The Economic Impacts of the Great Depression

The Great Depression of 1929 is one of the memorable moments in US history. It was a period marked by increased unemployment and poverty rates. One of the factors that led to the Great Depression was reduced consumer demand and spending habits. There were goods in the automobile and agricultural industries, but Americans were no longer buying them. Most Americans could afford luxury and basic goods since they had no jobs. Local industries closed their operations since they could not support the workforce. Other countries also felt the effect of the Great Depression and stopped purchasing American goods. As a result, the US economy was unstable, and the policies that the federal government and monetary authorities implemented exacerbated the impacts of the Great Depression. Since they were uncertain about their future, Americans panicked as the Great Depression contributed to the stock-market crash, economic instability, and increased unemployment rates. 

Crash of the Stock Market 

The Great Depression adversely affected the stock market, forcing people to sell their businesses, use their life savings, and brokers requested payment of their loans from corporations and wealthy individuals. Economists described 24 October 1929 as the “Black Thursday” since it was the day that the US recorded the worst crash in the stock market (Amadeo & Estevez, 2020). Some banks attempted to reverse this outcome by buying stocks, but their efforts were insignificant. People lost faith in Wall Street. Brokers reduced the loans they offered to corporations and wealthy individuals by $120 million (Kinfleberger, 1986). The Great Depression created panic in the business sector. A year before the stock market crash, Americans predicted positive earnings. The stock prices were high, and the investors bought stocks anticipating increased returns on investment (Ng, 1999). After “Black Thursday,” local and foreign investors and corporations were concerned that the banks could not save the stock market. Some companies froze their assets since they were concerned that the Stock Exchange would be closed (Kindleberger, 1986). Companies rely on the stock market’s performance. Increased profits result in high stock prices and, consequently, high return on investments. As a result, investors become confident about a company’s future earnings. Investors’ expectations dwindled when major industrial companies in transportation, utilities, and manufacturing recorded a sharp decline in profits (Ohanian, 2009). Foreign investors were quick to make withdrawals. Business owners believed that the stock-market crash would result in a business depression since federal banks did not make significant efforts to protect their businesses from the Great Depression. 

The federal system was responsible for the stock-market crash of 1929. Adolph Miller, a member of the Federal Reserve Board, implemented a policy that resulted in the decline in equity prices (Cecchetti, 1997). The Federal Reserve directed federal banks to stop giving loans that would encourage people to buy stocks. There was a concern about the speculation created through loans used to purchase shares. Federal Reserve Board leaders thought that the stock prices were extremely, creating a wrong impression of the stock market (Cecchetti, 1997). They believed that the increase in stock prices resulted in the depletion of real sources and a decline in real investment. The confusion between real and financial investment resulted in creating a policy that influenced the stock-market crash. For example, New York Banks and the Federal Reserve Bank of New York bought $169 million worth of securities (Kindleberger, 1986). These institutions were attempting to make a direct purchase and hold back foreign investors' margin calls. This decision was a mistake since it created further economic instability and a decline in stock prices. Instead of focusing on expanding assets, the Federal Reserve Bank of New York promoted liquidation of assets. The outcome was a significant decline in broker loans from New York Banks in 1929 (Cecchetti, 1997). Federal Reserve could have saved the stock market if they had a proper interpretation of the market dynamics. Adolph Miller failed to consider the significance of the brokers in the US economy. He denied them credit opportunities since he believed that the interest rates would have been high, resulting in businesses' collapse (Cecchetti, 1997). His decision resulted in instability in the business sector. As a result, the stock market crash resulted in reduced consumer spending. There was a sharp decline in automobile registrations and department store sales (Cecchetti, 1997). Federal Reserve could have offered more loans to encourage business growth, but instead, it focused on reducing broker loans. This decision made brokers recall their loans. As a result, companies sold their assets. When Americans noted that the stock market crash, they stopped spending their income on depreciating assets such as vehicles, and most of them lost faith in the stock market. 

Destruction of the US Economy 

The Great Depression adversely affected the US economy. Undoubtedly, the stock market is an important part of the US economy since it determines the availability of loans, companies' performance, and capital market investments (Kindlebeger, 1986). The decline in the stock prices resulted in bankruptcies and macroeconomic difficulties, such as bank failures, business closures, reduced money circulation, and credit contraction. Other countries noted the instability in the US economy and resorted to using gold deposits. As a result, the Federal Reserve raised interest rates (Cecchetti, 1997). American banks felt the impact of the Great Depression when farmers could not repay their loans. The Great Depression adversely affected the agricultural sector since the economic crisis occurred when America experienced severe drought conditions. Most farms were destroyed, and the banks could not offer additional loans to farmers. Some people started to migrate to other towns to find high-quality farms (Ohanian, 2009). Since most of them did not have money to board buses or trains, they had to hop into freight trains illegally. Americans were never ready for the Great Depression. Most families had to move around cities in search of food and a place to live. 

