unemployed. This figure amounted to twenty-five percent οf the nations work force. However, even the seventy-five percent οf the workforce who were able to maintain or find a job were severely affected. Many experienced major wage reductions or were given only part time work. (Great) In the 1920s the economy appeared to be very strong in the U.S. and around the rest οf the industrialized world. The rapid increase in industrialization, growth in economy, and technology improvements had the leading economists believing that the expansion would continue. During this booming period, wages increased substantially for most workers. As family income rose do did consumer spending. Stock prices began to rise as well. Billions οf dollars were invested in the stock market as people began speculating on the rising stock prices and buying on margin. The enormous amount οf unsecured money created by this dramatic ordeal left the stock market essentially off-balance. Many investors were caught up in the race. Believing nothing could go wrong, they invested their life savings. Many got the funds to invest by mortgaging their homes and cashing safer investments such as treasury bonds and bank savings accounts. As the prices continued to rise some economic analysts began to warn οf an impending correction. Unfortunately, most investors ignored the economists warnings. They believed the strong market would continue indefinitely. Many banks, eager to increase their profits, began speculating dangerously wit their investments. Finally, in October 1929, the buying craze began to decline, and was followed by an even wilder selling craze. On Thursday, October 24, 1929, the bottom began to fall out οf the market. Prices dropped greatly as more and more investors tried to sell their holdings. By the end οf the day, the New York Stock Exchange had lost four billion dollars. It took exchange clerks until f oclock a.m. the next day to clear all the transaction. By the following Monday, the realization οf what happened began to sink in. A full-blown panic ensued. Thousands οf investors, many οf them ordinary working people, were financially ruined. By the end οf 1929, stock values had dropped by fifteen billion dollars (Galbraith 1979, 26; Bernanke 1995). Many οf the banks had speculated heavily in the stock market with the money from their deposits. Consequently, they were wiped out by falling stock prices. These bank failures sparked a "run" on the banking system in the United States. Each failed bank, factory, business, and investor contributed to the downward spiral that would drag the world into the Great Depression (Wicker 1996, 24) The Great Depression was the worst economic slump ever in the U.S. history extensive spending for their involvement in World War II did the depression end (Cargill 1991, 168). Many factors played a role in causing the depression. A major cause οf the Great Depression was the combination οf the greatly unequal distribution οf wealth throughout the 1920s. Another factor was the extensive stock market speculation by investors that took place during the latter part οf that same decade which led to the panic on the stock market and the crash now called Black Thursday ("Headlines"). The distribution οf wealth in the 1920s existed on many levels. Money was distributed unevenly between the U.S. and Europe. This imbalance οf wealth created an unstable economy. The excessive speculation in the late 1920s kept the stock market artificially high. Eventually, these speculations led to the large market crashes. The crashes, combined with maldistribution οf wealth, caused the American economy to capsize. A major reason for this large and growing gap between the rich and the working class people were the increased manufacturing output throughout this period. From 1923 - 1929 the average output per worker increased thirty-two percent among U.S. manufacturing companies. During the same period οf time, average wages for manufacturing jobs increased only eight percent. Thus, wages increased at a rate one fourth as fast as productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit οf the increased productivity went into corporate profits. In fact, from 1923 - 1929 corporate profits rose sixty-two percent and dividends rose sixty-five percent. Many historians also have concluded that from 1924 until Black Thursday, the bull market kept prices escalating. More people than ever before invested in stocks due to an optimistic belief that it was an infallible get rich quick scheme. Higher wages during this time meant that even average people had money to invest. Stocks were no longer just for the rich. Banks lent money on margin to those who wanted to borrow money to invest. There were no regulations on the banks or on the stock market as there are today, which might have prevented this type οf investing. This speculation and the resulting stock market crashes acted as a trigger to the already unstable U.S. economy. By the time spring arrived in 1933, the U.S. banking system was near collapse. More than 5,000 had failed. Depositors lost millions οf dollars οf savings. Due to maldistributions οf wealth, the economy οf the 1920s was very dependent upon confidence. The market crashes undermined this confidence. The rich stopped spending on luxury items, and slowed investments. The middle-class and poor stopped buying things with instalment credit for fear οf loosing their jobs, and not being able to pay the interest on their loans. As a result, industrial production fell by more than nine percent between the market crashes in October and December 1929 (Kindelberger, 249). The affects οf the Great Depression were not only physical, but psychological too. Many felt they were to blame for their desperate conditions. During the prosperity οf the earlier years, many citizens believed that success went to those who deserved it. For those who could not find employment or feed their families, it was a devastating blow. Self-blame and self-doubt was abundant. Asking for charity was very humiliating for men who were proud οf their previous ability to care for and provide the necessities οf life for their families. People who lost their jobs could no longer afford proper medical care for their families. One out οf every five kids was under nourished. In 1933, starvation claimed twenty-nine people in New York. People fought for foods in the streets. There were food shelters to help people, but that was hardly enough. The ironic thing about the depression is that while thousands οf people were starving in the city, the farmers had more food than they could sell. The consumers who needed and wanted the food just did not have enough money to do it. As consumer demands shrunk, prices for farmers products fell. Most οf the time farmers could not even afford to pay the freight to send their livestock to market. This left farmers with no choice but to shoot and bury their livestock and to let their crops rot in the fields. Many farmers had their farms