World History Chronology

Evolution of Hominids

Foraging Societies

Settled Agriculture

Primary Urbanization

Classical Empires

Unification of Eurasia

Unification of the Hemispheres

Formation of World Culture

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The Great Depression Begins

1929

 

The leading theory regarding the cause of The Great Depression holds that it resulted from the stock market crash in 1929.  Prior to the crash, around the beginning of 1928, the Federal Reserve began raising interest rates due to financial speculation and inflated stock prices. Industrial production turned down in the spring of 1929, and overall growth turned negative in the summer. This prosperous decade had proven the old adage that all good things must come to an end, when a recession began in the summer of 1929 (2).  In the two months before the crash, industrial production fell to an annual rate of 20%, and continued to drop well into the fall months.  “By mid-November, the market had declined by a half.” (2)

Back to the "Interwar Years" Chronology

After the crash, the world monetary system was still very fragile from the resumption of the gold standard after WWI.  The gold standard was an economic standard used in the 20’s that backed up the value of each US dollar with its equivalent weight in gold.  Meanwhile, output, prices, and savings began to sink across the country.  As a result of this, policy makers felt certain that they needed to now keep their currencies in gold at all costs.  Economic stability needed to be restored, and in order to do this, prices and wages needed to be cut.  Andrew Mellon, the US Treasury Secretary, stated that there was a need to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…Purge the rottenness out of the system”(1).  In an unsuccessful attempt at accomplishing these tasks, they instead transformed an ordinary recession into the Great Depression.

During this time of depression, people were desperate for help and turned to the Federal Reserve Bank to instate policies to help the situation.  The economy grew worse as the American banks began to fail in 1930.  The Federal Reserve Banks insisted on collateral before it would offer any help.  It wanted commercial bills, however, which local banks did not have.  “Before the Federal reserve was created in 1913, the banks had their own clearinghouse arrangements for helping each other resist runs; now, with those arrangements all but defunct, the banks looked to the Federal reserve to do the job, and nothing happened”(2).  The crisis began to spread as more and more banks failed across the country.  People rushed frantically to turn their bank deposits into cash, but it was too late.  The money supply had collapsed, and panic set in for many citizens.

The Great Depression not only affected the US, it had an effect on the entire world. Most of the world was running on the gold standard in 1929.  The Federal Reserve would not allow this system to work, however, which caused the demand for imports to fall and caused the balance of payments to move further into surplus.  Gold should have been flowing into the country to expand the money supply and restore some tangible value to the economy, but instead, “this mechanism was deliberately shut down by the Federal Reserve, which was still worried about the effect of easier credit on speculation.”  The sale of government debt caused the flow of gold into the country to be “sterilized.”  Money grew tighter still as America instigated the Smooth-Haley Act of 1930, which was only a vain effort.  Monetary pressure was not relieved and trade collapsed, which greatly effected industry.  “The Federal Policy, together with Smooth-Hawley, had turned the gold standard into a global-recession machine”(2).

It was not until World War II that the US was able to get out of depression and back to a time of prosperity.  The war provided some jobs to push the US citizens back into full employment, but unemployment rates stayed up, partly because of the New Deal.  This was a program started by President Hoover and carried on by President Roosevelt.  The New Deal “brought in bank-deposit insurance (a wise move, though not without problems)…It piled taxes on business and sought to prevent ‘excessive competition.’  To stop prices falling, controls were brought in, alongside other new and avowedly anti-business regulations” (3).  By 1935, America was off of the gold standard and the money supply was expanding.  The money supply was once again expanding, only to move into recession again in 1937-38.  Unemployment rates were still at 17% in 1939.  In the end, it was the war, not the New Deal that restored full employment in the US and brought it out of depression.


Notes:

A price comparison from the 1930's to Today of common items
Great Depression Affects Ontario, Canada 
Great Depression affects the meat industry in France


Sources:

[1] Fortune, August 18, 1997 v 136 n4 p36

[2] The Economist, Sept. 19. 1998 v347 n8090 p95

[3] Insight on the News, Feb. 16, 1998 v14 n6 p18

[4] Paul A. Samuelson, William D. Nordhaus, Macroeconomics 5th ed. (McGraw-Hill 1995)

[5] Adam Smith, An Inquiry into the Nature and Causes of the Wealth Of Nations (Liberty Fund 1981)

 


Edited by Karl W. Erickson
Research by Elliot J. Wachter
Written by Kathryn D. Magnuson
18 February 1999

Text copyright 1996-2016 by ThenAgain. All rights reserved.

 

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