HIST 1025 Unit 5: Depression, New Deal, and Global War
According to Lee (1984), the 1929 Wall Street crash led to an implosion of activities on the financial markets. Many countries affected simultaneously all around the world. There were drastic decline in output, unemployment and acute deflation in almost every country of the world. Lee (1984) further explains that the depression was caused by a number of causes among which includes; Declines in consumer products demand, financial panics and misguided government policies and the Gold standard. Decline in spending or aggregate demand was a key to the depression; it led to a decline in production, a trend that was transmitted to the rest of the world largely through the Gold standard (Davis 1997). The 1920s served as an economic boom period in the US with the stock market having prices go up fourfold to the peak in 1929. The Federal Reserve in a bid to arrest the rise in stock prices raised interest rates. These interest rates depressed interest- sensitive spending, which in turn reduced production (Davis 1997). According to Lee (1984), due to Panic share price decrease and investors lose of confidence leading to the Black Thursday. There was a decrease in aggregate demand, sharp fall in consumer purchase and business investment after the crash. Bank Panics contributed greatly where depositors lose confidence in bank solvency simultaneously demanding the deposits in cash form a factor that may have to force banks to liquidate the loans a process which if done hastily can even cause a previously solvent bank to fail. Under the Gold standard countries set currency values in terms of Gold and took monetary actions to defend the fixed price (Boyer 2010). Trade imbalances in the different countries basing on Gold standard and currency value like when the American economy began contracting severely, gold flow from other countries intensified because of the deflation making American goods at the particular time desirable to the outsiders while at the same time the low income cut down on American demand for foreign goods. Financial crises and banking panics occurred in a number of countries besides the US. The widespread banking crises as a result of poor regulation and contagion from country to country and the gold standards forced many countries to deflate along with the US, cut down the value of banks and collateral making them more vulnerable to panics which further on depressed output and prices (Lee 1984). President Hoover hung on to the Gold standard, having balanced budgets and a small Government as described by Boyer (2011) which led to labor market failure giving a direct hand in the depression and made it three times more severe than it was necessary. Thinking it would work out and stimulate the economy he increased government spending, jobs protection, and keep jobs from falling and that through that could prevent a big bust in the economy. Davis (1997) describes that his intervention to farmers, support to subsidies and marketing cartels to farmers meant more money was injected into the programs by the end of which the subsidies only encouraged more production as opposed to higher prices.
Increased spending on public works projects by the Government kept wages and prices high and change of bankruptcy laws favoring debtors and establishing the Reconstruction Finance Corporations and the Home loan Bank was a bid to alleviate the deepening economic crisis (Lee 1984). Hoover’s efforts to protect labor and keep wages high was a recipe for an economic disaster, and ultimately his policies were responsible for turning the recession of into the Great Depression. According to Matsumoto (1993) Franklin Roosevelt was elected to office and had a duty of turning round the economy where he set out initiate short term programs to alleviate immediate suffering of the people. He came up with the new deal, which essentially stood for capitalism and…