The Great Depression, which lasted from 1929 to 1939, was the longest and most severe economic downturn in the history of the United States and the modern industrial economy. This catastrophic economic event sparked fundamental changes in economic institutions, macroeconomic policy, and economic theory. While the stock market crash of 1929 marked the beginning of the crisis, it was not the sole cause. Many other factors, including ill-timed tariffs and misguided moves by the young Federal Reserve, combined to create the Great Depression.
Between 1922 and 1929, the gross national product experienced an average annual growth rate of 4.2%, and the unemployment rate dropped from 6.7% to 3.2%. Total wealth in the US more than doubled, leading to a period of exorbitant economic growth known as "the Roaring Twenties." During this time, individuals, including the wealthiest, heavily invested in the stock market. Companies responded to the high demand by over-producing, and consumers spent beyond their means. Financial institutions also became heavily involved in stock market speculation.
Unfortunately, many investors were not making informed choices based on research or fundamentals; they were simply gambling, hoping that stock prices would continue to rise. Additionally, many people bought shares on margin, only needing 10% of a stock's price to make a purchase. This inflated prices, as shares were selling for more money than justified by their companies' actual earnings. The stock market kept climbing until it abruptly collapsed on Thursday, October 24, 1929, a day known as "Black Thursday." The market opened 11% lower than the previous day, and despite a brief rally, prices fell again the following Monday. Numerous investors were unable to meet their margin calls, leading to wholesale panic and increased selling. From 1929 to July 1932, the market lost more than 85% of its value.
During the early to mid-1920s, the Federal Reserve contributed to the rapid expansion by keeping interest rates low. However, after the crash, the Federal Reserve took the opposite approach of what economists would advise today. Instead of lowering interest rates, they raised them, doubling them in 1931 from their pre-crash levels. This measure was intended to discourage lending and borrowing, but it fuelled speculation, causing the market to bubble and eventually burst. The mass production of goods fuelled the consumption boom of the 1920s, but it eventually led to overproduction. Even before the crash, companies had to sell goods at a loss. The agricultural sector faced a similar crisis. Farmers had bought more machinery during World War I to boost production, but this costly move put them in debt. In the post-war economy, they ended up producing far more than consumers needed, resulting in a drop in prices for both agricultural and industrial products. This decimated profits and further strained already over-extended enterprises.
As a result of the economic recession, consumers stopped spending, leading companies to reduce production. Layoffs became common as companies struggled with reduced output, which ultimately raised the unemployment rate. During the peak of the Great Depression, unemployment reached its highest point at 24.9%, with 12.8 million Americans out of work.
In 1930, the Smoot-Hawley Tariff Act was implemented to boost farm incomes by reducing foreign competition in agricultural products. However, multiple countries retaliated by imposing tariffs on US goods, resulting in a trade meltdown. In the following two years, US imports fell by 40%. Although it originated in the United States, the Great Depression caused drastic declines in output, severe unemployment, and acute deflation in almost every country around the world.
The worst economic depression ever experienced by the global economy was the result of a multitude of causes. The gold standard, which linked almost all countries in a network of fixed currencies and exchange rates, played a crucial role in transmitting the American downturn to other nations. Great Britain struggled with low growth and recession throughout most of the second half of the 1920s. France also faced a relatively short downturn in the early 1930s, although its recovery in 1932 and 1933 was short-lived. Germany's economy initially slipped into a downturn in early 1929, stabilized, but then turned down again in the third quarter of 192. The decline in German industrial production was roughly equal to that of the United States. While some less-developed countries experienced severe depressions, others, such as Argentina and Brazil, experienced comparatively milder downturns.
The road to recovery in the United States began in the spring of 1933 when Franklin D. Roosevelt, the newly elected president, introduced a project called "the New Deal." The New Deal went beyond efforts to stabilize the economy and provide relief to jobless Americans. It created previously unheard-of safety net programs, regulated the private sector, and reshaped the role of government. Many of these programs have become integral parts of American society. Although the economic depression persisted throughout the New Deal era, the darkest hours of despair seemed to have passed.
The most devastating impact of the Great Depression was the immense human suffering it caused. However, the way this decade is remembered varies in different parts of the world. In the United States, the 1930s are indelibly etched as the age of the Great Depression.
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