Great depression in economic and money terms Essay
The Great Depression is considered to be one of the most remarkable event of the XX century.
From the very beginning till the very end it ruled sway the destinies of people: somebody was loosing everything, other just started to obtain the power; one man couldn’t help starving, another was growing up in prosperity. It has left its mark in every family of such industrially developed countries as the USA, Germany, Great Britain. The rising tide lifts all boats, and it all started from the country which was first-rated by all economic criterion in the world – the USA.
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In the late twenties, a lot of reasons to be very optimistic towards development of American national economy arose. Since the First World War there was the quick increasing of both labor productivity (let’s recollect at least Ford’s conveyor) and actual families income. Even farmers who suffered from the landslide of prices on agricultural products, when European farming had turned back to the ordinary course after the War, increased their profitability in the end of twenties, so that this stratum of society could afford buying trucks and variety of agriculture vehicles. But there where vulnerable places inside such a healthy economy.
At first, Americans didn’t tend towards the cautious optimism. The euphoric feeling of “new era” prevailed in society of those days. Besides rich people, millions of Americans of average income and even workers were buying up the shares of companies awaiting of the quick rise in their values. Let’s define some basic definitions for better understanding of the issue. The power of economy is measured by two main categories: the financial potential and economic stability. Funds (or financial assets) are the most common medium of exchange, and as we proceed further, you will get to know several main laws of interdependency amid money supply (production, or printing of money by the government) and economic stability. The latter is commonly weighted by such numbers as growth of prices and its relevance to the growth of average citizen’s income, etc. Now, let’s dwell on the major principle of supply and demand: when the first exceeds over the latter, the cost of each item of supplied product goes down.
Vise versa, when demand exceeds over supply, demanded production’s cost goes up.Therefore, in those times, the USA experienced the same: costs on each share (share, to say, is “any of equal portions into which the capital stock of a corporation is divided and ownership of which is evidenced by a stock certificate”) where increasing when people chaotically leaned to buy some constant quantity of the shares (i.e.
some static supply). Thus, the common value of shares registered at New York stock exchange multiplied in three times during 1924 – 1929. Economic theory emphasizes that this public excitement and expectations always results in down-fall of prices, and this problem is to be prevented by state. Simply speaking, when you’re expecting that tomorrow prices on bread will be much higher than today, you will buy all the bread in the neighborhood to sell it tomorrow. And if the whole country breaks to corner (buy up) the bread, it all reflects on economy and its stability.
That is the reduced role of the government what was the second largest problem in the USA of 1929. In his time British economist-researcher Adam Smith has written a law of the state’s policy of non-intervention in economy. He proved that if it really doesn’t pry into regulations of each financial operation, each treaty, etc., economy will start regulate itself with even greater effectiveness, because every player in economic relations will lean forward his own profit and security, thus, providing some balancing force with other players. So did the vast majority of Americans as well as their government, who considered that state activities in times of economic crisis should be directed to minimize its expenditures on anything and let the economy to cope with its objective problems by itself. Being aware of this, newly elected president Roosevelt hastened to close banks for 4 days and forbid export of American dollars abroad.
Why did he do this? Aiming to keep financial potential inside the country, he knew so well that hasn’t he done that, at least ten more factors favorable to ruin American economy would appear, and one by one breakdowns would overflow European countries even greater than it did. But we’ll dwell upon the basic forces that provoked Depression, without digressing from the topic. What’s the problem? – can we ask. If there is no money in the country, the state prints respectful bank-paper, even lends other states huge amounts of freshly printed money and than obtains dividends from interest charges. The USA has practiced such schemes, but there are principles of conducting such activities to acknowledge. Firstly, it should be considered that every bank-note should be supported by definite amount of gold (history knows several so called standards – etalons for each currency to be defined in compliance with it: gold standard – in times of Great Depression; gold and exchange currency standard; etc.).
To say, for every dollar of American man there should be some amount of gold in the State treasury. That is the clear economics and it won’t be deepened into right now. So, instead of this additional unsupported supply of money causes inflation that means relevant devaluation of the national currency being calculated according to the before-mentioned principle. Turning back to collapse of expectations (we have already clarify this notion) of people who invested their money in shares chaotically buying them, we will dwell upon the reason of this collapse. It wasn’t the rock of destiny which is highly unfavorable to those who are on the top of the pyramid. We come against the same milestone called economic background based on laws and principles. The devastating power of economic crisis revealed itself at first in the industrial production. The economic indexes illustrate this fact: comparing with the aggregate output level of 1928, in 1930 it came to 80.
7%, 1931 – 68.1%, 1932 – 53.8% of this level. The heaviest decrease in sells of goods in time of downfall occurred in heavy industry sectors.
It is explained by the following: positions of monopolies were highly firm there, and using such the method of reduction of sells of goods they tried not to permit excessive downfall of prices and to fix their incomes at the high level. As a result, the coal production in the USA decreased on 42%, the smelting of iron – fell in 4 times, and smelting of cast iron diminished to the mark of 1896, when 46 of 285 blast-furnaces in the whole country were operating. The major reason of such falls was in the overproduction in automobile industry. During the post-war ten-year the USA experienced unprecedented economic rise due to the constant purchase orders from rebuilding Europe. When supply of vehicles, machines, automobiles greatly exceeded over the demand from Europe, the majority of plants and factories realized that warehouses and boxes are full of unclaimed machinery which costs millions of American dollars. The ordinary cyclic recession could have been omitted if stock operators and traders wouldn’t have sold their shares as quickly as possible, being frightened of the respective share cost recession. After this fateful date 23rd of October 1929 the total prices on New York stock exchange have lost $26 billion during the first month, and they were going on recessing in the course of the next 2 ½ years. Monstrous size of devaluation of private funds, banks assets, industrial corporations, pension funds and other institutions played the crucial role in the resulted collapse of national economy.
Intensifying of industrial and agriculture downfalls in 1931 brought the country to the next stage of financial crisis. As we have briefly devoted our attention to this issue before, it is worth paying more fundamental attention to this problem. The crisis peak was reached in February-March 1933, when all banking system appeared in massively spread disorder. The new wave of banking collapses passed along the country in greater way.
Millions of small depositors – workers, farmers, representatives of the middle stratum of the cities, have lost their last savings and turned into beggarly. The reasons can be explained as follows:1. Following the chaos in the first-rate country of international industrial and financial importance, the noticeable misbalance in European countries started to be publicly unveiled. American overseas capital has melted like fog, and Germany with Austria have hardly avoided the dimensioned bankruptcy. The Great Britain has lost its American consumers and suppliers and was forced to reject the gold standard in September 1931.2.
Confused establishment of import quotes, tariff barriers, limitations on exchange of gold and currencies and other protective measures called for rescuing the national economies at the expense of other states – all this highly stressed the international economic system.3. In 1931, the USA investors appeared to be unable to take back credits or sell their assets.
They started to demand return of the cash, and 2300 of banks which were holding $1,7 billion crashed.4. During 1929-1933, more than 125 thousand of American companies have been busted. The Gross national income decreased in two times, average salary was cut down by 60%, and in 1933 the estimated amount of unemployed came to 14-16 million people. The Great Depression had the very important consequences in political sphere. In the USA it brought the democrat F.
Roosevelt to victory on presidential elections. But in spite of his interventions, massive unemployment wasn’t minimized to the very beginning of the II World War. This crisis has fully finished when the USA entered this War in 1941. For comparison, economic chaos in Germany assist Hitler to come to power in 1933; owing to the load of military projects, Nazis have managed to overcome the crisis threshold by 1936.