The Rise and Fall of the American Economy: From Boom to Bust
The Rise of the US Economy
Post-War Supremacy
World War I accelerated the shift in global economic power from the UK to the US. Demand for British goods declined while American products gained traction. Although the pound sterling remained the international trade currency, the US dollar emerged as a strong competitor, impacting British exports and industrial production. The dollar gradually became a dominant force in global trade.
US Banking Consolidation
American banks consolidated their position as the most dynamic in the world, forming a robust financial system capable of sustaining long-term loans. This further strengthened the US’s economic influence.
Trade Imbalance with Europe
The US experienced a favorable trade balance with Europe, exporting significantly more than it imported. This was driven by the implementation of new technologies and efficient working methods, boosting American competitiveness. Consequently, the US became a key player in Europe’s post-war financial reconstruction.
The Dawes Plan
The Dawes Plan, a loan mechanism, provided Germany with US dollars to pay war reparations to the UK and France. This allowed the US to recoup its wartime loans, further solidifying its financial dominance.
The Roaring Twenties
The 1920s witnessed a period of economic expansion and transformation in the US, marked by a burgeoning consumer society. Workers, fueled by readily available credit, began purchasing luxury goods previously enjoyed only by the wealthy. Industries producing consumer goods and construction flourished, leading to the development of iconic skyscrapers in major US cities. Increased productivity lowered production costs, further driving demand and supply.
Crisis and the Stock Market Boom
Speculative Bubble
Around 1925, companies began investing profits in the stock market, perceiving it as a stable investment. This influx of capital created a speculative bubble, where stock prices rose beyond the actual value of the companies. The availability of installment payments attracted smaller investors, further inflating the bubble.
The 1929 Crash and the Great Depression
Black Thursday and Black Tuesday
In 1929, stock prices began to decline, leaving investors unable to repay their loans. Banks, facing a liquidity crisis, restricted lending. Black Thursday (October 24th) marked the beginning of the stock market crash. By Black Tuesday (October 29th), banks demanded loan repayments, forcing investors to sell their depreciated stocks, exacerbating the crisis and leading to widespread bank failures.
The Great Depression’s Impact
The stock market crash triggered the Great Depression, characterized by a liquidity crisis, plummeting consumption, industrial collapse, deflation, falling agricultural prices, and widespread debt. Lack of consumer demand led to overproduction, job losses, and a stalled American economy. The banking crisis and industrial recession further deepened the economic hardship, leaving millions unemployed and impoverished.
Global Expansion of the Crisis
The Great Depression spread beyond US borders, impacting European countries and other regions worldwide. Lower US product prices undermined other nations’ competitiveness, while decreased demand for imports harmed exporting countries. Banking troubles reduced loans and investments in Europe, leading to industrial decline and rising unemployment.
Country-Specific Impacts
- Germany: Already struggling after WWI, Germany faced hyperinflation, reduced industrial output, and soaring unemployment.
- UK: The UK struggled to maintain the pound’s dominance against the dollar, contributing to the international monetary system’s instability.
- France: France lost international competitiveness and resorted to protectionist measures.
The collapse of international trade, currency devaluations, and rising protectionism had severe repercussions for Latin America and Asia, which relied heavily on exporting food and raw materials.
The Keynesian Proposal and the New Deal
Keynesian Economics
John Maynard Keynes, in his 1936 work “The General Theory of Employment, Interest and Money,” argued against wage reductions and advocated for government intervention to stimulate economic recovery. His concept of the “Keynesian Multiplier” proposed increased public spending on public works to create jobs and boost demand, thereby generating economic activity and tax revenue.
The Roosevelt New Deal
President Franklin D. Roosevelt’s New Deal implemented Keynesian principles through economic interventions such as public works projects, currency devaluation, banking regulations, investment incentives, and agricultural programs. Social interventions included reduced working hours, minimum wage laws, unemployment benefits, and employment policies. These measures aimed to alleviate the economic crisis and provide relief to struggling Americans.