Kylie Langlois

Independent Studies-Economics

 

The Effects of the Great Depression

 
    Most economists consider the beginning of the Great Depression as the fall of the Stock Market in 1929. For most Americans, though, it began much earlier because of the events that led up to the stock market crash, such as the Oklahoma Dust Bowl. These natural disaster were ultimately man-made, and it was men and women who paid the price. Before the actual crash of the stock market, many other aspects of the economy were also going down. This is much like now. The economy did not just collapse one day. No, it started with the housing market. Likewise, the Great Depression began with the unemployment problem. There were too many people and not enough jobs. This also seems familiar with our current economic crisis. Although, we are not yet in a "depression", only a "recession", there is still a chance of this being another Great Depression. If it is, how can we stop it? Can we learn from our past mistakes and make similar choices to get us out of this economic rut? The Great Depression changed the government's and common people's opinion of economics. It changed their view on banking, loans, savings, and the way the economy works altogether. Although the Great Depression was a terrible time for the majority of American, it ultimately brought about a new and better kind of economy. 
          "A government should keep its role in the economy small" (O'Sullivan and Sheffrin 395). This was the thought of many economists before the Great Depression. And who could blame them? This is what the American people wanted and this is what had worked so far. John Keynes once said "When the facts change, I change my mind. What do you do, sir?" (Coleman). Keynes had the right idea, but American was not ready for it yet. Adam Smith, David Ricardo, and Thomas Malthus are considered classical economists. Classical economy ruled the American economy for over a century before the crash of the Stock Market . Classical economics is the thought that the free market regulates itself because people act in their own self-interest, causing prices to rise and fall (O'Sullivan and Seffrin 395). Economists thought that this would cause the market to tend toward equilibrium indefinitely. If there was a fall, that was normal, a rise would follow. This type of thinking got classical economists, and the American people, in trouble. Instead of prices rising after steadily falling prices, and demand getting lower and lower as the unemployed increased, the prices continued to fall and more and more people wound up without a job. According to classical economics, "the market should have reached equilibrium, with full employment. But it didn't" (O'Sullivan and Seffrin 395). Instead of the demand for jobs going up because of unemployment, more and more people were being laid off, not knowing what to do. Instead of prices bouncing back, people became too poor to feed themselves, let alone their entire family. Another reason why the economy did not return to equilibrium like it should have is because many banks loaned large amounts of money to unstable companies and farmers who could not pay back their loans (O'Sullivan and Seffrin 225). Money is not the actual paper notes and coins we call "money". Money is made by banks loaning paper notes and coins to certain businesses or people, receiving interest on the first money and then loaning out the interest and then getting interest on the first interest. This goes on and on until someone cannot pay their loan. Then money is not longer made and money production stops. This is what happened to poor farmers. They had no means to pay back their loans because they had no jobs because there was no money in the banks. This spiral caused the eventual crash of the stock market. In John Steinbeck's novel, The Grapes of Wrath, the plight of the American migrant worker is revealed in startling detail. Steinbeck's novel shows the desperate situation the American people were put in because of classical economics and its supposed equilibrium and its consistency. "The facts had changed and policies should have changed accordingly. The fact that they didn't reflects what happens when politicians become more concerned about consistency than about doing the right thing" (Coleman). This what I think happened during the Great Depression and why the stock market finally crashed and why nothing was done remedy the situation quickly. Politicians did not want to change, even though something terrible had happened. It took a fact so big that it could not be ignored that policies finally changed.

