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Wednesday, April 28, 2010

How Did America Cope with the Great Depression?

How did America cope with the Depression? Why was the depression in the United States so long-lasting and what effect did it have on Europe? What's your opinion?

After World War I, European states and the United States sought a more liberal market, free from state intervention. However, the war had strengthened cartels and labor unions, therefore some governments felt these organizations were necessary. With the downturn in domestic economies, and the fall of the stock market, an international crisis had begun.

Most of Europe’s prosperity was built upon the bank loans to Germany, so when investors started to pull their money out of Germany after the crash of the stock market, the banks of Germany and other European states were left weakened. In all actuality, the global economy was severely in disarray, so much so that Americans found it difficult to cope with unemployment, the depression lasting longer that it should have, resulting in a huge impact on the European nations.

Roosevelt's advisers sought a policy of government intervention known as the New Deal, which included new agencies to aid in relief, reform, and recovery. The FDIC started to ensure bank deposits up to $5000 and funds were administered to help the destitute and homeless. The Second New Deal included a stepped up program of public works, such as the WPA, established in 1835. The issue was, however, that none of these reforms and agencies were able to solve the problem of unemployment. The American people were questioning all the maxims on which they had based their lives - democracy, capitalism, and individualism. After the Dust Bowl, farmers packed up their families and moved out West and to agricultural fields. Survival was key.

Why Did the Depression Last So long?

A major cause of the pro-longed Great Depression was unemployment, which was largely due to the government and the market. The government’s resolution was a deflationary policy of balance budgets, which included lower wages and raising tariffs to exclude other countries' goods from home markets. However, this served only to worsen the economic crisis and create mass discontent within the European market.

To put it simply, the United States decentralized and the laissez-faire labor market did poorly in dealing with long-term unemployment. Furthermore, the United States remained on the gold standard beyond 1930-31, which added fuel to the fast burning fire. Their unemployment rose to and remained at levels that seemed too high to contend with the normal mechanisms of standard business cycles.

Long-term unemployment was strongly present in European nations like Britain, Germany, Italy, and the gold block nations of France and Belgium. Of these, only Germany achieved a strong recovery from the Depression in the 1930's. Unemployment was still on the rise, even before the Great Depression, however a labor government tried to resolve the problem and failed. In 1931, a national government used balanced budgets and protective tariffs to pull Britain out of the worst stages of the depression. In France, six different cabinets were formed as they faced political chaos.

The Great Depression made certain doctrines like Marxism and Fascism attractive, especially since Karl Marx had previously predicted that capitalism would destroy itself through over production. These doctrines, however, were unsuccessful, as in the case of Italy shows, unless accompanied by rapid rearmament as in Germany. Right-wing groups marched in demonstration through the French streets, and fears of extremists intending to seize power led leftist parties to merge. The political system was failing, as their Nazi neighbors powers were growing. On the other hand, Scandinavian states coped quite well in lieu of the Great Depression, even encouraging the development of industrial cooperative enterprise.

According to Friedman and Schwartz (1963) “the most notable feature of the revival after 1933 was not its rapidity but its incompleteness.” They claim that monetary policy and the Federal Reserve were passive after 1933. The monetary authorities did nothing to stop the fall from 1929 to 1933 and did little to promote the recovery.

It was the Treasury that was generating increases in the monetary base at the time by issuing gold certificates equal to the amount of gold reserve inflow and depositing them at the Federal Reserve. When the government spent the money, the Treasury swapped the gold certificates for Federal Reserve notes and this expanded the monetary base. The problem is that monetary policy was powerless to promote recovery, and as we can see, this directly influenced the length of the post war unemployment.

Picture Sources

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To read more about the Great Depression, check out the following resources:

Fear Itself: The New Deal and the Origins of Our Time –A work that “deeply reconceptualizes the New Deal and raises countless provocative questions” (David Kennedy), Fear Itself changes the ground rules for our understanding of this pivotal era in American history. Ira Katznelson examines the New Deal through the lens of a pervasive, almost existential fear that gripped a world defined by the collapse of capitalism and the rise of competing dictatorships, as well as a fear created by the ruinous racial divisions in American society.

The Worst Hard Time: The Untold Story of Those Who Survived the Great American Dust Bowl – The dust storms that terrorized America's High Plains in the darkest years of the Depression were like nothing ever seen before or since, and the stories of the people that held on have never been fully told. Pulitzer Prize–winning New York Times journalist and author Timothy Egan follows a half-dozen families and their communities through the rise and fall of the region, going from sod homes to new framed houses to huddling in basements with the windows sealed by damp sheets in a futile effort to keep the dust out. 

What Was the Great Depression? – On October 29, 1929, life in the United States took a turn for the worst. The stock market – the system that controls money in America – plunged to a record low. But this event was only the beginning of many bad years to come. By the early 1930s, one out of three people was not working. People lost their jobs, their houses, or both and ended up in shantytowns called “Hoovervilles” named for the president at the time of the crash. By 1933, many banks had gone under.

Karl Marx: Selected Writings, 2nd Edition – This second edition of McLellan's comprehensive selection of Marx's writings includes carefully selected extracts from the whole range of Marx's political, philosophical, and economic thought. Each section of the book deals with a different period of Marx's life, allowing readers to trace the development of his thought from his early years as a student and political journalist in Germany up through the final letters he wrote in the early 1880s. A fully updated editorial introduction and bibliography has been included for each extract in this new edition.

America's Bank: The Epic Struggle to Create the Federal Reserve – For nearly a century, America, alone among developed nations, refused to consider any central or organizing agency in its financial system. Americans’ mistrust of big government and of big banks—a legacy of the country’s Jeffersonian, small-government traditions—was so widespread that modernizing reform was deemed impossible. Each bank was left to stand on its own, with no central reserve or lender of last resort.


    jo oliver said...

    Very interesting post. I think my grandparents descriptions of the Great Depression in rural Mississippi will be something that will stay with me for the rest of my life. What a hard time to live through. A very interesting take on why the depression lasted so long. Many people just dont understand that depressions and recessions are not created overnight....and therefore, they can't be solved overnight either. FDR is one of my fav. political heads of all time. I just wish we had a modern FDR now:)

    Brian M. Connole said...

    I'm glad that I didn't have to go through that. Today's recession is nothing compared to the great depression!

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