The Great Depression is one of the darkest chapters in the history of United States. Followed by First World War began the era of economic development in which reconstruction was taking place employing major share of labor causing further economic development.1920s was the era best known as roaring 20s in which American economy demonstrated immense development on the basis of speculation. The economy was at its extreme boom and industries were flourishing. However, this economic bubble burst when the speculation played its game again. Stock market shows responsiveness to speculations about future events. Following the panic created by major banking institutions and reductions in share prices of key corporations, a vicious cycle of stock price decrease began which ultimately lead to Wall Street Crisis in October 1929 (Woolf n.p). Followed by Wall Street Crisis was a long period of economic depression during which two governments changed stages and finally Roosevelt’s administration presented reforms which not only paved way for present industrial, agricultural and political framework but also brought American economy back on the path of recovery and then development.
Prior to October 1929, market investment was highly expedient. From 1923, American economy experienced bullish trend in the Wall Street. Lending by banks and brokers was higher than the general face value of the stocks being purchased. Household investors and novice sponsors further aggravated the progress in stock market. Increasing development and prices of iron and steel industry further amplified prices due to speculation. Further introduction of installment in the banking system allowed many families to own what they could not afford otherwise (Suddath, n.p). At this scenario, the demand and supply forces came into play. Due to higher demand and excess of borrowed money, general rate of trade was at its highest. Presence of many small banks despite having no ability to lend without having substantial savings to back up these loans, further strengthen speedy stock exchange. This trend of trading was further increased by the presence of marginal buyers (Woolf n.p). Marginal buyers only paid 10-20 percent of the actual value of shares whereas the remaining amount was credited by brokers or banks. Due to little requirement of investment capital, number of novice investors who were susceptible to negative speculation, increased (Galbraith 57). On October 29, 1929, best known as Black Tuesday, the stock market crashed completely with over 16000,000 shares traded on a single day leading to Wall Street crisis which further initiated a decade of economic depression.
However, with increase in the stock prices and overall economic development, small traders and famers extended their production scale which lead to excessive supply of wheat and other eatables (Galbraith 29). As a result of this excess, farmers had surplus which lead to decrease in overall prices. Wall Street responded to speculation of wheat industry fluctuation and a high rate of trading was observed in mid1929. However, due to weather conditions and other factors, most of this stock was disposed off leading to increase in the prices of wheat demand. According to Suddath (n.p), “The market peaked on September 3, 1929. Steel production was down, several banks had failed, and fewer homes were being built, but few paid attention — the Dow stood at 381.17, up 27% from the previous year. Over the next few weeks, however, prices began to move downward. And the lower they fell, the faster they picked up speed.”
After this temporary increase in stock prices, inflow of wheat from neighboring countries reduced the prices of American wheat greatly that once again followed decreasing trend. As a result of aggressive trading, the prices of overall stock at Wall Street decreased greatly. Due to higher number of marginal buyers who tried to redeem at least the amount they indebted, panic trading began which reduced the prices of stocks greatly. Banks and private investors who lent money to these marginal buyers also sustained heavy losses. Followed by speculation, many household investors and others having their active money in banks withdrew their accounts. This excessive withdrawal left banks with no money ultimately leading to shutdowns (Hyvig 19).
Although market leaders tried to instigate trading by making investments in blue chip companies however none of these efforts could reduce public panic. America's financial elite tried to rescue the market – members of the Rockefeller family and William C Durant of General Motors bought large quantities of stocks to demonstrate their confidence in the market but the move could not stem the tide (Guardian, 2008). Followed by Roaring 20s was a period of Great Depression which initiated with the crash of Wall Street. With closures of banks due to excessive withdrawal and lending without having sufficient backups, many lost their life savings. Due to overall shortage of money, the consumption pattern also curtailed. Since there was no demand, many industries and ventures closed down due to which millions became unemployed. Although President Hoover announced support for farmers in the earlier phase of economic crash however it was not duly managed as a result of which the invasion of foreign products in US market caused a severe economic crash (Bernanke 27; Hyvig 38).
