The Great Depression 1929-1939 Introduction: Roaring Period - the 1920s World War-I ended by the Treaty of Versailles signed on 14th Nov, 1918 The US economy at that time was not so much affected as arms and ammunitions and war tools were
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The Great Depression 1929-1939<br>
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Introduction: Roaring Period - the 1920s World War-I ended by the Treaty of Versailles signed on 14th Nov, 1918
The US economy at that time was not so much affected as arms and ammunitions and war tools were manufactured and supplied to the other countries. Besides, it gave loans to countries, So, its economy was good
In fact, stock markets were raised by 50% from 1918-1919
America’s GDP (Gross Domestic Product) increased by 4.7%
Jobless rate 3.7%<br>
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Roaring period Continued... Consumer debt increased, companies over-extended themselves, financial institutions became heavily involved in stock market speculation. In some cases, they created securities "subsidiaries" with their own brokers secretly selling their own stocks.
Weak regulations had opened the way for a period of wild speculation on stock exchanges. Many investors without proper research of companies, kept buying based on the fundamentals — they were just gambling that the stock would keep going up.
Many bought shares on margin, (with just 10% of a stock's price to make a purchase), not realizing the effects if the price fell. Shares were sold for more money than justified by their companies' actual earnings.
Overheated market crashed!<br>
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Stock market crash, 1929 The stock market first crashed on Oct. 24, 1929 - the markets opened 11% lower than the previous day.
Then came the Black Thursday-nervous investors sold overpriced shares of (12.9 million)
Prices fell again the following Monday. Wholesale panic set in, leading to more selling. On "Black Tuesday," Oct. 29, investors unloaded millions of shares — kept on unloading. There were literally no buyers.
The market lost more than 85% of its value from 1929 to July 1932. The Dow Jones Industry’s average sank from 381.17 in 1929 to 41.22 in 1932.
This caused economic problems that came to a boiling point.<br>
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Oversupply and overproduction problems The 1920s were powered by mass production due to consumption boom. But it also led to overproduction on the part of many businesses. Even before the crash, they started selling goods at a loss.
In agriculture, farmers had bought more machinery to boost production during W.War-I that put them in debt. In the post-war economy, they produced more supply than needed by consumers. Land and crop values decreased, farmers and investors lost
It resulted in price drop of both agricultural and industrial goods and hurt the already over-extended businesses<br>
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Low demand, high unemployment Loss of money forced companies to cut production and workforce.
Debt-ridden consumers stopped spending.
Businesses collapsed, cut and laid off more people.
In 1933, the rate of jobless people reached 24.9%
15 million Americans out of a population of 125.6 million. It was still nearly 19% in 1939.<br>
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Wrong steps at the wrong time: the Federal Reserve Throughout the 1920s, banks were irresponsible, letting their reserves get dangerously low. The Federal Reserve was the worst. Aleksandar Tomic (program director of M.Sc in applied economics at Boston College) said, "The Great Depression can be laid at the foot of the Fed”. It contributed expansion in mid 1920s-keeping low interest rates. After the stock market crash, instead of lowering, it raised interest rates and doubled them in 1931. The purpose was to discourage lending and borrowing but it crashed the economy further
The Fed also followed "liquidationist" policy of Andrew Mellon (Treasury Secretary). Purpose: to weed out financially irresponsible institutions to make stronger, sounder banking systems. But instead of the bad, smaller banks ended. By 1933, 11,000 of them had failed, wiping out the savings of millions of people.
Decrease in money supply led to reduction - caused sky-high increases in real interest rates, companies no longer had chances of investing or expanding.<br>
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Stiff presidential response President Herbert Hoover (31st President, 1929 - 1933). His response to the economic crisis was slow. He believed in minimal government intervention. He felt that direct public relief character was weakening. Eventually, he started spending and launched lending and public works projects. But according to many economists, it was too little, too late.<br>
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Ill-timed tariff As demand declined, big business and agriculture, lobbied for protection as they felt the effect of cheap goods from abroad. Congress obliged with the United States Tariff Act of 1930 - (17th June, 1930) the Smoot-Hawley bill, (sponsored by Senator Reed Smoot and REpresentative Willis. C. Hawley - raised tariffs on foreign products by about 20% - to protect American business and farmers. It added considerable strain to international economic climate of the Great Depression.
Effects: Multiple countries retaliated with their own tariffs on US goods. The inevitable result was a melt-down trade. In the next two years, US imports fell 40%.
No markets abroad. No demand at home. Economic activities came to a standstill.<br>
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Effects When Franklin D. Roosevelt became President (1933), he immediately started pushing through Congress a series of programs and projects called the New Deal. How much the New Deal actually alleviated the depression is a matter of some debate - throughout the decade, production remained low and unemployment high.
But the New Deal did more than attempt to stabilize the economy, provide relief to jobless Americans and created previously unheard of safety net programs, as well as regulate the private sector. It also reshaped the role of government, with programs that are now part of the fabric of American society.
Some of the New Deal's accomplishments:
It encouraged the beginning of labor movement
It included new constraints and safeguards on the banking industry
It made efforts to re-inflate the economy after the fall of prices
It also included laws passed by the Congress and Presidential Executive orders during the first term of Franklin Roosevelt.<br>
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New Deal Accomplishments Worker protections, like the National Labor Relations Act - legitimized unions, collective bargaining, and other employee rights
Public works programs - aimed at providing employment via construction projects - a win-win for society and individuals
Individual safety nets - the Social Security Act of 1935 - created the pension system still with us today, and unemployment insurance<br>
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Legacy of government regulation New Deal legislation ushered in a new era of government regulations with the underlying concept that even a free-enterprise system can use some federal oversight. Milestone measures include:
The Glass-Steagall Act of 1933 - separated investment banking from commercial banking to prevent conflicts of interest and the sort of speculation that led to the 1929 crash (it was repealed in 1999, though some of its regs remain in the Dodd-Frank Act of 2010)
The Federal Deposit Insurance Corporation - to oversee banks and protect consumer accounts, via FDIC deposit insurance
The establishment of the Securities and Exchange Commission (SEC) - to oversee the stock market, create securities legislation, and protect investors from fraudulent practices<br>
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Legacy of the great Depression "The biggest legacy of the Great Depression is a change in the view of government's responsibilities — that it should take an active part in addressing economic and social problems".<br>
