The Great Depression Essay, Research Paper

Avoiding Another Depression: The Most Important Challenge For Any Government

The Great Depression of the 1930’s was a worldwide phenomenon composed of an infinite

number of separate but related events. The Great Depression was a time of poverty and despair caused by

many different events. It is hard to say what caused this worldwide depression because it is all based on

opinion as opposed to factual data. There are many contributing factors but not one specific event can be

pin pointed for starting the depression. It is believed that some events contribute more than others, such as

the Stock Market Crash of 1929. The depression also effected both Canada and the United States and

their people. The countries have made fiscal and monetary policies to ensure another depression does not

occur.

This all began with a stock market crash in October 1929; slowly and steadily deepening over the

next three years until the nation’s economy, social and political systems approached a total collapse.

Resulting in the demoralization of the people. It continued in one form or another for a full decade, not

only in Canada and the United States but also throughout much of the rest of the world, until war finally

restored prosperity (Wecter 2).

On October 21, 1929, stock prices dipped sharply, alarming those who had become accustomed to

an uninterrupted upward progression. Two days later, after a brief recovery, an even more alarming

decline began. J. P. Morgan and Company and other big bankers managed to stave off disaster for a while

by conspicuously buying up stocks to restore public confidence but on October 29, all the efforts to save

the market failed. “Black Tuesday,” as it became known, was complete devastation as widespread panic

caused the market to crash. Sixteen million shares of stock were traded, the industrial index dropped 43

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points, and stocks in many companies became virtually worthless. In the weeks that followed, the market

continued to decline, with losses in October totaling $16 billion. Despite occasional hopeful signs of a

turnaround, the market remained deeply depressed for more than four years and did not fully recover for

more than a decade (Wecter 8).

The sudden financial collapse in 1929 came as an especially severe shock because it followed so

closely a period in which the New Era seemed to be performing another series of economic miracles. In

particular, the nation was experiencing in 1929 a spectacular boom in the stock market (Wecter 6). In

February 1928, stock prices began a steady ascent that continued, with only a few temporary lapses, for a

year and a half. By the autumn of that year, the market had become a national obsession, attracting the

attention not only of the wealthy but also of millions of people of modest means. Many brokerage firms

gave added encouragement to the speculative mania by offering absurdly easy credit to purchasers of

stocks. It was not hard to understand why so many citizens flocked to invest in the market. Stocks

seemed to provide a certain avenue to quick and easy wealth.

Between May 1928 and September 1929, the average price of stocks rose more than 40 percent.

The stocks of the major industrials, those used to determine the Dow Jones Industrial Average, doubled in

value in that same period. Trading mushroomed from two or three million shares a day to more than five

million and at times 10 to 12 million. There was, in short, a widespread speculative fever that grew

steadily more intense. A few economists warned that the boom could not continue, that the prices of

stocks had ceased to bear any relation to the earning power of the corporations that were issuing them, but

most investors refused to listen (Wecter 7).

Due to irrational psychological reasoning the stock market depression caused the general public to

believe that it would depress general business and it did, but it should not have. There were 120,000,000

persons in the countries and at the maximum not more than 10,000,000 were involved in stock market

transactions, the remaining 110,000,000 persons suffered no loss. The bulk of the population did not

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suffer the loss of stock investments, yet due to this economic calamity it made the public leery of

investing. By the end of 1929, unemployment was rising, shops and factories were ornamented by closed

and out of business signs, and, perhaps most terrifying of all, the nations banks closed taking with them

millions of dollars in deposits (Watkins 54). More than 9,000 American banks either went bankrupt or

closed their doors to avoid bankruptcy between 1930 and 1933 making depositors loose more than $2.5

billion in deposits (Watkins 54). Two hundred and fifty six banks failed in the single month and on

December 11 the United States Bank, with deposits of more than $200 million, went under causing the

largest single bank failure in America history up to that time. This contributed a large portion to the

economic hangover which, in the words of banker J. M. Barker was, “stupidity, turned into unreasoning,

emotional, universal fear (Watkins 55).