Careful analysis reveals that American society showed conformation to established notions of economic cycle. According to this theory, an economy is expected to undergo recession after showing peak performance. In the case of US in 1920s, most of the price increases and high investments were a result of speculation instead of real face value of the commodity or a business venture. As a result, prices increased twofold without any substantial value addition (Kindleberger 57). It can also be found that along with Wall Street crash which made a reasonable number investors lose their money, it was an overall failure of economy and business to have investments for further projects and providing continued employment that limited overall household income.
Where many economists argue about the possible reasons behind Great Depression, it can be said that the sudden turn shown by the volatile nature of American economy cannot be a cyclic behavior. Ideally, an economy is expected to show slow progress in a steady manner. On the other hand, sudden diversion from affluence to economic crash in 1929 was rather unexpected. Although it can be assumed that American economy was undergoing a usual economic cycle, its progress was aggravated and worsened by the Wall Street Crash. Therefore, it may not be a reason of economic crisis however it surely was the catalyst that made it worse. Another underlying reason was market’s and investors’ susceptibility to speculation. In the era of 1920s, most of the share price increase was a result of investors’ zeal instead of real economic progress of the enterprises.
Prior to economic depression, there were symptoms of slow economic growth. In order to utilize economies of scale, industries such as automobile, steel and utility were performing massive productions that decreased overall per unit costs. However, slow demand and then ultimately no sales lead many companies and private vendors and suppliers to shut down or report as bankrupted. Other than slow industrial growth, agriculture was also in a discouraging state as with advent of new technology and increasing competition, overall sales prices and demand for labor dropped leading to unemployment. Further immobility made this rate worse.
Although usual aftermath of such disasters include government aid for general public however other than private donors and charitable organizations, no concrete recovery plan was established for a considerably long time until the arrival of President Roosevelt. Where fluctuations in the rate of stocks are an acceptable behavior in a stock exchange, the slump shown in prices of shares increased because of highly inflated share prices. Furthermore, banks had lent a high amount of capital which had no substantial guarantee of return and deposits for actual owners. Other than that, American society was highly credit driven. From industries to private investors, ventures were being financed on credit money. As a result when crisis began, many companies went bankrupt with capital accumulated in business ventures without any promising returns (Woolf, 2002).
Realistically speaking, less than 1 percent of total population actually owned the shares in Wall Street. Therefore, besides Wall Street crash, it was the overall economic model that crashed as a result of faulty banking system, collapsed agriculture and industries. Wall Street was also a resultant of fraudulent activities undertaken by several bankers. Many bankers like Albert H. Wiggin sold their shares sometimes before the crash earning millions in terms of revenues while investing Bank’s money in a faulty manner (Hughes and Cain n.p). Also, strategies to evade taxes made overall economy suffer.
As a result of Wall Street Crash and then aftermath of Great Depression, almost quarter of the labor became unemployed with unemployment rate rising to 8.7 from 3.2 percent. Even the prices deflation continued for four years till 1933 and then began picking up after that however full recovery could not be made till Second World War (Hughes and Cain 461). Although price decline was observed in early 1920s as a result of First World War however income deflated by 13.6 percent (Hughes and Cain 462). Followed by income and price deflation was an increasing rate of unemployment. Another reason presented for lower recovery was inability of private sector to adjust for lower wages and depending hugely on government relief programs which were introduced too late. As a result, overall income and consumption remained low in the meanwhile and no new ventures could be initiated. Higher dependency of general public and private sector on government relief programs even in the years of recovery during mid 1930s made unemployment rate to stay higher than it was in 1920s (Galbraith 39). Hence, it can be concluded that government efforts in Hoover’s era were effective to a limited extent for reducing prevailing unemployment. Furthermore, employment in agricultural sector could not be included in overall employment statistics due to its seasonal nature. It can also be added that despite wages increase after 1934, overall unemployment remained high as business owners may not have welcomed new labor (Bernanke 5).
