How the 1930 Depression affected the financial and the
econmic?
- Stock Market Crash of 1929
- On October 24, 1929, as nervous investors began selling
overpriced shares in mass, the stock market crash that some had
feared happened at last. A record 12.9 million shares were traded
that day, known as “Black Thursday.”
- Five days later, on October 29 or “Black Tuesday,” some 16
million shares were traded after another wave of panic swept Wall
Street. Millions of shares ended up worthless, and those investors
who had bought stocks “on margin” (with borrowed money) were wiped
out completely.
- As consumer confidence vanished in the wake of the stock market
crash, the downturn in spending and investment led factories and
other businesses to slow down production and begin firing their
workers. For those who were lucky enough to remain employed, wages
fell and buying power decreased.
- Many Americans forced to buy on credit fell into debt, and the
number of foreclosures and repossessions climbed steadily. The
global adherence to the gold standard, which joined countries
around the world in a fixed currency exchange, helped spread
economic woes from the United States throughout the world,
especially Europe.
- Bank Runs and the Hoover Administration:
- Despite assurances from President Herbert Hoover and other
leaders that the crisis would run its course, matters continued to
get worse over the next three years. By 1930, 4 million Americans
looking for work could not find it; that number had risen to 6
million in 1931.
- Meanwhile, the country’s industrial production had dropped by
half. Bread lines, soup kitchens and rising numbers of homeless
people became more and more common in America’s towns and cities.
Farmers couldn’t afford to harvest their crops, and were forced to
leave them rotting in the fields while people elsewhere starved. In
1930, severe droughts in the Southern Plains brought high winds and
dust from Texas to Nebraska, killing people, livestock and crops.
The “Dust Bowl” inspired a mass migration of people from farmland
to cities in search of work.
- In the fall of 1930, the first of four waves of banking panics
began, as large numbers of investors lost confidence in the
solvency of their banks and demanded deposits in cash, forcing
banks to liquidate loans in order to supplement their insufficient
cash reserves on hand.
- Bank runs swept the United States again in the spring and fall
of 1931 and the fall of 1932, and by early 1933 thousands of banks
had closed their doors.
- In the face of this dire situation, Hoover’s administration
tried supporting failing banks and other institutions with
government loans; the idea was that the banks in turn would loan to
businesses, which would be able to hire back their employees.
- Economic impact
- The most devastating impact of the Great Depression was human
suffering. In a short period of time, world output and standards of
living dropped precipitously. As much as one-fourth of the labour
force in industrialized countries was unable to find work in the
early 1930s. While conditions began to improve by the mid-1930s,
total recovery was not accomplished until the end of the
decade.
- The Great Depression and the policy response also changed the
world economy in crucial ways. Most obviously, it hastened, if not
caused, the end of the international gold standard. Although a
system of fixed currency exchange rates was reinstated after World
War II under the Bretton Woods system, the economies of the world
never embraced that system with the conviction and fervour they had
brought to the gold standard. By 1973, fixed exchange rates had
been abandoned in favour of floating rates.
- Both labour unions and the welfare state expanded substantially
during the 1930s. In the United States, union membership more than
doubled between 1930 and 1940. This trend was stimulated by both
the severe unemployment of the 1930s and the passage of the
National Labour Relations (Wagner) Act (1935), which encouraged
collective bargaining. The United States also established
unemployment compensation and old-age and survivors’ insurance
through the Social Security Act (1935), which was passed in
response to the hardships of the 1930s. It is uncertain whether
these changes would have eventually occurred in the United States
without the Great Depression. Many European countries had
experienced significant increases in union membership and had
established government pensions before the 1930s. Both of these
trends, however, accelerated in Europe during the Great
Depression.
- In many countries, government regulation of the economy,
especially of financial markets, increased substantially in the
1930s. The United States, for example, established the Securities
and Exchange Commission (SEC) in 1934 to regulate new stock issues
and stock market trading practices. The Banking Act of 1933 (also
known as the Glass-Steagall Act) established deposit insurance in
the United States and prohibited banks from underwriting or dealing
in securities. Deposit insurance, which did not become common
worldwide until after World War II, effectively eliminated banking
panics as an exacerbating factor in recessions in the United States
after 1933.
- The Great Depression also played a crucial role in the
development of macroeconomic policies intended to temper economic
downturns and upturns. The central role of reduced spending and
monetary contraction in the Depression led British economist John
Maynard Keynes to develop the ideas in his General Theory of
Employment, Interest, and Money (1936). Keynes’s theory suggested
that increases in government spending, tax cuts, and monetary
expansion could be used to counteract depressions. This insight,
combined with a growing consensus that government should try to
stabilize employment, has led to much more activist policy since
the 1930s. Legislatures and central banks throughout the world now
routinely attempt to prevent or moderate recessions. Whether such a
change would have occurred without the Depression is again a
largely unanswerable question.