Economic Boom and Bust: The 1920s and the Great Depression
The Roaring Twenties and the Great Depression
The Roaring Twenties (1922-1929) marked a period of unprecedented economic prosperity in the United States. This boom benefited society as a whole, leading to rapid economic growth and a speculative bubble. However, this prosperity was short-lived, ending abruptly on October 24, 1929, known as Black Thursday, with the Stock Market Crash of 1929, which ultimately led to the Great Depression.
The rise of installment buying contributed to consumer debt, while the radio became a popular and accessible mass medium. Ford’s innovative use of the assembly line significantly reduced costs and production time, a method later adopted by other industries like steel and glass.
The New York Stock Exchange Crash of 1929
The 1929 crash of the New York Stock Exchange triggered the most significant economic crisis in capitalist history. Overconfidence fueled by the preceding years of prosperity led many companies to invest their profits in stocks, driving prices up. Investors bought these inflated stocks with borrowed money, creating a precarious financial situation. When banks began to fail, they demanded repayment of loans, causing a massive market drop.
Consequences of the Crisis
The crisis had far-reaching consequences:
- Global trade declined sharply.
- Governments increased intervention in the economy, fixing prices and attempting to restore confidence in payment systems.
- The crisis discredited liberal economic policies and fueled the rise of alternative ideologies, such as right-wing totalitarianism and leftist movements.
The Great Depression
The Great Depression had a devastating impact on various economic sectors:
- Industrial Sector: Global industrial production fell by 40%, with steel and consumer goods industries particularly hard hit.
- Agricultural Sector: Prices collapsed and demand plummeted, leading to the destruction of crops, even as millions of families faced food shortages.
The decrease in economic activity and consumption led to a general decline in world trade.
Initial Responses to the Crisis
Initially, governments believed the crisis would be short-lived. Many resorted to protectionist policies to shield domestic industries from foreign competition.
Keynesian Proposal
The Keynesian approach emphasized aggregate demand as the key economic variable. If demand exceeds total production, prices rise. The impact of increased aggregate demand on prices depends on the state of the economy, particularly the gap between demand and supply. In a fully employed economy, increased demand leads to inflation. However, with significant unemployment and unused resources, increased demand can be met by increased supply, mitigating inflationary pressures.
The New Deal
The most successful policy response to the crisis was the New Deal in the United States, implemented by President Franklin D. Roosevelt. The New Deal aimed to stimulate economic and social production by boosting demand through government intervention, a departure from traditional laissez-faire economics.
Key New Deal measures included:
- Banking reforms to strengthen government oversight and protect consumers.
- Job creation programs employing millions of workers.
- Price supports for farmers and collective bargaining rights, minimum wages, and reduced working hours for workers.
- Public investment in large-scale projects.
- Trade regulations, production quotas for businesses and farmers.
- Creation of the first federal unemployment insurance and pension system, along with minimum wage and maximum working hour laws.
The New Deal significantly improved the economic situation and addressed the social crises caused by the Great Depression. The final push towards recovery came with World War II and the increased demand it generated. However, the global economy continued to struggle with lingering effects of the depression into the late 1930s.