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Friday, July 1, 2022

The Great Depression | Years, effects, causes & What happened in the great depression

  Rajesh Kumar Rana       Friday, July 1, 2022


The Great Depression | Years, effects, causes & What happened in the great depression
The Great Depression pictures
source: Wikimedia

The Great Depression | Years, effects, causes & What happened in the great depression

The Great Depression years: 

The Great Depression is the rapid decline of the world economy in the first half of the twentieth century. The economic crisis began in 1929 and ended in early 1933, but the world community remained in a "depression" until 1939, which is why the 30s are called the years of the Great Depression.

The Great depression causes:

The “depression” caused significant damage to Western countries, as well as Canada, the USA, Germany, Great Britain, France and many other states. Those cities where industry was developed suffered greatly. In many countries, the volume of construction was reduced as early as 1926.

Two months before the crash on the American stock exchange, in August 1929, the country for the first time felt the threat of an economic recession. Prices for agricultural products have fallen significantly (by 40-60%), construction work has been reduced.

In February 1930, the Fed lowered the prime rate to 4% from 6%. To maintain liquidity, government bonds were purchased from the market. bonds. For the next two years, Secretary of the Treasury Andrew Mellon saw fit to stay out of the way. He believed that the market should try to correct proportions and prices on its own.

In June 1930, to protect the domestic market in the United States, the Smoot-Hawley tariff was adopted, which introduced a 40% duty on imports. This tariff - like a virus, instantly infected the whole of Europe with a crisis, as it limited the sale of products to European manufacturers. This year, banks began to fail, because depositors massively withdrew their savings.

The Great Depression | Years, effects, causes & What happened in the great depression
The Great Depression affect Unemployed Union March in New York
Image source: Flickr/Ashley Wilson

In the spring of 1931, a second wave of panic swept through banking institutions, but the authorities did not want to react to what was happening. During these years, GDP begins to fall by 9.4% and 8.5%. Unemployment increased over the year from 3.2% to 15.9%.

Already in 1932 - GDP fell by another 13.4%, and starting from 1929 - by 31%. The unemployment rate reached 23.6%. Since 1930, the value of industrial stocks has fallen by 80%, and the value of agricultural products by 53%.

In three years, about 13 million US citizens lost their jobs, every two out of five banks went completely bankrupt, with the loss of about 2 billion deposits. The money supply contracted at par by 31% and fell sharply from $26.6 billion to $19.9 billion. People no longer trusted banks and preferred cash savings. Those banks that managed to survive stopped issuing loans and maintained cash liquidity. Since both the banks and the public kept money in cash, this intensified the economic recession.

Naturally, during this period, the birth rate and population growth in the United States decreased.

The RFC, the Reconstruction Finance Corporation, was created by the US Congress in January 1932. The main task of the corporation was to provide financial assistance to the railway system, business corporations and institutions. In July of the same year, the financial corporation provided support for agriculture, as well as the financing of public works.

Soon, the authorities passed a law on the Federal Housing Bank, which provided loans to organizations associated with the issuance of mortgages. Another equally important Glass-Steagall law allowed the Fed to issue loans to member banks. The processes of intensifying the budgetary distribution of income from the rich to the poor strata of the population were launched, which in turn significantly stimulated consumption. The maximum income tax rate was also raised from 25% to 63%.

However, society considered belated the measures taken by the administrative apparatus of Hoover. Therefore, Hoover lost the election and in the fall of 1932, Franklin Roosevelt became President of the United States. Thus, the Democrats seized control of the US Congress.

In 1933, Roosevelt launched his new program, also known as the Roosevelt New Deal. The program was aimed at correcting the mistakes of the previous government and eliminating destructive economic processes. Many of the measures proposed by the president have significantly improved the standard of living of the population and have indeed eliminated the causes of the “depression”. But some of Roosevelt's methods, on the contrary, further aggravated the situation.

In March 1933, the third wave of banking panic began. Roosevelt closed banks for seven days in order to prepare a deposit guarantee program in a week.

In her first 100 days in office, Roosevelt actively worked to change the legal framework. The Federal Deposit Insurance Corporation was created, as well as, under the Economic Recovery Act, the Federal Emergency Relief Administration (FERA).

FACP was engaged in:

  • construction and improvement of highways, highways, public buildings, public utilities and state enterprises.
  • saving natural resources and increasing their production, i.e. control over the use and purification of drinking water, soil and coastal erosion control, construction of port and river facilities, flood prevention, improvement of water energy.

Unemployed Americans took an active part in public works under the auspices of the Public Works Administration and the Civil Works Administration. They were engaged in the construction of canals, bridges, roads, especially in swampy areas. In total, 4 million Americans were employed in public works.

Congress passed important bills that regulated the financial sector. These are the Emergency Banking Act, the Second Glass-Steagall Act, the Securities Commission Act, the Agricultural Credit Act.

The Agricultural Act, passed on May 12, 1933, made possible the reconstruction of the $12 billion farm debt. Mortgage debt also decreased, and the period for which debts had to be paid was extended.

The government gave farmers the opportunity to get a loan. Over the next four years, the agrarian banks extended $2.2 billion in loans to half a million landowners on very favorable terms.

Under this law, farms had to reduce production, reduce the area under crops and reduce the number of livestock on farms. A special fund was set up to compensate for the losses.

During the reign of Roosevelt, the number of unemployed increased (by 24.9%), but the decline in GDP stopped (by 2.1%).

In January 1934, a law on the gold reserve was passed, according to which all gold had to be redeemed at a fixed price. According to Roosevelt's proclamation, the official price of gold was set at $35/ounce. Those. there was a devaluation of the dollar to 41%.

The government has drawn up 557 basic, as well as 189 additional "codes of fair competition". The codes applied to various industries, affected 95% of workers of all categories and affected the restriction of competition, since workers in one category were given a single salary.

Roosevelt's method was a kind of attack on the US Constitution. It greatly increased the role of the government in the life of the country. As early as 1935, the Supreme Court declared unconstitutional the law that set in motion the National Restoration Administration. The reason for this was the abolition of anti monopoly laws, as well as the consolidation of the monopoly of trade unions over workers.

The state invaded the sphere of health care and education, gave a guarantee for a living wage, and assumed obligations to provide for the disabled, the elderly and the poor. At the same time, government spending has doubled since 1932. Fearing an imbalance in the budget, in 1937 Roosevelt reduced government spending, after which a new recession began, which lasted from 1937-1938.

In 1939, the index of industrial production was 90% compared to the level of 1932, the unemployment rate still reached 17%.

When did the great depression end?

Today, there is a lot of debate among economists about how the Great Depression ended. Someone calls the beginning of the Second World War, which provoked massive state purchases of weapons, the reason. The revival of industry in the country began in the period from 1939-1941, in the period of preparation for the war.

But there is another opinion, which is based on the wrong actions of the government in the 1930s that were detrimental to the country. Milton Friedman and Schwartz blamed the Fed for everything, arguing that it was responsible for the "crisis of confidence." They believe that many banks could have avoided bankruptcy if the Fed had expanded lending back in 1930 and 31, as it did before the crisis began in 1932.

Friedman turned 90 in 2002. Among the invited guests was Ben Bernanke, a member of the Fed's board of directors, who in his speech confirmed the correctness of Milton Friedman and Anna Schwartz, but also said that it was thanks to them that the Fed would not repeat such mistakes again.

Other researchers, Harold L. Cole and Lee E. Ohanian, calculated that if Roosevelt had not taken his measures to curb competition, the country's economy would have entered the path of recovery five years earlier.


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