The Great Depression
On Tuesday October 27th, 1929, the United States experience the worst crash of the stock market in history. It was so severe, economist called that Tuesday “Black Tuesday” Since many banks also invested in the stock market; the crash caused many banks to close their doors. Many people tried to sell their stocks but no one was buying. Although the Stock Market crashed, many optimists were hopeful that the economy will turn around. John D Rockefeller stated that: “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again” The market did not start to go upward until the early 1930’s.
During the beginning of 1930, the government and business spending have risen while the consumers cut back on their expenditures by 10%. The lack of spending from consumers caused many businesses to lower wages and lay off employees. Unemployment rate increased to 25% which is the highest it has been in US history. Automobile sales also declined to the lowest levels. In 1931, a deflationary spiral started due to the decrease in prices.
Consequently by May 1930, the agriculture was destroyed by a severe drought. The great plains were affected by a drought and a dust storm which created the Dust Bowl. Overgrazing and the effects of the drought caused the grass to disappear, which left only the top soil so the high wind picked up the dirt and whirled it for miles. Since the dust storm destroyed everything, many farmers were left without their crop. All the farmers were affected but small farmers took a huge hit because they were already in debt from the invention of tractors; which cut the need for man power. The small farmers were borrowing money for seed and they had to pay it back when their crops come in. Since the dust storm destroyed their crops, they couldn’t pay back, the bank foreclosed on their small farms; they couldn’t feed themselves and their family so they became homeless.
The great depression caused by the major bank failures, stock market crash, deflation in asset and prices, dramatic drop in demand and credit and disruption of international trade. Nearly two months after the crash of the stock market, stockholders lost over $40 billion. By 1930, there 9,000 banks that closed, at that time there were no insurance so many people ended up losing their savings. The surviving banks could not create new loans due to lack of asset. There were demand-driven theories known as Keynesian economics refer to the breakdown of the international trade and institutional economists, they argued that under-consumption and overinvestment caused an economic bubble. British economist John Maynard Keynes argued in his book General Theory of employment interest in money that “lower aggregate expenditures in the economy contributed to a massive decline in income and to employment that was well below the average. In such a situation, the economy reached equilibrium at low levels of economic activity and high unemployment.” Keynes’ idea was to keep people fully employed and the government would run on deficits when the economy slowed down. On the contrary, the monetarist believed that the depression started a normal recession but as a result of the significant policy mistakes by monetary authorities caused the money supply to shrink which led the recession to the great depression
Many economists believed that the sudden decline in international trade caused the economy to worsen. They also blamed the Smoot-Hawley Tarrif Act (an act enacted in June 1930 that increased U.S. tariffs on 20,000 imported goods) for worsening the depression as result of a decline in international trade. Although international trade was only a small part of the economy, it still impacted some businesses such as farmers. American exports decreases and prices also fell, the most impacted farm commodities…