    As opposed to classical economics, Keynesian economics puts a larger emphasis on the government being an active role in the economy. According to Keynes, "the economy is composed of three sectors-individuals, business, and government-and that the government actions can make up for changes in the other two" (O'Sullivan and Seffrin 397). This kind of economics puts more responsibility on the government and requires fiscal policy to intercede when individual or businesses "mess up". A "mess up" would be to take out loans that cannot be repaid. If classical economists like Malthus, Smith, and Ricardo would have changed their thinking when the facts changed, the Great Depression might have been avoided altogether. But as it is, the Great Depression forced classical economists to changed their views on how the economy should be run. Even though Keynes looks at the economy as three parts, they are three cohesive parts that work together to keep the economy from falling under. This way of thinking is called "demand-side economics because it involves changing demand to help the economy" (O'Sullivan and Seffrin 396). They way this works is that the government keeps track of the nation's private spending. If the spending begins to fall at a constant rate, the government can respond by spending more in the public sector until demand is raised again and spending returns to normal (O'Sullivan and Seffrin 397). This is way to combat against recessions and depressions. In classical economics, if the private sector's spending was falling, the government would wait until demand rose again and rose prices with it. This would bring the economy back into equilibrium. But this did not happened during the Great Depression. So, the economy looked to change to the Keynesian way of thinking, and President Franklin Delano Roosevelt brought that about.

    After facing severe hardship with his bout of polio and intense physical therapy, Franklin Delano Roosevelt ran for President in the heat of the Great Depression. In 1932, FDR flew out to Chicago and "pledg[ed] to deliver to the American people a "New Deal," a federally funded, federally administered program of relief and recovery" (Axelrod 243). Roosevelt was talking about a Keynesian economy where the government plays a much bigger role than it ever had previously. Axelrod says that Roosevelt's main aim was to bring immediate relief (243). This is one of the characteristics of Keynesian economics: a tool to use in the short run (O'Sullivan and Seffrin 396). By bringing the economy under the watchful eye of the government, President Roosevelt did indeed bring immediate relief to many. But more than just bring short term relief to the needy and desperate poor that had been created by the Great Depression, Roosevelt also strengthened the American economy from the inside out. By enacting a series of legislative measures, Roosevelt tried to protect the American people from the kind of devastating effects of another Great Depression. By enacting the Federal Deposit Insurance Corporation (FDIC), Roosevelt protected investors. This showed that the government was indeed incorporating itself into the economy to protect the people and not just the "big wigs" of corporate companies. Roosevelt also helped bring along the "Federal Securities Act [which] reformed the regulation of stock offering and trading--an effort to avert the kind of wild speculation that helped bring about the crash of 1929" (Axelrod 243). This was John Keynes' major goal: a way to prevent a large scale recession or depression. Or in the case of the American economy, to reverse the effects of a recession or depression. But fortifying the infrastructure of the economy was no good without anyone to invest money in the banks or to buy stocks of companies that do not exists anymore. As Donna St. George reports, "At the height of the Depression that spanned the 1930s, unemployment rates reached almost 25 percent" (C1). Enter President Roosevelt. By creating various organizations and labor task forces (like CCC and Agriculture Adjustment Administration), the President gave previous farmers and industrial workers a new place to work (Axelrod 244). This probably provided a sense of direction and a glimmer of hope. June Roper was born a month after the crash of the Stock Market and says "We saw the recovery, which I think people need to remember now. You do recover" (St. George C1). Roosevelt was trying to show people the road to recovery: a strong government infrastructure and more jobs for the American people. President Roosevelt was one of the key players, using Keynes' ideas, that lifted America up from the Great Depression by changing role of the government in the economy.   

