Great Depression in the United States.
The Great Depression began with the Wall Street Crash of October, 1929 and rapidly spread worldwide. The market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation, plunging farm incomes, and lost opportunities for economic growth and personal advancement. Although its causes are still uncertain and controversial, the net effect was a sudden and general loss of confidence in the economic future. The usual explanations include numerous factors, especially high consumer debt, ill-regulated markets that permitted overoptimistic loans by banks and investors, the lack of high-growth new industries, and growing wealth inequality, all interacting to create a downward economic spiral of reduced spending, falling confidence, and lowered production.
Industries that suffered the most included construction, agriculture as dust-bowl conditions persisted in the agricultural heartland, shipping, mining, and logging as well as durable goods like automobiles and appliances that could be postponed. The economy reached bottom in the winter of 1932–33; then came four years of very rapid growth until 1937, when the Recession of 1937 brought back 1934 levels of unemployment. The depression caused major political changes in America. Three years into the depression, Herbert Hoover lost the 1932 presidential election to Franklin Delano Roosevelt in a sweeping landslide. Roosevelt's economic recovery plan, the New Deal, instituted unprecedented programs for relief, recovery and reform, and brought about a major realignment of American politics.
Causes.
Current theories may be broadly classified into two main points of view. First, there is orthodox classical economics, monetarist, Keynesian, Austrian Economics and neoclassical economic theory, which focuses on the macroeconomic effects of money supply, including Mass production and consumption. Second, there are structural theories, including those of institutional economics, that point to underconsumption and over-investment (economic bubble), or to malfeasance by bankers and industrialists.
There are multiple originating issues: what factors set off the first downturn in 1929, what structural weaknesses and specific events turned it into a major depression, how the downturn spread from country to country, and why the economic recovery was so prolonged.
In terms of the initial 1931 downturn, historians emphasize structural factors and the stock market crash as well as bank failures, while economists point to Britain's decision to return to the gold standard at pre–World War I parities ($10.98 Pound). The vast economic cost of World War I weakened the ability of the world to respond to a major crisis.
Banks began to fail in October 1930 (one year after the crash) when farmers defaulted on loans. There was no federal deposit insurance during that time as bank failures were considered quite common. This worried depositors that they might have a chance of losing all their savings, therefore, people started to withdraw money and changed it into currency. As deposits taken out from the bank increased, the money multiplier decreased, which means that money circulation slowed down. This led to a decrease in the money supply, and an increase in interest rate and a significant decrease in aggregate investment.
The US government's commitment to the gold standard prevented it from engaging in expansionary monetary policy. High interest rates needed to be maintained, in order to attract international investors who bought foreign assets with gold. However, the high interest also inhibited domestic business borrowing.
Economists dispute how much weight to give the stock market crash of October 1929. According to Milton Friedman, "the stock market in 1929 played a role in the initial depression." It clearly changed sentiment about and expectations of the future, shifting the outlook from very positive to negative, with a dampening effect on investment and entrepreneurship, but some feel that an increase in interest rates by the Federal government could have also caused the slow steps into the downturn towards the Great Depression. Thomas Sowell, on the other hand, notes that the rise in unemployment had peaked at 9% two months after the crash, and had fallen to 6.3% by June – he blames the later unemployment rate on the tariffs that Hoover passed against the advice of economists in that same month, and says that six months after their implementation unemployment rose to the double digit figures that characterized that decade.
The US interest rates were also affected by France's decision to raise their interest rates to attract gold to their vaults. In theory, the U.S. would have two potential responses to that: Allow the exchange rate to adjust, or increase their own interest rates to maintain the gold standard. At the time, the U.S. was pegged to the gold standard. Therefore Americans converted their dollars into francs to buy more French assets, the demand for the U.S. dollar fell, and the exchange rate increased. The only thing the US could do to get back into equilibrium was increase their interest rates.
(From Wikipedia, the free encyclopedia)
Text 8.