Unemployment increased steadily from the fall of 1929 to the spring of 1933 with such affect on

the economy that relief was virtually impossible to obtain. Even a cursory reference to the several existing

estimates of unemployment will amply show the rapidity with which unemployment established itself as

an economic factor of the first order of importance (Shannon 6). By 1932 a quarter of the civilian labor

force was unemployed and the number was still rising. State and local relief agencies lacked sufficient

funds to meet the demands of families for bare sustenance. While some families managed to stay in their

homes and apartments, even though they failed to pay the rent or mortgage interest, others were evicted.

To keep some semblance of a home, families built shelters from discarded crates and boxes on vacant land

or in the larger parks and as time passed the structures became more elaborate and habitable. Municipal

authorities, unable to provide adequate help, were forced to adopt a tolerant attitude against these

squatters.

The economic hardships of the Depression years placed great strains on American families,

particularly on the families of middle-class people who had become accustomed in the 1920s to a steadily

rising standard of living and now found themselves plunged suddenly into uncertainty. It was not only

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unemployment that shook the confidence of middle-class families, although that was of course the worst

blow. It was also the reduction of incomes among those who remained employed. Economic

circumstances forced many families, therefore, to retreat from the consumer patterns they had developed

in the 1920s. Women often returned to sewing clothes for themselves and their families and to preserving

their own food rather than buying such products in stores. Others engaged in home businesses taking in

laundry, selling baked goods, accepting boarders. Many households expanded to include more distant

relatives. Parents often moved in with their children and grandparents with their grandchildren, or vice

versa (Current 22). Older children were inclined to wander away and look for opportunities elsewhere

(Cochran 29-30).

Another large contributing factor was Mother Nature, because in most of the prairie land

in the U.S. and Canada the weather was so dry that the farmers were unable to harvest their crops. The

land was a barren wasteland of dust and dirt in which it got it’s name the Dust Bowl. In other areas, the

extreme opposite took place: farmers overproduced and prices rapidly dropped because the demand

decreased. The drastic result of this oversupply made it hard for farmers to make money due to the fact

that they had so much that they were forced to sell it at substantial low priced just to remain competitive

enough to make even the small profit they were making. The imbalances were however, self correcting in

which if manufacturers made too much of something, it’s price would fall, profits would disappear, and

the producers would cut back on output. In 1932 the American writer, Stuart Chase described cycles as

“the spree and hangover of an undisciplined economy.”

During the 1932-33 term the deflation gathered momentum so rapidly that many communities had

to close their schools. By March nearly a third of a million children were out of school for that reason.

The number of children affected, shocking as it is, does not tell the story so vividly as does the distribution

of the schools. Georgia had 1,318 closed schools with an enrollment of 170,790, and in Alabama 81

percent of all the children enrolled in white rural schools were on an enforced vacation. In Arkansas, to

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site the case of another sorely pressed state, over 300 schools were open for sixty days or less during the

entire year. By the last of February more than 8,000 school children were running loose in a sparsely

settled New Mexico. And over a thousand West Virginia schools had quietly given up the struggle

(Shannon 94). The downswing, which began in 1929, lasted for 43 months. The Great Depression’ has

the dubious distinction of being the second longest economic contraction since the Civil War, second only

to that which began in 1873 and continued for 65 months. The length of a depression, however, can only

give a limited indication of its impact; the amplitude and national ramifications of 1929-33 give those

years a special importance (Fearon 89).

The depression seemed to carry on forever. At times, the effects eased, but they never halted,

until the recovery. The recovery began around 1937 or 1938, but it was a long, tough struggle. The rains

came to the prairies and that helped to produce bountiful harvests. More and more men went back to

work. In Europe, Hitler’s troops were marching into Austria and then into Czechoslovakia. Wise men

knew it would only be a matter of time before Germany would invade Poland. On September 10, 1939

war broke out and Canada did not hesitate to jump in. A vast military effort got under way. The war

machine required the services of every available man and woman for the next six years. Any willing

worker could find work in the armed forces, in defense plants, in factories and on farms across the nation.

By 1942 everyone was at work.

The recovery from the Great Depression was one that took a long time coming. In order to

prepare for another possible occurrence of such events, the American and Canadian governments

implemented four monetary and fiscal changes in the economy that would protect themselves if another

great depression occurred or to attempt to stop one from starting (see Appendix A). These four changes

were: bank deposit insurance,, taxes and government spending, multi-income families, and also lender of

last resort .