Agriculture was an important part of the American economy, but the Great Depression destroyed it, causing economic problems. In 1929, farming contributed to a quarter of employment in the US (Kindleberger, 1986). The onset of the Great Depression resulted in a sharp decline in prices for agricultural products. As a result, farmers did not generate significant profits, and investors withdrew their agricultural investments. There was an excess supply of agricultural goods, but the demand was low (Ohanian, 2009). The outcome was structural deflation in the US economy due to monetary and non-monetary forces. For example, the Federal Reserve pursued monetary policies that transformed recession into depression (Cecchetti, 1997). Banks failed to consider how deflation resulted in a rise in interests that punished brokers. During the Depression, the Federal Reserve leaders followed the gold standard rule by raising the interest rates to protect the dollar from foreign speculation (Cecchetti, 1997). This approach destabilized most banks and resulted in a reduction in industrial production and growth. Other countries noted the US' economic problems and reduced the prices of their local agricultural products. Consequently, cotton, lard, tobacco, beef, and mutton had no foreign demand (Kindleberger, 1986). Since the US agricultural sector relies on foreign markets, the Great Depression severed its growth, resulting in economic instability. 

Besides, the American banking system was never prepared for such an occurrence. The policies at the time focused on short- and long-term loans offered to companies and individuals. Leaders in the banking sector had not analyzed how to save the economy in a stock-market crash. For example, President Herbert Hoover supported Adolph Miller’s opinions on speculation around the stock market (Cecchetti, 1997). Banks make profits when they offer loans since they earn interest in return. However, the Federal Reserve was discouraging banks from offering loans to brokers. Since there was no federal deposit insurance, most banks were in debt, leading to closures (Kindleberger, 1986). Americans were concerned that they would lose their savings. As a result, they made significant withdrawals and converted their deposited cash into hard currency. When people held money in their possession, there was a significant decline in money circulation. The outcome was slow economic growth since the opportunity cost for holding money was insignificant, causing a decline in consumption and investments (Cecchetti, 1997). Federal Banks were issuing liquid assets and promising people returns. Consequently, more people converted their assets into cash, and the nature of money changed. This strategy reduced the value of the in-place capital stock and contributed to negative net investments. The US economy became decapitalized; there was a significant reduction in consumption. There was no demand for products, increased inability to repay loans, and skepticism towards bank deposits. Most banks attempted to increase their interest rates to survive the Depression. Foreign and local investments were also reduced. Construction, shipping, and mining industries reported significant losses (Ng, 1999). At first, it was a reduction in imports. Although an economy benefits when it has more exports than imports, a sharp decline in imports indicates an economic crisis. The US needed raw materials from Germany to run its economy (Kindleberger, 1986). When imports reduced, some businesses in the US started to make losses. As a result, US exports started to decline. The stock-market crash fostered production cuts, inventory runoffs, and a reduction in the value of imports (Kindleberger, 1986). There was a psychological connection between the stock-market crash and the business sector. When business owners noted that banks had raised interest rates, they focused on liquidating their assets. The decline in stock prices reduced the US’ investment in developing countries, creating a liquidity crisis that reduced their exports (Kindleberger, 1986). This change resulted in a sharp decline in US exports due to reduced industrial production, price of commodities, and personal income from employment and investments. 

Unemployment 

Unemployment was one of the worst outcomes of the Great Depression. During the Great Depression, about 19 million Americans lost their jobs (Ohanian, 2009). Unlike the UK, the US did not have a plan to offer unemployment benefits. Most unemployed people depending on the inadequate food relief program that the federal government initiated. The most affected groups included the young and older adults and the minority communities. Besides, employers were unwilling to hire people who had been unemployed for a long time. The loss of income and high unemployment rates significant;y reduced consumer spending (Kindleberger, 1986). Even the few individuals who secured their jobs and had high incomes faced the adverse impacts of deflation. Most of them refrained from buying assets since their prices would have reduced significantly in the following months. 

