The Great Depression of 1929: Causes, Impact, and Recovery Strategies
The 1929 Economic Crisis
Origins of the Crisis
The Crisis of 1929 was a universal economic downturn, primarily characterized by a crisis of overproduction. How did this situation develop?
During the First World War, countries not participating in the conflict focused on producing and selling goods to warring nations, thereby creating a fictitious market. They sold their products, increasing their profits, even if payments were sometimes delayed. They even lent money to warring countries to purchase these products and keep their industries running.
The countries at war became heavily indebted to the U.S. Furthermore, their economies were artificially inflated by war production, which was inherently temporary. Consequently, when the First World War ended, Europe began its reconstruction, reconverting its economies and producing its own necessities, thus asserting its independence from the U.S.
The first manifestation of the crisis of overproduction occurred in 1921, leading to business closures. This went largely unnoticed by the broader economy, primarily because the state did not issue warnings. Meanwhile, Europe experienced the ‘Roaring Twenties,’ fueled by economic recovery.
The Stock Market Crash and Global Impact
By 1929, reports indicated that the U.S. economy was stagnating. Producers and investors realized that companies had stopped selling up to 50% of their products, creating a significant gap between the value of companies and the value of the Stock Market.
The Stock Market is a place, often regulated by the state, where companies raise capital by borrowing from private individuals, often through the issuance of shares (stocks). In 1928 and 1929, a massive sale of shares occurred. The stock market had become a speculative business, as people could sell shares for more than they had purchased them. Sometimes, individuals borrowed from banks to buy shares, as the indebtedness was perceived as short-term.
When the true state of the economy became known in 1929, investors rushed to sell their shares. This created a ripple effect worldwide: everyone was selling, but no one was buying, leading to the ruin of shareholders and businesses. The state urged banks to purchase shares to curb the sell-off, but banks lacked sufficient funds to do so.
The United States withdrew its support for Europe’s reconstruction and demanded the repayment of war debts, plunging Europe into a major crisis. Colonies also faced severe crises.
Responses to the Great Depression
The U.S. was the first country to adopt measures to resolve the Great Depression. These measures were influenced by John Maynard Keynes, who developed a theory on a ‘new economy.’ Keynesian economics, unlike the laissez-faire theories of Adam Smith prevalent in the 18th and 19th centuries, proved essential in addressing the Crisis of 1929.
Keynesian Economic Theory
- Keynes proposed that the state should become a primary economic actor within a country. The state is uniquely positioned to enforce rules and regulations.
- It should stimulate economic activity by creating jobs and industries, using taxation to penalize certain behaviors and offering grants and various forms of aid to reward others.
The United States applied Keynes’s theory through the New Deal program. The results were very positive: job growth resumed, prices stabilized, and new businesses were created. However, some aspects of this legislation were later declared unconstitutional by the U.S. Supreme Court as contrary to individual freedom.
In Europe, two main economic proposals emerged to overcome the crisis. The first was centralized planning, adopted in countries like Russia, Italy, Portugal, and Spain, where the state created economic plans with specific goals for a set period. The second approach was seen in Germany, which created a domestic currency for internal use to manage its war debts. The German state became a primary employer, creating jobs and a body of government officials. However, extensive public works and state spending led to a deficit, which was intended to be resolved through higher taxes.
Today, a debate persists: some believe the state should intervene to fix economic problems, even if it means creating a deficit to be resolved by rising taxes. Others argue that lower taxes, rewarding employees, and supporting private enterprise would be the best solution to end economic crises.