America’s “Great Depression” began with the dramatic crash of the stock market when sixteen million shares of the stock were quickly sold by panicking investors who had lost faith in the American economy (Roma, 1992). At the height of the Depression, nearly twenty-five percent of the Nation’s total workforce were unemployed (Romer, 1992). There were radical reductions in salaries and wages for those who were lucky to keep their jobs. It has been known to be the worst economic tragedy the USA has ever experienced.
After the stock market crash in 1929, government revenues fell because of the drop in economic activity. A drop in the economic activities resulting from increased government taxes led to large budgetary shortages or even worse scenarios. Although the initial trigger event may not have been a result of government action, many have argued that incorrect government policies turned the stock market crash from a momentary crisis into a decade-long depression (Romer, 1992).
The stringent monetary policies by the Federal Reserve are one of the two policies formulated by the government to deal with the situation. It imposed limitations on how money was to be released to the economy. Recourse protectionism measures were the second policy that increased import duty on imports to protect local producers from foreign competition (Fisher, 1933).
The issues leading to the Great Depression originated directly from the USA economic structure: Unequal allocation of resources and wealth. Despite an overall increase in wages, there was an unequal distribution of income. The one percent of the population at the very top of the pyramid had incomes 650 percent greater than those eleven percent Americans at the bottom of the pyramid (Romer, 1992). The extreme retention of wealth by a few people in the economy meant that continued economic development relied on high luxury spending and investment of the rich people.
Nevertheless, both these, the high investing and the luxurious spending of the period were vulnerable to economic instability. People who spent on necessities like clothing, food, and shelter were more stable than them. Therefore when the market crashed and the economy tumbled, both big spending as well big investments collapsed as well.
Secondly, there was the unequal distribution of corporate power. From the late 1870s, there had been an ongoing movement of business consolidations and mergers in the United States (Romer, 1992). During WW I, many emerging business opponents amalgamated into huge multinational corporations and therefore removed competition in major American businesses. In 1929, two hundred of the biggest corporations controlled fifty percent of the nation’s corporate wealth (Roma, 1992). The concentration of corporate power in the hands of a few businessmen led to the fact that the entire economy would suffer if only a few companies crashed after the depression.
Moreover, the banking industry was badly affected. In the 1920s, banks were opening at the rate of 4-5 five per day (Fisher, 1933), but without any federal restrictions to determine how much start-up capital a bank needed or it could lend. Consequently, many banks were bankrupt and during the time between 1922 and 1930, banks closed at the rate of 2 each day. Yet, until the stock market crash of 1929, the nation’s seemingly inevitable prosperity helped conceal the potentially fatal flaws in the American banking system (Fisher, 1933).
By the time Roosevelt came to office, 5,000 banks had failed and 47 of the 48 states had declared “banking holidays”, stopping some or all of banking activity (Fisher, 1933). Many expected Roosevelt to take all the banks into the public sector. Instead, he also declared a “public bank holiday” following in the steps of the states. This was to allow inspectors to identify solvent banks that would be allowed to reopen and operate. After 10 days, most of the banks became operational after only a few were reviewed. In addition, the American public entrusted their money to the banks after they were reopened and this made them solvent again.
Another issue was an imbalance in foreign payments. The First World War turned the USA from a nation with debts to a nation with creditors. After WW I both the defeated and the victorious countries were indebted to the US more than it was indebted to other nations. The US administration at that time demanded payment in gold billions but this was not possible since gold was in limited supply after the war. This meant that the countries paid their debts to the US in form of goods and services. Therefore by the end of the 1920s, the US had control over the world’s supply of gold and other goods (Fisher, 1933). However, the increase in tariffs limited the entry of foreign goods into the US as well as debilitated foreign countries from buying goods from America. This was famously referred to as protectionism. One of Roosevelt’s major actions was the stoppage of using gold as a standard of exchange as he entered the presidency.
Lastly, the limited state of economic intellect motivated the great depression to worse conditions. Nevertheless, Roosevelt was aware of his shortcomings as a man of ideas and, so he worked closely with qualified intellectuals and businessmen when addressing this matter. New Deal programs that he formulated were aimed at encouraging demand, creating jobs, and providing relief to the poor people coupled with raised government spending and the sought to stimulate demand and provide work and the establishment of financial reforms. Eventually, we can assert that the actions the administration of Roosevelt took to rescue the US out of the Great Depression in the New Deal were preliminary steps distinguished addressing the immediate problems of joblessness and later wrapped up by reforms.
Reference
- Fisher, Irving (1933). “The Debt-Deflation Theory of Great Depressions”. Econometrica 1: 337–357.
- Romer, C.D. (1992)”What Ended the Great Depression”, Journal of Economic History, vol 52, num 4, pages 757-784