The Great Depression
The Great Depression was caused by not just one event, but by a combination of factors that led to the Great Depression. These included the stock market crash of 1929, the failures of nine thousand banks, drought conditions in the Mississippi valley, also known as the Great Dust Bowl, in 1930 and American economic policies with Europe, including the Smoot-Hawley Tariff in 1930, which reduces trade with Europe and contributed to an overall reduction in purchasing of durable goods. The stock market crash of 1929 was the event that sparked everything off. On September 3, 1929, the Dow Jones Industrial Average reached a high of 381.2, a record high at the time.
At the end of the market day on Thursday, October 24, the market was at 299. 5, this was a twenty one percent drop in just under two months.
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In November of the same year, the Dow Jones Industrial Average was at 199. By the time 1932 was over, the market had lost over ninety percent of its value. Banks, at the time, were also largely unregulated and often loaned out more money than they had on hand. Brokerage firms would lend out none dollars for every dollar, their investors had deposited. This was called buying on a margin. When the market failed, these loans were called in and the investors had no way to pay.
This was worsened when many loans could not be collected on and depositors demanded their money back. There was no such thing as the FDIC back then, and the banks depositors lost their entire savings when a bank failed. The dollar was also decreasing in value while the debit people had stayed the same. This caused banks to decrease lending, which in turn, disrupted businesses, causing job losses as these businesses failed as well. It was a vicious cycle made worse by runs on the banks. Bank runs are when people rush to withdraw their money from banks for fear of losing it if the bank was in financial trouble.
When people were unemployed and fearful of the banks, they tried to withdraw money that simply was not there. The Decline in the Supply of Money As we have discussed, a chain of events led to the great depression one of those was a decline in the money supply. The table below will help understand better the status of the money supply before and after the great depression years. (Watkins, 2013) M1= The sum of currency in circulation and the level of demand deposits M2- The sum of M1 plus time deposits. Political Debate During the Great Depression, the political parties had some heated debates between each other to try and solve the crisis.
Essentially the debates among parties during the great depression are not unlike the fiscal debates that have gone on since the parties’ inception. Fiscally conservative and liberal parties both have good points and have both been proven successful in the past. The problem is that both theories have also shown examples of failure. FDR originally took a fiscally conservative approach during the recession but soon adopted a new strategy. In April 1938 he took advice from Harry Hopkins and other advisers who believed that government spending on relief and public works would revive the economy, even if it produced larger deficits.
The idea was that the depression was the product of under-consumption and that giving consumers more money (“priming the pump”) would stimulate consumer spending and fix the economy’s recession. FDR asked Congress for a $5 billion relief program, which passed in the spring and summer of 1938. But it didn’t really have an effect because although this was an aggressive approach to the recession, it was still too conservative. The amount of $5 billion was too little to provide the necessary stimulus.