People lost jobs during the Great Depression occurred due to different reasons. One of them was the stock-market crash. When Federal Reserve Board directed banks to stop offering loans, consumer spending and investment reduced significantly, leading to low aggregate demand (Cecchetti, 1997). Business owners noted the trend and reduced their operational costs by firing some workers. Companies that sold luxury goods, such as vehicles, were the most affected by the Great Depression (Kindleberger, 1986). Although a few Americans had invested in the stock market, they felt the impact of the fall in stock prices. When people no longer demanded luxury goods, workers in the manufacturing sectors lost their jobs, causing a decline in spending power. Deflation also contributed to increased unemployment rates. When the prices of goods and workers’ incomes were reduced, the value of debt increased (Ohanian, 2009). People and companies who were in debt could repay loans, resulting in reduced spending power. Some people were unwilling to buy goods since they thought their prices would reduce in the future. The lack of money circulation made it difficult for banks and companies to be stable. Besides, the agricultural recession influenced unemployment. During the Great Depression, agricultural products' costs reduced significantly, and farming became economically unsustainable (Kindleberger, 1986). Most farmers were not making profits from their produce. Also, the foreign countries’ demand for American agricultural products declined. Farmers started moving around cities seeking employment. The banking system and the US government did not foresee the events of the Great Depression, resulting in increased unemployment rates with no immediate long-term solutions. 

The US government panicked after noticing the increasing rates of unemployment. Consequently, Congress passed the Smoot-Hawley Tariff Act in 1930 to save local industries and boost employment (Amadeo & Estevez, 2020). However, this policy worsened the state of unemployment in the US. The Smoot-Hawley Tariff was meant to increase the charges for imported goods. The US government wanted to discourage a rise in imports since they could contribute to industrial closures. Other countries reacted negatively to the Smoot-Hawley Tariff. For instance, Switzerland rejected the increased tariffs on embroideries, shoes, and watches and boycotted US exports (Kindleberger, 1986). Some countries consider the Smoot-Hawley Tariff as a barrier to global economic progress. While the US government was attempting to protect its citizens from the impact of the Great Depression, foreign countries were displeased for not being involved in the formulation of the Smoot-Hawley Tariff. As a result, they started retaliating directly. Canada, Mexico, Italy, France, Australia, and New Zealand raised tariffs on US exports (Kindleberger, 1986). Instead of resolving the unemployment issue, the Smoot-Hawley Tariff severed the foreign trade ties. It promoted the prevalence of the Great Depression. The Act required countries to settle their debts using gold instead of goods (Kindleberger, 1986). At that time, the US was no longer a creditor nation. When the foreign countries had no gold reserves, they sent additional goods to the US, lowering the prices of imported goods instead of raising them. Consequently, unemployment rose from approximately 1.2 million in March 1929 to about 1.7 million in 1930 (Kindleberger, 1986). The US government had not deeply evaluated how a rise in import tariffs would affect global trade. Without proper policies in place, most industries close their operations, and Americans were forced to use their savings to move to different towns, searching for jobs. 

Conclusion and Summary 

Overall, the Great Depression resulted in a stock-market crash, destroyed the US economy, and exacerbated unemployment rates. Before the Depression, some Americans had invested in the stock market due to the speculation around it. They regretted this decision on “Black Thursday” when the stock market crashed. American companies recorded a decline in stock prices. As a result, wealthy individuals withdrew their investments. Brokers also requested for repayment of the loans that they had offered to people and companies. Instead of addressing this issue, the Federal System raised interest rates and bought companies’ stocks. This move resulted in industrial closures. Business owners could not access loans to support their workforce and operations. Americans stopped spending their income on luxurious goods since they believed their prices would have reduced in the following months. The worst-hit sector was the agricultural industry. There was a significant reduction in local and foreign demand for farm produce. Congress's proposals, such as the Smoot-Hawley Tariff Act, promoted global conflict and worsened unemployment in the US. Hence, the current US government and monetary authorities should learn from the mistakes during the Great Depression to prevent another economic tragedy. 

References 

Amadeo, K, & Esteve, E. (2020, May 27). The Great Depression, what happened, what caused it, how it ended . The Balance. https://www.thebalance.com/the-great-depression-of-1929-3306033 

Cecchetti, S. G. (1997). Understanding the Great Depression: Lessons for current policy . National Bureau of Economic Research. 

Kindleberger, C. P. (1986). The world in depression, 1929-1939 . University of California Press. 

Ng, K. (1999). The causes of the 1929 stock market crash: A speculative orgy or a new era? The Journal of Economic History , 59 (2), 548-549. 

Ohanian, L. E. (2009). What–or who–started the great depression?. Journal of Economic Theory , 144 (6), 2310-2335.