History Of The American Economy
History of the American Economy
The investigation of the issue of economic crises is very important for economists since the identification of the causative relations between the components of a crisis helps to predict the occurrence of similar phenomena in the future and to prevent mistakes common for the past experience. Many crises tend to develop according to a similar scenario, and, therefore, the anti-crisis policy implemented in the past can become a model for overcoming future economic collapses. For example, when the World Financial Crisis commenced in 2008, the US government took similar steps to save the economy as the Roosevelt government during the Great Depression. The paper describes the main causes for the Great Depression that lasted for about four years due to the inefficient approach of the US government to overcoming the crisis.
In 1918, after the end of the First World War, most European countries had to overcome enormous financial difficulties and needed to restore the national economies, which were characterized by heavy debts necessary to restore the country after the war. Unlike the states of Europe, which experienced an economic recession, the US economy finished the World War I as the strongest economic power in the world (Duignan). The reason for this was that the US losses in the war were incomparably smaller: the industry, agriculture, and infrastructure of the country were not affected as the military actions took place away from the US borders. However, the US government took an active part in the war, selling arms and food to the allied countries and lending money for making these purchases. If before the First World War, the external debt to the United States was about five billion dollars, after the war, the total debt was about ten billion.
Thus, after the First World War, in the USA, there took place a rapid rise of the economy, and the production volumes, exports, and the welfare of the population increased. It seemed that there would be no limit to the growth. Banks issued loans to people using the mortgages of property and lands that subsequently caused an increase in the demand for the sold goods. Moreover, the American enterprises did their best to meet the wishes of buyers and expanded production, releasing more products and eventually causing reinvestment and overproduction. Such major improvements instilled optimism into hundreds of thousands of people who believed that buying shares would be an easy way to make money. The popularity of the stock market also increased owing to the marginal loans, allowing people without large capital to purchase shares paying only 10% of their value. However, at any time, a broker could demand the payment of the debt, and people had to return it within 24 hours (Duignan). Such practice was called a margin call, and it usually boosted the sale of shares bought on credit.
Throughout 1928-29, the stock prices soared rapidly;, however, in September 1929, the stock pricing started to fall. The owners of the largest banks could forecast the crisis, and, in April 1929, they converted paper money from the stock market to gold (Duignan) However, this decision did not arouse any suspicions, and, hence, the shareholders were at ease. Such confidence, first of all, could stem from the optimistic statements of influential experts of the economy and politics of that time.
Since the beginning of August 1929 in the United States, there took place a recession, and stock prices had begun to decline, which initially caused excitement in the ranks of investors and then, after a subsequent fall, a panic on the stock market. On October 24, 1929 (“Black Thursday”), the New York brokers that were issuing the marginal loans began to demand the payments, and, people rushed to sell shares. As a result, the total sales on October 24 amounted to twelve million shares. On October 28, the stock market crash reached its peak. The total decrease in the value of American securities for this day was about fourteen billion dollar. On October 29, 1929 (“Black Tuesday”), there took place the most massive sale of shares during the entire period of the Great Depression, numbering up to 16 410 thousand shares. Because of this drop in the stock market, about 20-25 million people sustained financial losses. As a result, by October 29, 1929, the Dow Jones index dropped to 41 points (Hyde). By December, the situation of the population aggravated: workers witnessed the mass stops of production at enterprises, banks were demanding the repayment of loans, and the wages were being delayed. In the first months, the administration of President Hoover did not take any serious measures, hoping that “the market will heal itself.” In June 1930, the Smoot-Hawley Act came into effect, introducing a 40% import duty to protect the domestic market (Hyde). In fact, this step could not help overcome the crisis; on the contrary, it aggravated the situation. The prices for imported goods increased, which was characterized by further weakening of the purchasing power of the population. Moreover, shortly after the failure to stabilize the status quo, Europe introduced reciprocal taxation, which caused an increase in prices for American goods and, consequently, their lower competitiveness in the European market. All these events led to a reduction in international trade. The trade with the US was first stopped by Germany and then by France. It is believed that the Smoot-Hawley Act was one of the main channels for the transfer of the crisis to Europe. Only in the 1930s, the international trade began to recover to pre-crisis levels.
At the end of 1930s, people started a massive withdrawal of deposits that led to a wave of bank bankruptcies and the contraction of the money supply. The second banking panic took place in spring, 1931 (Hyde). Due to a large number of claims, banks did not have enough funds to meet the demands of the depositors and eventually became bankrupt.
The Herbert Hoover government tried to overcome the crisis by providing the financial assistance to banks and industrial companies to save them from bankruptcy. The government’s second step was a social policy. In the fall of 1929, the president held a series of meetings with large industrial companies, forcing them to promise not to reduce wages of their workers (the promise was afoot until the summer of 1931). In 1930, the policymakers introduced the tax cuts (Hyde). Additionally, there was a major focus on the humanitarian activity of municipal structures and private charity.
However, in fact, the reforms mentioned above only delayed the crisis for many companies and enterprises. It was not possible to keep wages at the same level. An unprecedented increase in the state expenses forced the Hoover administration to raise taxes. The actions of Hoover only delayed the fall of the American economy. Due to the lack of readiness of the government to struggle with the Great Depression, it lasted for a long time. However, from the perspective of the then economy experts, it would be impossible to forecast the behavior of the market without any previous experience. Only after a couple of years, the American Government could completely realize the nature of the crisis and take effective steps in overcoming it. Accordingly, these lessons from the past became an important experience for the American economists as it helped to handle the economic crisis that took place at the beginning of the XXI century.
The Great Depression was the biggest crisis in the history of the economy. Evidently, there were multiple factors that caused the emergence of the economy crash. A distinctive feature of the Great Depression, compared with the previous economic crises, was the collapse of the stock market. Thus, the causes of the Great Depression in the US include speculative operations in the stock market, because of which the prices of shares were more expensive than the real assets of enterprises; the policy of cheap loans on the security of property issued to those who did not have sufficient income to pay the loan, as well as the World War I, during which the economies of many countries faced the industrial growth due to the military orders, which, after the end of the war, sharply declined causing the recession in the military industry and related sectors of the economy of most countries. Modern economists identify multiple causes of the Great Depression, such as reinvestment (investments in production without real necessity); overproduction; a cheap credit policy pursued by the Federal Reserve; as well as multiple increases in stock prices in the stock market, resulting in the fact that value of shares of enterprises was more expensive than the company’s real assets due to speculations in the stock market. Due to the policy of non-involvement of the contemporary government in the economic situation, the crisis persisted for many years. The Great Depression in the United States had a great impact on the entire world economy and on policies taken by many European countries. In most countries, a policy of protectionism was introduced, increasing import duties to stimulate national producers, which caused a significant reduction in the international trade. The actions of the governments of many countries were aimed at creating jobs, the competitiveness of domestic goods in domestic markets, and the import duties.