Economic Problems of the 1920s (Essay Sample)

Economic Problems of the 1920’s
Student’s Name:
Institutional affiliation:
Economic Problems of the 1920’s
The 1920’s represented a time of major economic changes, improvements, adjustments, alterations and reforms in everything all over the world. The decade roared in some selected areas but was a big disappointment for others. The periodic time of the 1920’s earned it its name the "roaring twenties" because the decade sustained prosperity, there were lively cultures and technology was in its advancement stages. The decade marked the distinct flourishing and advancement of mass consumption economy, modern mass production, which raised the bar for the living standards of the middle urban working class as well as delivered remarkable profit margins for investors. But it was not all rosy. Towards the end of the decade, the world suffered the famous ‘Great Depression’.
The great depression was virtually a severe and intense worldwide economic downturn which made many people lose their jobs and homes. The great depression first originated from the United States of America and went on to affect many if not all the counties worldwide. The period and time of great depression greatly varied between countries. It first started in the late 1920’s and ran through the 1930’s and ended in 1940 right before the start of the Second World War This era virtually devastated everyone; people from all walks of life, the poor and rich and people from all occupations of life. The term ‘Great Depression’ was first contrived by Lionel Robinson, a British economist who wrote the book ‘The Great Depression’ in 1934. But it was president Hoover who later popularized it in his statement where he quoted "I need not remind all of you that right this moment, our world is going through a period of great depression.
The real cause and reason for the happening of great depression still remains an open and disputed debate amongst historians and economists. Sociology theorists are divided into two main categories; Keynesian economists and Classical economists. When theorizing the great depression by the Classical economists, they particularly focus on the decisions of central banking and how it led to an economic bubble and overinvestment, or excess supply of gold. Gold was known to back many of the major currencies at that time. On the other hand, Keynesian economists blame the incompetence of banking and the government as well as overinvestment and under consumption.
Many people admit that the events which prompted the great depression were as a result of the stock market crush in 1929. The fateful day of the crash was known to many as the ‘Black Tuesday’. This was the most historic stock market downturn in the history of America. 29th of October 1929 was the fateful day that saw the collapse of the stock market and the start of an economic slump which persisted for more than a decade. The economic slump came off as a big surprise to many people.
During the roaring twenties, the economic standings were great. Thousands and thousands of Americans were borrowing money and purchasing stocks as the economy looked promising. More than 9 billion US dollars was given out in form of loans. This was much more than the total amount of money going round in the whole of America at that time. The market share prices continued to advance and the people kept on purchasing stocks with a hope that their value would increase. This in turn led to an economic bubble.
The crash of the market stocks prompted and stirred multiple debates. One of the possible cases of the market stock crash was that the banks were enthusiastic and so they put deposits that were at risk up for sale on the stock market. Other people believed that exploitations by some utility holding companies largely contributed to the market stock crash. Another raging debate that still raves on till now is whether the crash of the stock market really sparked the great depression. Eminent economists believe that the great depression was inevitable and the crash of the market stock only aggravated the economic cycle. Monetary History of America, (co-written by Milton Friedman and Anna Schwart) states that the depression was not evoked by the crash of the stock market or the negative cycle of businesses but it was aggravated by the rapid downfall of systems of banking during the three panic waves in the early 1930’s.
At the time of the market stock crash, only 16% of Americans had invested in stocks yet everyone felt the brunt of its effects. The reason was simply because many businesses were not in a position to secure enough capital investment funds. This in turn led to financial uncertainty. Job security for many people was not guaranteed because of the financial uncertainty. This led to lowered consumption which in turn caused closure of businesses, unemployment and bankruptcies. The negative cycle of most businesses triggered a worldwide rush on the gold deposits of America which basically forced the Federal Reserve of America to increase the rates of into the slump. With time, a number large number of money lenders and banks ended up failing. Shortly after the crash, there was an implementation of the ‘upstick rule’. This rule kept the short sellers at bay and prevented them from plunging the stock market down in a flat bear run.
The recession in international trade during the beginning of the great depression distinctively stands out as the most shocking in the history of the world trade. Between the years of 1929 and 1932, the world export and import quantities in industrial nations significantly declined. Some of the factors that accounted for this include international exchange rate policies, escalating tariffs, declining demand, an increase in bilateral trade agreements and escalation of nontariff and tariff trade barriers. The US government thought that by erecting barriers of trade they were in turn protecting their economy. Trade barriers were employed to raise revenue, protect industries and to counter balance the barriers that were erected by other countries.
Through the struggles emerged two United States government officials; representative Willis C. Hawley and Senator Reed Smoot. They were aggressively lobbying for an act which would raise the tariffs. They were very vocal and believed that the new act would help the economy. In the 1930, the Hawley-Smoot act was passed into bill. This was put to help raise tariffs on imported goods. The acts main objective was to aid workers and farmers of the US against foreign competition. This was done by raising awareness and encouraging the people to buy products made in America by Americans and also increase the import prices. The idea backfired and blew back right on their faces. Some countries such as Britain, Germany, France and Canada went ahead to develop and forge new partners of trade while other countries raised their tariffs. This led to a decrease of US eexports and a relative increase of imports especially from Europe. It also led to a decrease in general world trade.
The Hawley-Smoot tariff was a complete failure and disaster.in fact it was one of the contributing factors that led to economic slump. In the year of the passing of Hawley-Smoot act saw the doubling of rates of unemployment. In years to come, the country did its best to prevent the passing of disastrous tariffs like the Hawley-Smoot. To ensure this, such protective acts as General Agreement on Tariffs and the Bretton Woods agreement were passed.
By the year 1930, interest rates had tremendously dropped. Despite the drop in interest rates, deflation still happened and it led to individuals and families spending less. Big production companies like producers of automobiles started suffering as the purchasing power and prices staggeringly dipped to their lowest. This continued happening even though the wages held steadily. Later on, a deflationary spiral started. This was because production had been decreased and so were the prices. Limited production meant reduced wages and demand which later led to an even further decline in prices.
During the great depression, some countries unemployment rates rose to a high of 33%. In the United States of America, the unemployment rate rose to 25%. This was a 607% increase between the years of 1929 and 1932. There was also a 46% drop in industrial production, a 70% drop in foreign trade and a 32% drop in wholesale prices.
By 1930 over 10,000 banks had failed with some closing down. At that time, the US lost almost 30% of its GDP while the stock markets took a plunge to a 90% decline. The US government deemed more than 60% of its citizens poor. Many families were stricken by diseases, lived in tents and cardboard boxes and the children were totally malnourished.
Countries from all over the world in a way perceived the accoutrements of the great depression. Countries such as Japan and France were not severely hit as others. To start with, France was a country that was greatly self-reliant and so never had so much to lose on imports and exports. The finance minister of Japan at that time Mr Takahashi Koromiko completely enforced the policies of Keynesian economy. This greatly helped in preventing the negative impact and effects of the great depression on their economy. The finance minister created a large fiscal stimulus which involved devaluing of their currency and deficit spending. By making the changes above, Japan saw itself not being much affected by the great depression and by the year 1933 their economy was running strong.
Countries such as South Africa and Australia who completely relied on industrial exports and agriculture really suffered. There came the emergence of a drought known as ‘the ...