Facts Of The Great Depression Essay Research

Facts Of The Great Depression Essay, Research Paper

To my amazement the Great Depression serves as a natural debating point that “justifies”

or “refutes” various economic policies. The Great Depression and the New Deal are

complex topics that are open to many interpretations. The Great Depression was the

worst economic slump ever in U.S. history, and one which spread to virtually all of the

industrialized world.

Seeing the order in which events actually occurred dispels many myths about the

Great Depression. One of the greatest of these myths is that government intervention was

responsible for its onset. Truly massive intervention began only under the presidency of

Franklin Roosevelt in 1933, who was sworn in after the worst had already hit. Although

his New Deal did not cure it, all the leading economic indicators improved during his

tenure.

To understand the Great Depression, it is important to know the theories of John

Maynard Keynes. Keynes is known as the “father of modern economics” because he was

the first to accurately describe some of the causes and cures for recessions and

depressions.

In a normal economy, Keynes said, there is a circular flow of money. My

spending becomes part of your earnings, and your spending becomes part of my earnings.

For various reasons, however, this circular flow can falter. People start hoarding money

when times become tough; but times become tougher when everyone starts hoarding

money. This breakdown results in a recession.

To get the circular flow of money started again, Keynes suggested that the central

bank, the Federal Reserve System, should expand the money supply. This would put

more money in people’s hands (through the multiplier effect), inspire consumer

confidence, and compel them to start spending again.

A depression, Keynes believed, is an especially severe recession in which people

hoard money no matter how much the central bank tries to expand the money supply. In

that case, he suggested that government should do what the people were not: start

spending money. He called this “priming the pump” of the economy. I think that most

economists believe that only massive U.S. defense spending in preparation for World

War II cured the Great Depression.

After the success of Keyne.s economic beliefs were proven, almost all free

governments around the world became Keynesian. These policies have dramatically

reduced the severity of recessions since then, and appear to have completely eliminated

the depression from those who follow such economic beliefs throughout the world.

Events of the 1920s

The Roaring Twenties were an era dominated by Republican presidents: Warren

Harding (1920-1923), Calvin Coolidge (1923-1929) and Herbert Hoover (1929-1933).

Under their conservative economic philosophy of laissez-faire (”leave it alone”), markets

were allowed to operate without government interference. Taxes and regulation were

slashed dramatically, monopolies were allowed to form, and inequality of wealth and

income reached record levels. The country was on the preferred gold standard, and the

Federal Reserve was not allowed to significantly change the money supply. Many try to

blame the worsening of the Depression on Hoover, for supposedly betraying the

laissez-faire beliefs.

As this time line will show, almost all of Hoover’s government action occurred

during his last year in office, long after the worst of the Depression had hit. In fact, he

was voted out of office for doing “too little too late.” The only notable exception to his

earlier idleness was the Smoot-Hawley tariff of 1930.

But much more important, the economy was clearly turning downward even

before Hoover took office in 1929. Entire sectors of the economy were depressed

throughout the decade, such as: agriculture, energy and mining. Even the two industries

with the most spectacular growth – construction and automobile manufacturing – were

contracting in the year before the stock market crash of 1929. About 600 banks a year

were failing. Half the American people lived at or below the minimum subsistence level.

By the time the stock market crashed, there was a excessive amount of goods on the

market, and inventories were three times their normal size. The fact that all this occurred

even before the first act of government intervention is a major refutation of laissez-faire

ideology.

TIMELINE OF GENERAL EVENTS

1920s

.During World War I, federal spending grows three times larger than tax collections.

When the government cuts back spending to balance the budget in 1920, a severe

recession results. However, the war economy invested heavily in the manufacturing

sector, and the next decade will see an explosion of productivity… although only for

certain sectors of the economy.

.An average of 600 banks fail each year.

.Agricultural, energy and coal mini

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