The Great Depression: Causes, Impacts, and Recovery
The Great Depression: An Overview
The Crisis of 1929
The 1929 crisis, often considered the starting point of the Great Depression, was initially perceived as a short-term financial crisis stemming from overvalued securities. This led to widespread issues in financial institutions, impacting the productive economy in the U.S. and other capitalist nations. Some believe that corrective measures like lowering the price of money and expanding the monetary supply could have mitigated the crisis.
However, others argue that the stock market crash reflected underlying economic weaknesses, such as declining consumption and investment levels, both domestically and internationally. These factors led to American capital returning to the U.S. and entering the stock market.
Long-Term Factors
Recent analyses emphasize long-term factors contributing to the crisis:
- Economic extensions from the late 19th century.
- Monetary instability from World War I, including reparations and the gold standard.
- The U.S.’s management of its wartime profits.
These factors converged with three distinct stresses by the end of 1929:
1. Agricultural and Industrialized Countries
Falling agricultural prices contrasted with stable industrial product prices, forcing agricultural exporting countries to over-export and borrow to finance imports.
2. Europe and the U.S.
Three factors strained the relationship between European and U.S. economies:
- Higher productivity growth in the U.S.
- The U.S.’s creditor position.
- U.S. protectionism, making it difficult for European countries to export, leading them to increase their own production or seek alternative markets.
3. Imbalances within the U.S.
The U.S.’s growth primarily benefited technology, capital equipment, and consumer durables industries. Capital gains outpaced real wages, affecting consumption and investment levels. Corporate profits were increasingly directed towards less productive investments and the stock market.
The Depression’s Spread and Impact
The reduced money supply, resulting from increased interest rates, led to business failures and bank collapses. This triggered massive deposit withdrawals, further reducing the money supply and causing price drops. This, in turn, affected farmers, businesses, and wages, leading to increased unemployment.
The crisis spread to other capitalist economies through:
- Declining international trade, as the U.S. represented 25% of global trade.
- The collapse of foreign capital markets and the withdrawal of U.S. investments abroad.
Open economies with close ties to the U.S. were most affected. Until 1932, there was little response, as it was believed the situation would self-correct.
Recovery Efforts: The New Deal
With Franklin D. Roosevelt’s presidency, the U.S. government’s approach to economic activity changed, reflecting Keynesian solutions. The New Deal included:
- Measures to restore confidence in the financial system, including lowering the price of money.
- Domestic price recovery through public subsidies and wage policies.
- Expansive policies to correct past imbalances and boost consumption through real wage increases.
- Direct state intervention in the economy to address economic inequality, including investments in productive activity.
- A comprehensive social program.
While the New Deal achieved some economic recovery, unemployment remained high in 1939, with signs of a recession emerging.
European Recovery and Germany’s Unique Path
European recovery measures mirrored the U.S. approach, except in Germany. There, the crisis led to the Nazi Party’s rise, promising an alternative path to recovery. Their program focused on increased public spending, initially on infrastructure and later on military spending.