US Economic Transformation: Prosperity, Depression, and Policy
U.S. Economic Expansion and the Roaring Twenties
The U.S. expansion was based on a profound transformation of production dominated by technical innovation. This led to decreased costs, increased production, and higher profits. It was at this time that the use of the telephone, automobile, and household appliances became popularized. Since these devices were expensive, the concept of installment sales was first applied. This created a wave of consumerism, as people could buy products without needing cash immediately. However, the increased use and popularization of installment sales led consumers to buy so much that they fell into debt.
The dissemination of radio as a mass medium was also popular, as it was affordable and accessible to the entire population. During these years, the Ford factory innovated with the use of the assembly line, which reduced costs and time. This means of production was applied to other sectors (steel, glass, etc.). Technical innovation also had a positive impact on the demand for the construction of skyscrapers. All this greatly influenced the labor market, leaving the jobless rate in the U.S. at 13 million. There had been no rate so low to date. These years were the best for American society, which experienced great prosperity and optimism for the future.
The Great Depression and Black Thursday
The Great Depression was a global economic crisis that began in October 1929 and lasted throughout the 1930s, being particularly intense until 1934. This very serious incident began in America after a decade of economic growth fueled by increasing debt and stock speculation, which promised quick and easy profits.
The first clear symptom, or trigger, of the Depression occurred on October 24, 1929 (Black Thursday), with the collapse of the New York Stock Exchange and the dizzying loss of value of shares listed there, although the contraction of the economy had begun in the first half of 1929. The collapse of the stock price was unusually heavy, reaching dramatic levels. A large number of investors saw their money, in many cases taken on credit, evaporate in a matter of days. The stock market crash triggered a chain reaction in the financial system, causing many banks to face problems with solvency and liquidity, which accentuated distrust in their ability to repay depositors. The crisis resulted from a false prosperity where stock gains were extremely fast but lacked a real basis.
Keynesian Economics and Fiscal Policy
Keynesian Economics, or Keynesianism, is an economic theory based on the ideas of John Maynard Keynes, as summarized in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s. Keynesian economics focuses on analyzing the causes and consequences of changes in aggregate demand and its relationship to the level of employment and income.[1]
Keynes’s ultimate interest was to provide national or international institutions with the power to control the economy in times of recession or crisis. This control is exercised through state budget spending, a policy known as fiscal policy. The economic justification for doing so is largely based on the multiplier effect that occurs following an increase in aggregate demand.
The New Deal: Roosevelt’s Interventionist Policy
The New Deal is the name given by U.S. President Franklin D. Roosevelt to his interventionist policy launched to combat the effects of the Great Depression in the United States. This program was developed between 1933 and 1938, aiming to support the poorest population, reform financial markets, and revitalize a U.S. economy wounded by the 1929 crash, unemployment, and chain bankruptcies.
There are commonly considered to be two New Deals:
- The First New Deal (1933): Marked particularly by Roosevelt’s “Hundred Days,” this phase aimed at short-term improvement. It included reform laws for banks, emergency social assistance programs, and outreach programs for work and agriculture.
- The Second New Deal: This phase was much more expensive than the first and increased the deficit. Moreover, despite programs like the Public Works Administration, unemployment still reached 11 million in the U.S. by 1938.
Numerous New Deal programs are still active today, including some that have retained their original names, such as the Federal Deposit Insurance Corporation (FDIC) and the Federal Housing Administration (FHA).