The Wall Street Crash of 1929: Causes, Impact, and Recovery
The Wall Street Crash of 1929
Introduction: The crisis of 1929 was a global crisis rooted in overproduction. How did this situation arise?
During World War I, neutral countries focused on producing and selling goods to nations at war, creating an artificial market. These countries increased production to maximize earnings and even lent money to warring nations to facilitate purchases, keeping their factories running at full capacity.
The countries at war became heavily indebted to the U.S., and their economies became artificially inflated, geared solely towards wartime production. When Europe began its reconstruction, it sought economic independence and started producing its own goods. The first sign of the overproduction crisis appeared in 1921, with business closures, but this went largely unnoticed due to a lack of government warnings. Europe then experienced the roaring ’20s, a period of rapid economic recovery.
The Progression of the Crisis
In 1929, news about the American economy began to surface. Producers and investors realized that companies’ sales had dropped by as much as 50%. The gap between the value of products and the value of the stock market widened.
The stock market is a state-created platform where companies borrow money from private individuals by issuing shares. In 1928 and 1929, there was a massive sale of shares. The stock market had become a business where shares could be sold for more than their purchase price (borrowed value). When the real economic data was released in 1929, investors wanted to sell, but no one wanted to buy, leading to the ruin of both businesses and investors. The state instructed banks to buy these shares to curb the sell-off, but the banks lacked sufficient funds, and bankruptcies multiplied.
The United States responded to the crisis with state intervention. Europe’s crisis began when the U.S. withdrew its support for European reconstruction and demanded repayment of war debts. The colonies were also affected by the crisis.
Measures to Exit the Crisis
The United States was the first country to propose measures to overcome the crisis. These measures were based on Keynes’ theory of the new economy, which became known as neoliberalism. This is the system that operates globally today. Adam Smith’s theory was practiced in the 18th and 19th centuries but became unsustainable after the crisis of 1929.
Keynesian Theory
Keynesian theory argues that the state should become the primary economic operator in a country because it is the only entity that can enforce compliance with rules through sanctions. The state engages in economic activity, creates employment in industries, and uses taxes to incentivize or disincentivize certain behaviors, providing aid and scholarships.
The U.S. implemented Keynes’ theory with positive results. This set of laws was called the New Deal, but it was later outlawed by legislation that deemed it to infringe on individual freedom.
In Europe, two economic policies were adopted to overcome the crisis. The first was planning in Russia, Italy, Portugal, and Spain, which involved creating state targets for specific periods. The second was implemented in Germany, which created a dual currency system. One currency was used internally to manage war debts, and the state became the primary employer, creating a body of officials. Public works and state spending led to a deficit, which was addressed by raising taxes.
Today, there is ongoing debate about whether the population should bear the burden of fixing the crisis or whether the state should lower taxes, support private enterprise, and reward private employers, which some believe would be more beneficial for the economy.