In 1967, the government of Canada established the Canada Deposit Insurance Corporation

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(CDIC). The United States also established an institution identical to this. These institutions were to

insure bank deposits up to $60 000 per deposit so that depositors would not need to fear bank failure.

Also by doing this in result of a enormous depression it would decrease dramatically the size and number

of bank runs (Parkin 837).

The government sector in 1929 was much smaller than what it is today. Government purchases

went from 11% of GDP to 20% of GDP today. Transfer payments also increased from 5% to 20% of

GDP throughout the years. If the government has high levels of purchases of goods and services, when

recession hits a large part of aggregate demand will not fall. The large size of the government causes it to

act as an automatic stabler that decreases the size of the expenditure multiplier (Parkin 837).

Another change in the economy that occurred that also will decrease the effect of another great

depression is the fact that more and more families now have multi-incomes. In 1929, the labour force

participation rate was 55%. Today it has increased to 67%. If unemployment increased to 20%, close to

54% of the adult population would have jobs, while during the Great Depression only 44% had work.

This in turn causes a minimal fall in consumption when aggregate income falls, resulting in a small

recession instead of a Great Depression.

Due to the fact, that there are government-insured bank deposits, the Bank of Canada has to

become the lender of last resort in the Canadian economy. This means that if a single bank s reserve runs

low, it will have to borrow from other banks. If the entire banking system s reserve is low, it will then and

only then be able to borrow money from the Bank of Canada. The Federal Reserve Board in the U.S.

plays a similar role. The Bank of Canada and the Federal Reserve reminded the world of their ability and

readiness to supply sufficient reserves in order to prevent a great depression from developing in the stock

market crash of October 1987.

So are we safe from another Black Tuesday? We can never be sure when the next fall

will occur, we can be sure however that it will happen, thus our concern should be to minimize the damage

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caused by the market fluctuations. There is a feeling among investors that the wisdom learned from past

market troubles is protecting us now, whether in the form of changes to the Federal Monetary policy or the

installation of circuit breakers. This all leads to the optimism of the boom we have experienced since the

mid 90’s, the booming stock market is a natural result of profound economic changes both here and

abroad. For starters, the end of the cold war not only has allowed governments to stop spending capital on

the arms race and freed up money for more productive uses but it has opened up huge new markets like

Russia and Eastern Europe. Companies are focusing on making money by producing goods more

efficiently rather than by raising prices, thus inflation should stay low. And there is more capital in the

market, coming from baby boomers saving up for retirement. In conclusion the solid footing the current

market has should keep from falling like the 1987 and1929 markets when the current boom comes to an

end.

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APPENDIX A

Chart of Regulatory Agencies and Major Economic Laws per decade.

(Batra 214)

DECADES No. of Regulatory Agencies

per Decade No. of Major Economic Laws

per decade

1760-70 4

1770-80 16

1780-90 8

1790-1800 7

1800-10 10

1810-20 7

1820-30 6

1830-40 1 9

1840-50 0 5

1850-60 0 5

1860-70 2 18

1870-80 1 10

1880-90 1 10

1890-1900 1 14

1900-10 1 14

1910-20 14 57

1920-30 3 31

1930-40 11 48

1940-50 24 80

1950-60 4 41

1960-70 12 73

1970-80 20 1

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Works Cited

Batra, Ravi. The Great Depression of1990. New York, NY: Simon and Schuster Inc., 1987

Cochran, Thomas C. The Great Depression and World War II 1929-1945. Glenview, IL: Scott

Foresman and Co., 1968.

Current, Richard N. The Great American History (CD-ROM) The Civil War to WWII.

Carlsbad, CA: Compton’s New Media Inc. & McGraw-Hill, 1995.

Fearon, Peter. War, Prosperity, and Depression: The U.S. Economy 1917-45. Lawrence,

KA: University Press, 1987.

Parkin, Michael. Economics: Canada in the Global Environment. New York, NY: Addison-

Wesley Publishers Ltd., 1997

Shannon, David A. The Great Depression. Englewood Cliffs, NJ: Prentice Hall, 1960.

Watkins, T. H. The Great Depression America in The 1930’s. Boston MA: Little Brown and

Co., 1993.

Wector, Dixon. A History of America: The Great Depression. New York, NY: The Macmillan

Co., 1948.