The Great Depression: Causes and Recovery Attempts
The Great Depression
Causes of the Depression
- Overproduction (Industrial): Purchasing power was insufficient to absorb increased production before 1929.
- Liquidity Crisis: A lack of monetary resources to address the payment of debts, causing a cascade of defaults that resulted in the closure of industries and banks. The desire to sell goods at any price forced down prices (deflation).
- Fall of Consumption: Caused by unemployment, reduced purchasing power, fear of dismissal, falling agricultural prices, and indebtedness from previous years.
The Financial and Industrial Crises
The causes above made the crisis affect all economic sectors, especially banks, which were the first affected as debtors could not repay their loans. Bank failures frightened people, who came to the banks *en masse* to withdraw their funds, which they could not do because the banks did not have enough monetary resources. All this triggered the banking crisis.
Banks, in turn, reduced lending to the industry, which prevented many companies from settling their debts. Pessimism led to a sharp decline in industrial investors because they doubted that products could find buyers.
The collapse of stock market investors and the reduction of credit led to a drop in consumption, which worsened overproduction and caused prices to fall, leading to an Industrial Crisis. The Industrial Crisis caused unemployment to rise, leading to poverty and miserable living conditions. Unemployment worsened the decline in demand, which further decreased industrial and agricultural production, creating a feedback loop of crises.
Paths to Economic Recovery
Keynes’ Proposals
J.M. Keynes argued that the crisis was temporary and that the main problem was a lack of demand due to the fall in investment. His plan was for the state to increase public spending, mainly on public works activities, employing many workers.
State spending would generate a deficit, but this would not be a problem because if it increased demand, it would create demand in other sectors.
Keynes campaigned for improved wages and increasing the purchasing power of the working class, promoting consumption and savings.
Roosevelt’s New Deal
The New Deal was an economic plan for crisis management implemented by Franklin D. Roosevelt.
The program had contradictory aspects:
- Intervention of the State.
- Cut spending to reduce the deficit.
The measures of the New Deal tried to fight deflation. The Agricultural Adjustment Act (to regulate production and prices) was introduced, and the Adjustment Agricultural Administration (AAA) was created to reduce agricultural production and recover prices.
The Industrial Recovery Act created two organizations:
- National Recovery Administration (NRA) to promote price agreements between firms and avoid retrenchments.
- Public Works Administration (PWA) to promote large infrastructure projects that would reduce unemployment and increase demand.
The Tennessee Valley Authority built hydroelectric dams in one of the most deprived areas in the U.S.
To prevent speculative and banking crises, Roosevelt implemented:
- State control over banks to ensure their financial soundness.
- Federal insurance to guarantee investors’ accounts in case of bank failure.
- Securities and Exchange Commission to monitor stock issues.
- A monetarist policy that devalued the dollar by more than 40%.
In the labor field, the New Deal introduced:
- The National Labor Relations Act, which recognized freedom of association and the right to negotiate wages.
- Minimum wage and maximum hours, which led to increased union membership.
- The Social Security Act, by which the government would provide basic unemployment benefits and assistance for seniors.
Business confidence in the New Deal and limited private investment led to the withdrawal of employers, and a new recession arose between 1936 and 1937.
Even today, it cannot be নিশ্চিত (assured) if the New Deal was positive for the U.S. economic recovery, but it did contribute to stabilizing the economy. Indeed, total economic recovery was not achieved until 1939, when the new war encouraged the development of the arms industry and the U.S.’s role as a provider to the Allies.