The Great Depression

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The Great Depression

The Great Depression is a term denoting the economic crisis that emerged in the United States and some European countries. The crisis began in 1929 and continued until the end of the 1930s. The term “depression” is mostly used to refer to events solely in the U.S., where virtually entire American nation was particularly strongly affected by a depressive state in addition to the economic decline. The term “global economic crisis” is commonly used for other countries that have experienced the same events (UK, Germany, France, and other European countries to a lesser extent). Large industrial cities had suffered the most from the crisis, but rural areas were also affected.

Crises in world history occur from time to time. However, according to the researchers, the Great Depression is one of the most prolonged crises in the history of the industrialized countries. It is considered that it started with the collapse of the U.S. stock exchange, the so-called Black Thursday, in October 24, 1929, when there was a sudden collapse in stock prices.

Afterward, events took catastrophic proportions in the Black Monday (October 28) and Black Tuesday (October 29). Black Tuesday, October 29, 1929 is the day of the stock market crash on Wall Street. The value of shares on October 29, 1929 has fallen by 90%. It led to a massive ruin of small depositors, which immediately affected the trade and industry. It has no less affected large depositors. In fact, 11 prominent U.S. investors committed suicide by noon of that day (McElvaine 31-32).

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New U.S. President Franklin Roosevelt saw no other way out but a new economic and political course, the main essence of which was to increase state intervention in economic and social life of the country. These measures of a strict state regulation resulted in a return to major economic indicators of pre-crisis level.

However, many modern economists believe that the Roosevelt’s “New Deal” was not as effective as one might think; thus, some researches indicate its failures in the regulation of free competition (allegedly without these errors recession would have ended a few years earlier). In addition, many believe that a new round of U.S. economic growth is not associated with measures taken by Roosevelt but rather with the beginning of the Second World War. In fact, the U.S. economy took the leading position in the world owing to the huge military orders and weakening of major competitors.

Thus, stock market fall is considered as the main reason for the Great Depression. However, there is a question whether there are other causes of the crisis and why it lasted so long. Various researchers suggest diverse reasons.

Restrictive measures, introduced in the U.S. by Smoot-Hawley Act in 1930, are considered another main reason for the Great Depression because they have led to higher prices for imported goods and reduction of consumer demand. Some researchers say that the U.S. government should have taken urgent measures and limited the maximum flow of imported goods so that their own producers could grow and progress. Others, on the contrary, say that high taxes that the government imposed on the import almost strangled industry because enterprises that depend on supplies of imported raw materials went bankrupt. In particular, the clothing industry, which was buying imported fabrics, suffered greatly (McElvaine 40).

Another reason (mentioned above) is the fact that a lot of people were engaged in the so-called stock market game in the 1920s in the United States. Instead of producing goods, a lot of people took loans from banks to buy shares in the hope that when shares would rise in price, it would be possible to capitalize on their further sale. Thus, when stock prices plummeted, many banks have lost their means because they were taken by speculators playing on the stock. In other words, the government did not control the situation in the stock market, and this has led to the collapse.

It is also considered that the U.S. government pursued a policy of concentration of funds, investing very little in the development of the industry, and, therefore, many manufactures collapsed. However, the opposite view is provided by the fact that, on the contrary, the U.S. government released to the market too much free money. Consequently, an abundance of spare cash and the availability of credit, inspired by policies of the Federal Reserve, had led to the formation of so-called “stock market bubble” that sooner or later had to burst, and which burst in 1929.

The term “Roaring Twenties” is certainly known to everyone. One would logically assume that rapid development of industry, the sounds of factories and the use of heavy machinery stand by this term. Nevertheless, 1920s were characterized not so much with a “roaring” of factories as with the development of stock market speculation. The economy was constantly developing; there was a constant merge of large enterprises and absorption of smaller enterprises. However, the shares ran the show; the situation was exacerbated by the fact that shares were purchased in order to resell them and not to really invest in the industry. Stock market game makes one as much passionate as any game, and like any other game of chance it might lead to bankruptcy.

During the First World War, the U.S. invested huge resources into military industry. Each country is potentially afraid of a military threat and prefers to be armed, especially if the war acquires a global coverage. From 38 by 59 independent states at that time were drawn into the First World War. It represents more than 50% of the total amount. Thus, the United States certainly had grounds for arming itself (McElvaine 53).

However, budgetary spending on the military industry, according to historians, was three times higher than budget deliveries. In other words, military industry in some way contrived to spend three times more than it was granted. When, after the war, military spending was cut drastically, military enterprises were on the verge of ruin, and, accordingly, unemployment has occurred. Unemployment, among other things, occurred because of the sharp production automation.

However, not only military enterprises went bankrupt. Approximately the same situation was in other industries, namely coal mining, energy, shipyards and railways. Moreover, 600 banks went bankrupt annually in the United States (McElvaine 58). In addition to this, oddly enough, the number of millionaires grew simultaneously with a steadily incomes falling of those who initially had a little. Thus, there was a concentration of capital in the hands of the propertied minority. If one recalls that gold reserves of the country were limited and did not increase as rapidly as prices did in 1920s in the United States, then it occurs that exactly the concentration of free money in the hands of some people led to lack of money in others. Therefore, the Great Depression lasted so long since big banks wanted to consolidate wealth in the hands of a few.

It is worth looking at the problem from the other end. Rich and poor are relative terms. Yesterday’s poor becomes rich if they successfully play on the stock exchange and receive the money. Thus, funds, which yesterday’s poor received, had floated away from other poor, who lost their job due to the fact that instead of financing the enterprise where they work, all and sundry invests in shares. Moreover, money earned from the sale of shares does not have time to reach enterprise because they are used for buying new shares instead. It is unclear what another poor should do, either continue to grow poor or to invest last money in the purchase of shares.

Thus, this is not the poor or the rich; this is passion for the game. Playing the stock market instead of standing at the machine or grow corn must have been more desirable for some people. The reason is that this is more exciting, and, most importantly, it brings income immediately in case of success, unlike corn planting, which will grow only in a few months. However, not all are lucky and not all will play so it is not surprising that more than a half of the U.S. population lived below the poverty line in 1920s.

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All these reasons have more or less influenced the fact that the Great Depression has nevertheless erupted. It is quite possible that it could have been avoided. However, it is easier to treat any disease if to grab it in the beginning. It is unclear why neither the United States government nor the people in whose hands was focused the capital were unable to soberly assess the situation. The most likely reason is that people in general tend to learn exactly from their mistakes when they are already made and that people tend to hope to the last moment that they “will be lucky today.”