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Great Depression

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Cause, Events and Effects of the Great Depression

The Great Depression is often considered as the most devastating single economic event. It has caused an incredible downturn of countries in just a few months which lead to unemployment and poverty never seen before in developed countries. Although USA has taken the greatest hit in this economic event, countries in Latin America, Asia and especially Europe also experienced economic problems during the Great Depression.

The experiences during the Great Depression have become one big lesson for economists and financial analysts worldwide. The events that followed before and after initial activities during the Great Depression have become guides for everyone so that the 2nd Great Depression is prevented.

Known Causes of the Great Depression

There is no singular act or person that caused the Great Depression. Most experts consider the gradual movement in stock market as well as rapid reaction of consumers and investors as the main causes. But in order for the stock market to reach its status before the Great Depression certain factors were in place:

  • Increased Reliability on Stock Market – while the stock market is regarded as a good way to earn a living, many people before the crash believed that it’s the best way to become rich. The result of this belief is increased interest in the stock market that drove shares higher than expected.
  • Debt Deflation – access to debt has never been easier before the Great Depression. Lenders and banks are very open to their clients who wanted to gain loans for different purposes. Because of stiff competition, some lenders are willing to offer loans for those who can show 10% of the said loan.
  • Depleting Demands for Products and Services – while the years before the Great Depression is considered a period of economic prosperity, people are still hesitant to spend. The idea of “economic prosperity” is not exactly the current notion wherein the government experiences surplus in budget and economic stability. USA still experienced minor recessions during the 20s (1924 and 1927) which contributed to the hesitation to spend and just focus on investment.

These factors all point out to single event that started the downward spiral of the US economy in 1929. On October 24, 1929 investors started to panic as the price of shares reached a point that future earnings will be considered absurd. Everyone stared to sell their shares which naturally affected the prices. By October 29, 1929 the stock market crashed and that day is forever remembered as the “Black Tuesday”.

During the time of the increased prices of stock shares, the Federal Reserve started to enforce higher interest rate. By increasing the interest rate, the Federal Reserve hoped that they can limit the increase of stock market shares which is already at a very rapid rate. Unfortunately, this created a side effect on industries that rely on interest rate for their success.

After the stock market crashed, the panic is not only on Wall Street as people started selling their shares. Very few people were able to sell their stocks but it was too late as the prices per share dwindled. Aside from panic in Wall Street, depositors also panicked because banks and other financial entities were also heavily invested on Wall Street as well. The result is massive bank runs which liquidated banks around the country. The US economy collapse in less than one year.

As already indicated, the increase in interest rate limited the capability of some companies. Among the industries affected were construction and automobiles. With an increased interest rate, they cannot easily purchase the raw materials they need. The result is limited production which also limited employment. Combine this problem with the crash in Wall Street, the country’s economy naturally went downhill.

Worldwide Effects of the Great Depression

  • United States - The economic effect of the Great Depression lasted for more than five years from 1929. Unemployment reached 25% in 1933 and more than 5,000 banks were closed because of bank runs. Aside from the numbers on unemployment and closed banks, the agriculture industry in the country has been hit hard. There’s no shortage of natural supply such as water and land but the agriculture industry went through the Great Depression as if it is experiencing long term drought.
  • United Kingdom - The towns and cities with economy based on large industries and heavy machinery were hit hard during recession. More than 20% of the workforce is unemployed and some cities even recorded 30% of their workforce were laid off and cannot land a job. The value of export also dropped to half of its original price because of the declining demand.
  • Japan - Asia was not greatly affected by the Great Depression although Japan experienced an 8% decline in their economy. However, swift government action has helped the country to get out of the economic slump as early as 1933.

Recovery through New Deal

Recovery from the Great Depression started in 1933 and this was referred as the “New Deal”. President Roosevelt pushed for three “R”s as a way of helping the economy get out of slump. The “R”s means relief, recovery and reform and they are directed to unemployed, the economy and monetary policy, respectively. This plan created a chain of effects that allowed the government to increase monetary supply which also improved the gold inflows. It’s a slow unfolding as it took three years of implementation before the country got out of the Great Depression.

Great Depression Quotes (6)

During the Depression, President Roosevelt decided to devalue the dollar against gold. In order to pull this off, the government had to control the entire gold market, and for a time the government made it illegal to own gold coins. Later on the ability to redeem the notes for gold was restricted to just banks, then to just foreign banks, and then finally to no one.

We are left with a currency that has no real value and can be expanded at will. This has prevented the government from ever having to make hard choices about spending and taxes, and has set us on a path that will eventually destroy the remaining value of the dollar.

— Peter Schiff; How an Economy Grows and Why It Crashes

If you use the stock market as a measurement, the last depression lasted twenty-five years. In September 1929, the Dow hit an all time high of 381. By July 8, 1932, the market had lost a staggering 89 percent of its value. On that day, the volume on the New York Stock Exchange contracted to around one million shares traded, and the Dow sunk to a low of 41 points. That low was the bottom of the bear market, and from there the market soared bullishly—even in the middle of a depression. Still, even with a bull market, it took twenty-five years, from 1929 to 1954, for the Dow to pass its high of 381.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

Stepping back and looking at the past seventy-five years, you can make a case that the last depression never ended. Many of today's financial problems stem from issues from the last depression that were never solved. The problems were simply pushed forward onto our generation. For example, Social Security was created in 1933, and the price for that government program will explode, as 75 million baby boomers began retiring in 2008. A solution created to combat the last depression has grown into a mega problem today. Social Security also led to the creation of Medicare and Medicaid, which arc financial problems five times bigger than Social Security. The Federal Housing Administration led to the creation of Fannie Mac and Freddie Mac, and those two agencies arc at the center of today's subprime mess. In other words, stepping back and looking over the past seventy-five years, the last depression never ended; the socialist solutions created to keep it at bay just keep getting more expensive.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

It was, after all, Franklin D. Roosevelt's brilliant "brains trust" advisers whose policies are now increasingly recognized as having prolonged the Great Depression of the 1930s, while claiming credit for ending it. The Great Depression ended only when the Second World War put an end to many New Deal policies.

— Thomas Sowell; Dismantling America

FDR himself said that "Dr. New Deal" had been replaced by "Dr. Win-the-War." But those today who are for big spending like to credit wartime big spending for bringing the Great Depression to an end. They never ask the question as to why previous depressions had always ended on their own, much faster than the one under FDR, and without government intervention or massive government spending.

— Thomas Sowell; Dismantling America

1929: The Great Depression. Following the crisis of the Great Depression, the U.S. government created many government agencies such as the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Administration (FHA), and Social Security; and the government took more control over our financial lives via taxes. This led to an acceptance of increased government intervention via social programs and agencies. Many of these government programs and agencies, such as the FHA, Fannie Mae, and Freddie Mac, are at the eye of today's subprime crisis. Today, unfunded government liabilities such as Social Security and Medicare are estimated to be $50 to $60 trillion time bombs that will eventually blow up and dwarf our current subprime crisis. In other words, government efforts created to solve the Great Depression will probably cause a bigger depression in the future.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich
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