    But America was not the only country affected by the Great Depression. American is, and has been, a powerhouse when it comes to the economy. By importing many foreign goods and exporting equal shares of produce, foodstuff, and goods, America's economic welfare is tied closely to many other countries. At the time of the Great Depression, the majority of these countries resided in Europe. Germany, France, England, and the United States were all involved in a tangled web of relying on each other to pay debts to other countries, "The Allies, and particularly France, depended on payments from Germany to subsidize their economies and pay their own debts to the United States; the German economy, in turn, had become heavily dependent on U.S. private investment in the mid-1920s. When the U.S. stock market collapsed in 1929, U.S. loans to Europe dried up, and the German economy very nearly collapsed" (Kagan). Farmers and industrial workers could not afford basic necessities such as food and proper clothing, so those lines of businesses went stagnant. This coupled with the inflation of many of Europe's currencies and the beginnings of World War II, set up a good environment for a continent-scale depression. When the stock market crashed in the United States, all of the countries tied to the American economy also crashed. Again, classical economics said that given enough time, the market will reach equilibrium. History tells us that this did not happen at all. In Britain, the government intervened in the economy, like the United States, with productive results; and the citizens remained confident in the government. On the other hand, France fell into social unrest where the effects of the American Great Depression came later, but lasted longer with little government leadership (Kagan). Britain and France are only two examples of the ripple effect the Great Depression had. Britain decided to change its idea about its own economy while France brooded and "stewed" in its own economic turmoil. The result of this was that Britain was basically the only government unscathed by World War II. Because the other governments most strongly affected by World War II (Italy, Russia, Germany) did not take a stand in their countries' economy, they succumbed to totalitarianism, fascism, and communism. The Great Depression did not only affect America, like so many people believe. It had far reaching and lasting shock waves in Europe that helped usher in World War II and changed multiple governments and economies. Like America, Britain's government decided to change its previous notions about its economy and took a more firm stand within it. In the end, this was the only government who played a major part in the war that came out the same as it went in. Also, the people of Britain still had faith in its government, which can not be said of France's citizens (Kagan). The economies now practiced in many European countries would never have been even thought of before the Great Depression and the war. This just shows how much one thing leads to another, ultimately causing people and governments to change their previous conceptions about something. 

     Throughout this discussion, only history has been discussed. But the American economic future is just as mysterious as it was in 1929. Many people see this as the next Great Depression. Like the Great Depression, our current economic crisis started with one aspect of the economy, the housing market. The housing market is what set this whole thing off. In the economy, one thing always leads to another, but right now "There's no deflationary spiral, at least not yet. But there is a collapsed U.S. housing market, a global financial system on the brink, and an economy that has gone into a stall" (Fox). Fox thinks that there is nothing to worry about right now, but as history shows us, this is probably not true. The American economy is officially in a recession and heading fast towards a depression, yet the majority of Americans are living the same way they were before the announcement of recession. If Keynes has pressed anything, it is that when facts change, policies and ideas much change. With a new President, maybe the ideas and policies of the American government will change to better suit the economy of the here and now, not one of the past.

    The Great Depression was a devastating and shocking event in the history of economics. The actually crash of the Stock Market was a long time coming and the effects were far reaching and long lasting. These effects were not confined to only the United States. They traveled across the Atlantic and into Europe, where they helped start what is called "The Great War." Americans were saved by President Roosevelt who held the keys to economic salvation: John Keynes' ideas of a new type of relationship between the government and economy. By overseeing the economy, the government ensures a degree of safety to its citizens. President Roosevelt did not only strengthen the governmental infrastructure in regards to the economy. He also strengthened the people so that they could "get back on their feet" and regain faith in their government for the future. Britain followed in America's example, which resulted with an intact government at the end of World War II. Countries such as Germany, France, Italy, and Russia suffered politically and economically during the war, which persisted after the war until radically politically changes. All these events happened because the American government refused to change its classical ideas of economics to fit the needs of the time. One thing snowballed into another and before anyone knew it, a war had started and the economies and several countries were revolutionizing. In conclusion, the Great Depression caused a cacophony of events across the world that changed economics forever.

      

 

 

 Works Cited  

 

Axelrod, Alan. "A New Deal and A New War." Complete Idiot's Guide to American History. United States: Alpha. 241-249.  

 

Coleman, Marc. "Stamp Duty Tipping Point." Irish Times. 8 June, 2007. Keynes  

 

O'Sullivan, Arthur, and Steven M. Sheffrin. "Fiscal Policy Options." Economics: Principles in Action. Boston: Pearson Prentice Hall, 395-398.

O'Sullivan, Arthur, and Steven M. Sheffrin. "Money and Banking." Economics: Principles in Action. Boston: Pearson Prentice Hall, 255.

 

St. George, Donna. "People remember." The Washington Post. 16 November, 2008. C1. 

 

Steinbeck, John. Grapes of Wrath. New York: Penguin Books, 2002.