repossessed by the bank. In 1930 parts οf the South suffered a sever drought, and farmers there, could not afford to feed their families (Chandler 1970, 3). The U.S. government response to the depression was to do nothing. President Hoover strongly believed that the economy was sound and that the prosperous times were just a short time away. He thought that all the economy needed was the confidence οf the American people. With this confidence he believed business would begin investing resulting in expanded production. As a result, more people would be employed and wages would increase. Businesses, on the other had, could fine no reason for increasing their production. Most already had excessive goods that could not be sold. By the 1932, business investment had dropped to less than five percent οf the investment amount οf 1929. Finally, Hoover realized that he had to do something to stop the madness. He first attempted to organize the banks to take care οf their own. This attempt was called the National Credit Corporation, a private firm launched in October 1931. Upon joining, member banks subscribed two percent οf their assets, in return for which they could obtain loans on eligible for rediscount at the Federal Reserve branches. The bankers in charge οf this venture were so reluctant to make loans that the National Credit Corporation proved to be an exercise in futility. Despite new waves οf bank failures, in December 1931 and January 1932 the NCC lent out only one third οf its available funds. Next Hoover tried to Reconstruction Finance Corporation, a creation οf the federal government set up by Congress with 3.5 million dollars οf stock and cash in January 1931. However, it, too, was short lived. Some relief was experienced when several large Chicago area banks were salvaged by loans. This was seen as a political ploy to enhance President Hoovers belief that relief was just around the corner. Providing further complications to the banking industry, the Federal Reserve Board took the attitude that it had no responsibility at all four banks that were not members οf the Fed system. From 1929 to 1932, the Fed did virtually nothing to stem the depression. In 1932 President Hoover wanted the Federal Reserve Bank to start providing the economy with credit in the form οf direct lending to businesses, as practiced by most European central banks at that time. The Federal Reserve board feared that issuing suck loans would open the door to panic runs on the Federal Reserve Banks. The fed finally agreed to make direct loans, but the new law carried the provision that this could be done only in an emergency. In July 1932, as soon as the direct loan facility had been legalized, President Hoover asked the Fed to declare a state οf emergency in order to enable the Fed to make the direct loans. However, the Fed refused to declare the state οf emergency. Its refusal to do so simply nullified the new law that would have provided loans to banks and might have stimulated the economy (Grieder, 11). President Hoovers inability to recognize the suffering and causes οf the depression made him very unpopular. It was no surprise that when the presidential election οf 1932, the American citizens turned to someone new. With his overwhelming ability to assure public confidence, Franklin D. Roosevelt was elected president. With his declaration that "the only thing we have to fear is fear itself," during his inaugural address, Roosevelt was able to quickly lift the nations spirit. His rapid and unprecedented actions helped turn the tide οf the Great Depression. Emergency legislation was passed to assist in slowing the panic in depositors and to aid the unemployed. He declared a nationwide bank holiday that closed all banks in the country for several days. His fireside chats on the radio helped reassure Americans that when banks were allowed to reopen, they would be a safe place for deposits. The "New Deal" οf Roosevelts presidency provided a number οf government programs to reduce not only unemployment and help restore confidence in banking, but also assisted agriculture and other businesses, provided regulation for the stock market and helped the elderly, the needy, and the disabled. The New Deal helped to lower the supply οf goods to the current low level οf consumption by working toward raising farm prices by paying farmers not to grow surplus crops. Another part οf the legislation regulated industrial competition, minimum wages, and maximum working hours for employees. Public works projects also helped to provide jobs by building schools, dams, and roads. Living conditions also improved for those in the southeast area οf the U.S. when the Tennessee Valley Authority, which provided electric power, was developed. The FDIC was created. This is the agency that regulates the banking industry. In addition, the Social Security Administration was developed. This program provides for the elderly, the retired, and the disabled in the United States. While these programs helped to offset some οf the problems οf the country, the Great Depression continued until the United States entered World War II in December 1941. At that time, the spending οf the U.S. government for national defence stimulated industrial growth. Unemployment declined very rapidly as companies began to produce ships, aircraft, weapons and other war materials. The lasting affect οf the Great depression was the new relationship οf federal government and the people. The governments expanded role during that time makes it more powerful in the lives οf every American today (Garraty 1986, 2). The social results οf the Great Depression in the U.S. reaffirmed a lasting set οf values - thrift, hard work, family life, neighbourliness - that we like to believe has always been a part οf our American heritage. References Bernanke, B. & H. James: The Gold Standard, deflation and financial crisis in the Great depression: an international comparison’, R.G. Hubbard (ed), Financial Markets and Financial Crises (NBER, 1991). Bernanke, B., The Macroeconomics οf the Great Depression. A Comparative Approach’, JMCB 27 (1995). Cargill, Thomas F. Readings in Money, the Financial System, and Money Policy. New Jersey: English Cliffs, 1991. 168 - 211 Chandler, Lester V. Americas Greatest Depression 1929 - 1941. New York: Harper and Row 1970. Eichengreen, B. The origins and nature οf the Great slump revisited’, EHR (1992) Galbraith, John Kenneth. The Great Crash 1929. Boston, Massachusetts: Houghton Mifflin Company, 1979. 26-254. Garraty, John A. The Great Depression . New York: Harcourt Brace Jov Anovich Publishers, 1986. 2 - 109. Great Market Crashes. http://members.aol.com/Mallard/crashes.html James, H. Financial flows across frontiers during the inter-war depression’, EHR (1992). Kindleberger, Charles P. The World in Depression 1929 - 1939. Univeristy οf California Press, 1973. 291 - 308. Wicker, Elmus. The Banking Panics οf the Great Depression. New York: Cambridge University Press, 1996. 24 - 58. Read More