According to Hughes and Cain, the increase in real GNP did not reflect changes in per capita income as income disparity was considerably high and per capita income did not regained its 1929’s status till 1940 as compared to real GNP which regained the same status in 1937 following recovery in 1934. During the same period, business investment rate remained considerably low mainly because of unfavorable business expectations. As a result of this uncertainty, no new businesses could be initiated and market moved towards disinvestment trend. Even the New Deal offered by Roosevelt took its time to influence investors. Simple disinvestment can be seen by average stock prices declining from 260.2 to 98.4 from 1929 to 1934 (Hughes and Cain 464). Registration of patents also reflected the trend of innovation during this period. The indices showed a decreasing trend illustrating that no new business models and products were introduced. Also, mergers followed a negligible rate where these business alliances are indicators of positive economic activity. American economy failed to rely on foreign exports due to prior tariffs increased by American government in early 1930s as a result of which neighboring countries reciprocated the tariffs making overall imports and exports highly expensive (Bernanke 18). Furthermore, with American government squeezing out loans from neighboring economies, a domino effect began due to which other countries reached economic collapse. In this period, only controlled economies survived due to lesser dependency on external trade.
In the same period, even banking system could not show revival due to lack of trust between general public and private banks because of earlier shutdown of over nine thousand small and middle-sized banks. Instead, general public favored government funding schemes and the same trend continued till World War II. Despite the fact that recovery began after 1934, private sector appeared reluctant to resume investment in stock exchange and very few banks showed higher cash deposits in their accounts. Furthermore, even lower interest rates could not induce general public to borrow and invest in Wall Street. In 1932, when economy was showing rather slow recovery, President Hoover chose to increase income taxes in an attempt of reducing government deficits which were showing increment as a result of continues expenditure and lower income (Klingaman n.p). However, this attempt of increasing government reserves backfired as overall income decreased showing reduction in tax base (Horwitz n.p.). This deficit reduction was also an attempt of reducing inflation in the years of recovery as overall propensity to consume increased. It is further important to note that higher tax rates discouraged private investment as well because of which Wall Street did not show tremendous growth as expected. Prior to World War II, American economy showed another downturn in 1938. Overall federal reserves increased as a result anti-inflationary measures however they curtailed public’s willingness to invest in Wall Street forcing indices to show a decreasing trend again. This is precisely the reason why government reserves showed a sharp increase in deficits only within a period of one year i.e. 1937-1938 (Galbraith 45).
For Great Depression, measures taken by Hoover’s administration are highly criticized for being too little, too late as he believed in public helping themselves instead of government intervening and taking over the role of public aide. Careful analysis of extended recessionary period discloses how money supply and demand shrunk during this period. Where overall economy showed recovery after few years of Wall Street crisis in 1929, it could be seen that most of the money reserves were held by general public and overall money reserves in the banks decreased sharply leading to overall reduction in money supply. Further reluctance to invest and consume caused lower rate of production and employment because of which overall economic activity showed a decreasing trend which further squeezed out money supply (Kindleberger 59). Hoover’s administration further tried to manage this money supply shortage by reducing interbank discount rate which allowed other private banks to borrow more under lesser interest rates. Absence of lender of last resort in early years of depression aggravated the situation which was intended to be controlled by the given federal policy. The already reduced money supply further decreased due to government policies in 1929-1930 (Hughes and Cain 470; Klingaman n.p).
According to Keynesian school of thought, government intervention becomes important when private sector is short of spending as the economy is dependent on demand instigated by such spending. According to Keynesians, American economy could not show significant growth despite recovery signs mainly because of higher government tax rates and public’s unwillingness to invest (Hughes and Cain 472). Further increase in social security taxes initiated another wave of depression in 1937. Following Keynesian regime, it can be said that through New Deal, Roosevelt government intervened and made significant investments and spending mainly in the era of World War II.
