The Great Depression was presented by a huge slump in the United States of America and few other parts of the world that started in 1929 and was around until 1939. It was probably the most severe depression America had ever seen.
The depression period started with a collapse of the New York Stock Exchange in October 1929. For the next three months, stock prices kept on falling in the United States and by 1932 the prices were just about twenty percent of their value in 1929. Besides ruining many thousands of individual investors, this precipitous decline in the value of assets greatly strained banks and other financial institutions, particularly those holding stocks in their portfolios. This way most of banks were eventually forced into insolvency, eleven thousand of twenty five thousand banks in the US had failed. The failure of all those banks together with loss of confidence in economy resulted in reduction in spending and production demand, thus aggravating the downward span. The output rates dropped and unemployment rate rose, by 1932, U.S.manufacturing output had fallen to 54 percent of its 1929 level, and unemployment had risen to between 12 and 15 million workers, or 25-30 percent of the work force.
The Great Depression initially started in the United States of America but rapidly moved to Europe, since the two had close economic relations. After the World War I, America came out as a major creditor and financier of postwar Europe. Meanwhile, European countries’ economies were very weak because of war and many of them were much in debt. Those countries, that had a largest debt to United States, were struck by depression the most, such as Great Britain and Germany. In Germany, unemployment rose sharply beginning in late 1929, and by early 1932 it had reached 6 million workers, or 25 percent of the work force. Great Britain was less severely affected, but its industrial and export sectors remained seriously depressed until World War II. Many other countries had been affected by the slump by 1931.
Most of the nations, affected by the depression were raising and imposing new tariffs and establishing quotas on foreign imports. All these measures resulted in the overall reduction of international trade: by 1932 the total value of world trade had fallen by more than half as country after country took measures against the importation of foreign goods.
The Great Depression had a strong reflection in the political scene. In America, economic slump caused the election of the Democrat Franklin D. Roosevelt to the presidency in late 1932. Franklin Roosevelt came to power and brought series of big changes in the whole structure of the United States economy. He used the increased government control and promoted public works to help the economy to recover. Nevertheless, the economy depression continued, not as strong as before – around fifteen percent of the labor force was still unemployed in 1939. The depression ended completely soon after the United States’ entry into World War II in 1941. In Europe, the Great Depression strengthened extremist forces and lowered the prestige of liberal democracy. In Germany, economic distress directly contributed to Adolf Hitler’s rise to power in 1933. The Nazis’ public-works projects and their rapid expansion of munitions production ended the Depression there by 1936.
Partly, the Great Depression in the United States was stimulated by major weaknesses and inconsistencies in the United States economy. It has been obscured by the boom psychology and speculative euphoria of the 1920s.
The depression brought those weaknesses to the surface; the incompetence of financial and political institutions became obvious. But it was a good lesson for them, as well. Prior to the Great Depression, the government usually did not take any actions in the period of economic downturn, relying on the natural market forces to correct the situation. However, such a position of government proved unable to work properly during the period of Great Depression. This discovery let United States to establish completely different economic structure. After the Great Depression, government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services, or deficit spending, came to assume a principal role in ensuring economic stability in most industrial nations with market economies.
In 1920’s America was trying to be the world’s banker, manufacturer and food producer, without consuming any foreign products. This was an attempt to always have a favorable trade balance, which could not the case all the time. The United States maintained high trade barriers so as to protect American business, but if the United States would not buy from our European counterparts, then there was no way for them to buy from the Americans, or even to pay interest on U.S. loans. The weakness of the international economy certainly contributed to the Great Depression. Europe was reliant upon U.S. loans to buy U.S.goods, and the U.S. needed Europe to buy these goods to prosper. By 1929, the 10% of American gross national product went into exports. When the foreign countries became no longer able to buy U.S. goods, U.S.exports fell by 30%, immediately. That $1.5 billion of foreign sales lost between 1929 to 1933, it was 1/8 of all lost American sales in the early years of the depression.
Mass speculation went on throughout the late 1920’s. In 1929 alone, a record volume of 1,124,800,410 shares were traded on the New York Stock Exchange. From early 1928 to September 1929 the Dow Jones Industrial Average rose from 191 to 381. This sort of profit was irresistible to investors. Company earnings became of little interest; as long as stock prices continued to rise huge profits could be made. One of such examples is RCA corporation, whose stock price leapt from 85 to 420 during 1928, even though it had not yet paid a single dividend. Even these returns of over 100% were no measure of the possibility for investors of the time. Through the miracle of buying stocks on margin, one could buy stocks without the money to purchase them. Buying stocks on margin functioned much the same way as buying a car on credit. Using the example of RCA, a Mr. John Doe could buy 1 share of the company by putting up $10 of his own, and borrowing $75 from his broker. If he sold the stock at $420 a year later he would have turned his original investment of just $10 into $341.25 ($420 minus the $75 and 5% interest owed to the broker). That makes a return of over 3400%! Investors’ craze over the proposition of profits like this drove the market to absurdly high levels. By mid 1929 the total of outstanding brokers’ loans was over $7 billion; in the next three months that number have reached $8.5 billion. Interest rates for brokers loans were reaching the sky, going as high as 20% in March 1929. The speculative boom in the stock market was based upon confidence. In the same way, the huge market crashes of 1929 were based on fear.
Prices had been drifting downward since September 3, but generally people where optimistic. Speculators continued to flock to the market. Then, on Monday October 21 prices started to fall quickly. The volume was so great that the ticker fell behind. Investors became fearful. Knowing that prices were falling, but not by how much, they started selling quickly. This caused the collapse to happen faster. Prices stabilized a little on Tuesday and Wednesday, but then on Black Thursday, October 24, everything fell apart again. By this time most major investors had lost confidence in the market. Once enough investors had decided the boom was over, it was over. Partial recovery was achieved on Friday and Saturday when a group of leading bankers stepped in to try to stop the crash. But then on Monday the 28th prices started dropping again. By the end of the day the market had fallen 13%. The next day, Black Tuesday an unprecedented 16.4 million shares changed hands (Baughman, Judith S. American Decades). Stocks fell so much, that at many times during the day no buyers were available at any price.
The stock market crashes and speculation that were taking place were a cause for already unstable American economy to crash. Also the uneven distribution of wealth made the economy in 1920 dependent only on the confidence. But the market drops knocked down the confidence. The result was the start of the Great Depression.