The Great Depression and The New Deal.

 

The Great Depression

The cause of the great depression is still something of debate till this day. But most economists can agree that some of the biggest factors to the cause of the depression was a fragile banking system, debt to demand ratio, income inequality, and agricultural fault. America during the 1920’s was in an age of economic prosperity, thanks to war torn Europe, high demand for US made goods and a demand globally for those goods. After World War 1 Europe was in shambles and was unable to produce goods at the capacity or at the speed the US was producing. In addition to high demand for goods there was a lot of loans given out to European governments and banks to try to jump start their economies again to become just as prosperous. Private US banks gladly loaned their money to Europe and because so much money was given high returns would be given to the banks, risky investment but in theory it would produce a lot of wealth in the US. Prohibition is also played a role in US economic prosperity just as much as illegal drugs is today. There was a high demand for alcohol and people were willing to pay the big bucks in order to obtain it. An underground market was created for those who could afford to pay for alcohol which saw billions in revenue to the gangster responsible. The gangsters were also infamous for helping out the poor and those who had less which was good for the increasing amount of lower class Americans and it brought huge amounts of investment to private institutions which grew.



On October 29, 1929 also known as Black Tuesday was the day the US stock market crashed. This is a subject of huge debate still to this day but most economists can agree that the the default of loans played a major role in the crash. The way most people bought stocks in the US was through a special kind of “stock loan.” If someone didn’t have enough money to buy the stocks they wanted, they would either go to the company or person they were buying from and ask tell them “look, I have X amount money and your stock costs Y amount. When the value of the stock goes up I’ll pay you the rest plus Z amount of interest.” This is such a great offer no one turned it down since the value of the stocks always went up, it was only logical that they would accept the offer which always happened. But when the stocks began to devalue people couldn’t pay back their loans and investors lost huge chunks of money. Since banks and investors lost huge amounts of capital they could no longer give loans to the the fragile European economies and demand the repayment of the loans they gave to them either at a faster pace or immediately. The Europeans couldn’t supply what the American banks demand so they fell just as hard or even harder than the American economy.



President Hoover was the man in charge of the country at the time of the crash. Before he was President he was Secretary of Commerce and a big free market guy. He believed that the markets would take care of themselves since the idea of capitalism is if you fail then you fail. He never expected that if the banking system failed that it would drag other companies down with them. He believed heavily in the theory that the markets would correct themselves, which meant no bailouts from the government for anyone. They did the exact opposite, they got heavily worse and the unemployment rate skyrocketed to 25% as corporations tried to hold onto life.



​President Franklin Roosevelt was inaugurated into office on March 4th, 1933 and brought with him a very liberal approach to solving the depression. He decided to invest in the American people directly instead of indirectly through private companies. He spent heavily on infrastructure jobs which brought the creation of modern national parks and upkeep, Hoover Dam, modern concrete city roads, etc. He also created regulations for banks. most notorious of all was the Glass Steagall Act which separated investment banks from commercial banks. If one system of banks failed than the other would still be alive making another crash not as bad as the Great Depression. The depression never truly ended until the US entered World War 2 in 1941 when the true industrial might of America awoke. Troops were needed as well as factory jobs, a demand for war equipment was created and the government bought all it could to supply its troops, so much in fact that it created a surplus in military goods. But unfortunately we never truly learned from our mistakes and that resulted a big recession in the US later on.