Although government spending make significant part of GNP, however it cannot be considered as a sole factor affecting overall economic progress. Therefore, it can be said that Roosevelt’s measures combined with expenditure in World War II initiated recovery but could not provide long-term stability. Therefore, New Deal entailed reforms that transformed the outlook of otherwise capitalist American economy and made it amalgamate with socialism. High end changes were made in federal responsibility concepts in order to avoid 1929 disaster. Following banking crisis, Roosevelt administration changed the policy structure under which banks used to perform. Restrictions were imposed on banks operations, wiping out small banks that were incapable of staying solvent (Bernanke 17). This measure was taken under Emergency Bank Act 1933 which positively affected health of banking sector. Solvent banks were also given federal funds to backup security for loans provided for investment at Wall Street. Following this policy, Federal Trade Commission was given authority to ensure transparency in stock exchange operations as earlier crisis was also considered a result of frauds committed by major stakeholders. Further policy measures included inflating the value of gold to reciprocate dollars prices also played its role in increasing exports and overall consumption. (Kindleberger n.p)
Another major policy of Roosevelt was creating temporary work programs. Where Hoover was against intervening as a caretaker of public in times of distress, Roosevelt took over that role but initiated work programs that were of little value addition but eliminated the idea of welfare programs where public was receiving money for doing practically nothing for the state. In order to finance these work programs, emergency funds were provided to State government. It is also important to note that most of major recovery was witnessed after 1935 in which New Deal programs were reinforced with full effectiveness (Galbraith 129). After Roosevelt’s re-election, reforms like Social Security Act, Wagner Act and Emergency Relief appropriation emerged that further strengthen the Roosevelt reforms. Along with PWA, other bodies like Civilian Conservations Corps, Work Progress Administration gave genuine public jobs as a result of which general infrastructure were built that had real value addition instead of sheer relief. However, these measures had little impact on private sector but reduced unemployment by 20 percent (Hughes and Cain 464). Social security Act further provided job security to aged work class and shaped policies like Medicare and Medicaid.
For further industrial development, National Industrial Recovery Act (NIRA) was introduced that was intended to eliminate needless practices threatening industrial development by unnecessary competition. This act was regulated by National Recovery Administration (NRA) (McElvaine 152). Although this act was abolished in 1935 as most of the powers were given to Congress which curtailed free economy movement. However through this act, various practices were identified that hampered industrial progress. As a result, two major bodies namely National Labor Board and Public Works Administration were made on the basis of lessons learnt by NIRA. Attempts like Wagner Act, NLRA, and formation of Congress of Industrial Organization gave concrete shape to unionization and labor laws. Other than labor law, Fair Labor Standard Act also preserved labor rights such as minimum wage, overtime, working hours (Bernanke 20).
Roosevelt managed to pay significant attention to agricultural sector along with other functions of economy. With introduction of Agricultural Adjustment Act (AAA), major relief funding and low-interest loans were given to farmers for controlling market supply. Farmers managed to receive funds on storing crops whereas government also performed buying and instigate temporary shortage to raise prices for the sake of restoring price parity indices. Furthermore, Federal Land Banks gave loans to farmers and their families against the property kept as security. After drought in 1934, the need for government aid increased further. Building of dams, restricting food supply and income support were some of the significant measures followed to support agricultural sector (McElvaine n.p; Marrin 32).
Wall Street crisis 1929 mainly affected money market as too mush autonomy was given to private banks and security institutions. Further investigations revealed that major banks, their management and stakeholders were also responsible for crash of Wall Street. First measure taken by Roosevelt’s administration was to take away the control from banks and private investors and make government the regulator of federal money system which acted as the cornerstone of Roosevelt’s reforms. Money and capital markets were brought under control of SEC along with other public utility institutions (Shachtman 138). The main purpose was to mitigate the extraordinary role of speculation on market behavior. Hence, pure policy model was given dominance over hearsay which later on affected overall economic performance. Despite their effectiveness, these policies were heavily criticized by Roosevelt’s competitors as government employment schemes made general wage rate high for other employers to follow and despite other efforts, farmers produced more than what was required (Woolf n.p).
Critical analysis reveals that Wall Street crisis indicated the downturns associated with speculation and bullish stock market trend. Furthermore, it indicated the faulty banking system practices which further lead to a devastating situation in 1929. In almost a decade of Roosevelt’s era, American economy sustained development and showed signs of recovery however major growth began after World War II in the reconstruction phase. There were striking differences between Hoover’s and Roosevelt’s policies. State intervention shaped many laws and regulations that further transformed industrial structure in coming years. Better remuneration packages, suitable scrutiny of banking system, agricultural controls, industrial development and investment in private sector were some of the salient features of New Deal and its aftermath. However, one of the major lessons learnt were that financial institutions and their performance along with policies are required to be kept under suitable check and balance mechanism so that deviation from the standards could be identified on timely basis. Furthermore, where cyclic behavior of the economy is inevitable, government should introduce reforms before time that could mitigate the effects of recession.
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