History of the Great Depression

Introduction

The great depression was a period in American history characterized by a catastrophic economic slump that lasted from 1929 to 1939. It was the longest and the most devastating depression ever recorded in American history. It all commenced with the collapse of the New York Stock exchange market in October 1929 (The great depression, Para. 1). This was preceded by a string of collapse of industries, banks, and other business establishments. By late 1932, the stock exchange had lost 80% of the value leading to severe depletion of investment portfolios across the counters. This was particularly devastating for the banks and financial institutions that held stocks in their portfolios. At the close of 1933, 11,000 out of 25,000 banks had been forced into insolvency causing a disaster in the financial market. It was followed by a period of high unemployment and low business activity. The most strained were banks and financial institutions that held stocks in their portfolios.

Americans response to the great depression

In the face of the imminent economic slump, President Hoover introduced a raft of stringent measures to mitigate the growing effects of the economic downturn. His immediate response was to cut the government expenditure and also to increase taxes. As a result of the collapsing economy, this only served to decrease aggregate demand further spelling doom to the economy. When this failed, he introduced stimulus packages to rescue banks and industries, expanded public works, and also aided states’ relief services. Government assistance also came in inform of federal payments a move that would be resisted by president Hoover later who said that too much assistance would compromise individual self-reliance (McElvaine Para. 12). This caused tension between the government and citizens which culminated in a demonstration by 20,000-second world war veterans in Washington DC in 1932 who were agitating for early bonus payment as they had been promised. The government also introduced protectionist policies by blocking imports to the US, a move intended to stimulate the American economy by increasing sales of domestically produced products. They also introduced the Hawley Smoot tariff to discourage imports, a move that dealt a severe blow to the European economies sinking further into depression. This move prompted other nations to raise their tariffs hence impairing international trade which declined by 50% as a result. The choking of international trade drifted the global economy further into recession.

On their part, individual Americans engaged in private giving to the needy which was complemented by a greater part by charitable organizations. These were however overwhelmed by the ever-increasing numbers in need of relief by 1932. Already engulfed in deep economic woes, Americans responded by electing Hoover out of power replacing him with Franklin Roosevelt in 1932. Roosevelt was elected in the hope of reversing the effects of the great depression a task he was later to measure up to through determined economic reforms.

The Great depression witnessed a significant shift in people’s lifestyles as a result of the reduced incomes and the dramatic loss of employment which pushed consumers to reduce their expenditures. So many people adapted to cooking at home rather than eating out as a cost-cutting measure. As a result, many people were spending much of their time indoors as going out became out of reach to many of them.

Roosevelt on coming to power announced a bank holiday closing operations of all banks a measure meant to stop panic-stricken depositors from withdrawing their money from banks. Through his so-called New Deal, he led the passing of emergency legislation that was intended to facilitate faster economic recovery. In the New Deal, several measures were implemented to reduce unemployment, assist business and agriculture, and regulate banking and the stock exchange markets which were virtually dead. In the Deal, huge amounts of public funds were injected into the economy through public works and relief services to increase public spending which would, in turn, boost the aggregate demand of the economy. The radical measures initially bore modest results but bore fruits later. Towards the beginning of the Second World War, the federal government introduced deficit spending a move that brought depression to an ultimate end.

Similarities between the current depression and the great depression

One similar aspect of the two depressions was the dramatic change in people’s lifestyles. The depressed earnings and loss of employment had catastrophic effects on people’s lifestyles. Many people adopted cost-cutting measures as a means of surviving through the harsh economic hardships. Many people were driven to their homesteads where they spent most of their time with their families. In addition, just like during the great depression, it has become economical to cook at home rather than to eat out.

Both depressions witnessed the worst housing crisis of their times leading to sharp declines in the sector. The massive speculation in the poorly regulated housing industry and the under deals that riddled the mortgage industry before the two depressions were partly to blame for dragging the country into depression. The mortgage industries during the two periods were experiencing booms in growth causing excess lending and borrowing in the financial market leading to the subsequent excess liquidity caused by the growing investor appetite for cash. Employees have borne the full wrath of unemployment in both depressions which rose at an alarming rate with increasing numbers filing for unemployment benefits. According to Leonard A. (2008 Para 4), by February 2008 the US Bureau of statistics had reported a 4.8% loss of employment while the Great depression claimed between 25 to 30% of the total workforce.

In both, the government came up with policy interventions to salvage the market from imminent collapse. The government banned short selling in both 2008 and the beginning of the great depression to protect the stock market. Just like with the great depression, the Obama administration introduced stimulus packages to rescue the ailing economy. Tax rebates have also been offered to first-time homeowners amidst the growing threat of foreclosures in the housing industry. Rescue packages were also injected to falling industrial giants like General Motors and Citigroup to avert the resultant loss of jobs.

Differences

During the great depression, the Federal Reserve responded by introducing contractionary monetary policies which were implemented through reduction of money supply and devaluation of the currency in the 1930s. As opposed to that, during the current depression the government has employed expansionary monetary policies and natural market adjustments to bring monetary sanity in the market. This has been made possible by the expansion of the money supply in the market. During the former, the gold standard was in operation whereby the currency in circulation was backed by an equivalent amount of gold. The ultimate effect of its use was a ceiling in the expansion of money supply in the economy which led to the devaluation of the dollar when the gold deposits failed to grow in tandem with the money in circulation. The result was a downward spiral in the price level.

The magnitude of the current recession has not been as high as the great depression. The current recession is much milder when compared to the great depression which claimed one-third of the American banks while many firms closed business. Furthermore, the slump in industrial production and the rise in unemployment rate combined with the fall in GDP are less pronounced as Eichengreen et al (2009 Para 1) point out. The service industry today is much larger than during the great depression which shields the United States from over dependency on the manufacturing sector. Before the great depression, the country was heavily dependent on industrial production which placed a heavy toll on the economy when recession set in (Krugman, Para. 1).

In today’s economy, the government sector is large and plays a pivotal role (in the economy) through the provision of economic security due to its size. This is as opposed to the 1930s when the government was small with minimal effect on the economy. Carrick (Para. 9) observes that the public service provides more job security than the private sector who usually suffers during economic meltdowns. A large government sector influences the country’s economy by providing a platform for implementing monetary policies which in turn stabilize the economy.

Works Cited

Carrick, Alex. Ten Key Differences between the Current Recession and the Great Depression. 2009. Web.

Eichengreen, Barry, O’Rourke, Kevin H. A Tale of Two Depressions. 2009. Web.

Krugman, Paul. The Great Recession versus the Great Depression. 2009. Web.

Leonard, Andrew. The Great Depression: The sequel. 2009. Web.

McElvaine, Robert S. Great Depression in the United States: Initial Response to the Depression. 2009. Web.

The great depression: The basics. 2009. Web.

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