History of the American Economy

By the early 1920s, the American economy was one of the largest and most developed economies in the world. The ratio of the US products in the global production was constantly increasing. The position of the United States on the international arena significantly strengthened after the World War I, in particular, due to the enormous profits from the supply of weapons and ammunition to the European continent. The industrial production was growing rapidly, and the export rate increased. The 1920s entered the American history as the “Decade of Prosperity,” and the 1929^th became the highest point of the American economic success. At that time, nothing could inform the economists about the possible crisis. However, the collapse that emerged in October 1929 was the most serious one in the economic history of the world in the XX century. It was a global crisis, which both capitalist and colonial countries faced, and the center of it was located in the United States (Smiley). The investigation of the world economic crisis of the 1920-30s helps to explore the causes of economic collapses more profoundly in general; it concerns the modern period as well. The analysis of the Great Depression allows conducting a more detailed study of the economic development and the condition of the economy of the United States of that time. Currently, there is no consensus on what was the main cause of the crisis. The paper investigates the most important factors that impacted on the occurrence of the Great Depression and the reasons why it lasted for such a long time.

 

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The Reasons and the Consequences of the Great Depression

The so-called “Black Thursday” of October 24 and the “Black Tuesday” of October 29, 1929, had marked the beginning of the economic crisis. They had pushed the New York Stock Exchange to a rapid financial collapse, which the general economic downturn reinforced very soon. The following figures express the most important indicators of the given economic collapse. First, the overall decline in production over the four years was 30%. In certain sectors, the recession was much more serious, for example, in construction, it reached 72% while in the coal mining industry, the recession rate achieved the level of 42%. The steel production industry demonstrated 400% decline. The national income decreased by more than two times. The unemployment rate in the country increased by eight times while partial unemployment was much higher, and according to the American Federation of Labor, in 1932, only 10% of workers were fully employed. During these years, 130 thousand cases of commercial bankruptcy occurred; 5760 banks, which constituted 20% of their total number in the United States, were closed. From 1929 to 1932, the volume of investments decreased from 16.2 to 0.8 billion dollars (Smiley). Such a tremendous crisis has not occurred in the economy of United States ever before.

The American scientists support the concept of the multiplicity of the causes of the crisis. It is important to review some of them. One of the reasons for the crisis was the mismanagement of the circulation of money by the Ministry of Finance. It led to the decrease in the stock of gold, on which the whole economic system held. The inability of the state to handle the widespread collapse of banks has caused mass panic (Eichengreen). Due to this fact, the buyers did not trust in the economic system anymore, and it reduced the ratio of sales.

Experts claim that the US Federal Reserve System was guilty of the crisis that affected the confidence of the United States nation. The system did not help the banks and launched a wave of bankruptcy cases. In their opinion, the reason for the contraction of money supply was not the liquidity trap but the inefficient management. The measures aimed at expanding the credits given to banks were similar to those taken in 1932; they could be adopted earlier, in 1930 or 1931 (Eichengreen).

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There also exists the explanation of the reasons for the crisis and the financial difficulties of Europe, which had direct impact on the American economy in the 1920s. After the First World War, the Western European countries including the winners of the war found themselves in debt to the United States. The Western European countries that won the war hoped to return a significant part of the debts with the help of reparations, which they had to receive from Germany. However, Germany was proved to be incapable of making payments. The United States refused to reduce the debt level. Instead, the American banks provided the new higher loans to the European countries, which the latter had to use to return the former debts. This financial strategy of the United States of America did not work mainly because of the deepening crisis trends in the industry and agriculture of the Western European countries. The possibility of settling the debts did not increase but even contracted (Eichengreen). The American economy has become largely dependent on the European one, and the sharp recess of the crisis in Europe at the end of the 1920s caused the appearance of the American economic crisis (Temin).

The US government has made a couple of serious mistakes that led to the economic crisis of October 1929, and these mistakes had huge impact on the American economy of that time. The policy of the Republican presidents was liberal-conservative; low taxes, minimal regulation of the economy, and the weakening of the anti-monopolistic actions characterized it (Smiley). For a decade, the federal authorities have been clearing the space for the free play of the market forces. Due to this fact, the problems in the country economy constantly accumulated: the traditional industry experienced decay while the agriculture, energy production, and coal mining were in the state of recession.

Nowadays, most of the economists state that the main mistake of the Hoover’s government was long-term deterrence of the Federal Reserve from expanding the monetary supply while the banking panic and billions of lost deposits led to the further contraction of the supply of money. The Federal Reserve inaction transformed the initial decline in economy into prolonged depression. It is necessary to state that even the perfect mechanism of the capitalist system is capable of showing failures, which one can not foresee and fully explain. The discussion of the exact causes of the Great Depression has lasted for 70 years and, apparently, will continue in future.

The Factors that Caused the Great Depression to Last for a Long Period of Time

At the beginning of the Great Depression period and in the next three years, the president of the country was the representative of the Republican Party Herbert Hoover who took the position in March 1929. The core of the government steps was Hoover’s illusory faith in the unlimited power of the liberal economic model and ability of the market to regulate itself. The American government, which followed the doctrine of non-interference of the state in the affairs of the market at first, believed that everything would come to order by itself in about two months (Smiley). Due to this fact, the economic measures that President Hoover took to overcome the situation demonstrated their weakness.

Initially, the government used the old methods of overcoming the crisis, for example, the strengthening of the policy of trade protectionism, which imposed high taxes on imported goods. However, in the end, these methods turned out to be unsuccessful, and from the end of the 1931^st, the government started to apply a series of more active and direct actions to save the large banks, industrial and trade corporations, transportation companies, and large farms through public lending (Smiley). Hoover put great efforts to reduce the number of bankruptcy cases. He agreed to change the legislation and allowed insolvent companies to exist as long as possible. It actually violated the rights of creditors. There took place certain revision of the government views of the nature of the crisis and, most importantly, the role of the government in the system of economic relations.

Conclusion

There is no doubt that the collapse of the stock market in October 1929 was one of the most significant events that caused the crisis in the economy. Although at that time, most politicians, economists, and experts considered the collapse of the stock market an isolated event, nowadays, most historians claim that it was the main turning point, which marked the start of the world economy recession. Concerning the reasons for the biggest and longest economic crisis of the XX century, some of the researchers state that the situation took place due to the US Federal Reserve System while other scientists consider it a result of the crisis in Europe. The crisis of 1929-1933 has remained almost uncontrolled for four years since the Republican Party of the United States followed the capitalist beliefs and hoped that the problem would resolve by itself. The Great Depression did not only cause the stagnation of the American economy but also gave a lesson of how the future generations should overcome similar problems.