The Great Depression: Its Causes and Cure.

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The Great Depression: Its Causes and Cure.

The economy in the United States during the 1930s was at its worst. In a normal economy, there has to be a circular flow of money. One’s spending becomes part of someone else’s earnings, and vice-versa. However, this circular flow can falter. People tend to spend less money when times become tough; but times become tougher when everyone starts hoarding money. This breakdown in the circular flow of money in an economy results in a recession. To get this cycle started again, the central bank has to expand the money supply. That would put more money in people’s hands and compel them to start spending again. A depression is an especially severe recession in which people hoard money no matter how much the central bank tries to expand the money supply. To cure a depression, the government has to do what the people are not: start spending. The Great Depression of the 1930s was the greatest recession America has ever seen.
The continually rising standard of living of the 1920s had people spending a lot of their money. Since people wanted to buy all the latest inventions, they were taking money out of banks. That forced the banks to go out of business. An average of six hundred banks failed each year. With no money left in the banks, people began to take their money out of stocks; causing the Stock Market Crash of 1929 and the Great Depression that followed. By 1930, the Gross National Product (a measure of the amount of money a country takes in a year) fell 9.4 percent; and the unemployment rate increased from 3.2 to 8.7 percent. And still there was no major legislation passed addressing the Depression. By 1932, the worst year of the Depression, the Gross National Product (GNP) fell a record 13.4 percent. And unemployment increased to 23.6 percent. Almost half the American people lived at or below poverty level. Despite the shape of the economy, President Hoover had made few attempts to try and help the economy. Franklin Roosevelt easily defeated Hoover in the fall election. After the election, Roosevelt began what was known as the “First 100 Days”. During these “First 100 Days”, there were sixteen pieces of New Deal legislation passed by Congress. This new legislation included the Agricultural Adjustment Act, Home Owner’s Loan Act, and the National Recovery Act. By 1934, the GNP rose 7.7 percent and unemployment fell to 21.7 percent. The long road to recovery began. Also in 1934, Sweden became the first nation to fully recover from the Great Depression. It did so by following the policy of deficit spending. However, Roosevelt rejected that policy because he was too obsessed with the idea of a balanced budget and because the New Deal programs seem to have been successful. Germany and Great Britain became the second and the third nations to fully recover from a Great Depression. They also did it by heavy deficit spending. In 1935, Congress also passed the Social Security Act. The economic recovery slowly continued for the next several years. However, in 1938, GNP fell 4.5 percent while unemployment increased to 19.0 percent. Roosevelt’s New Deal programs were helpful, but not enough to save the economy and pull this country out of the Great Depression. The United States began emerging from the Depression in 1939, when it spent one billion dollars to build its armed forces. Other countries began to recover from the Depression as they spent money to build their armies and prepared for war. And although World War II was one of the largest tragedies in human history and cost millions of people their lives, it helped America emerge as the world’s only economic superpower.
There was a lot at stake during the Great Depression. In addition to the economic future of this country, people’s trust in our government was also at stake. President Hoover didn’t do much to help our economy when he was in office. People began to lose their faith in him. FDR was a Democrat. He believed in more government interference in people’s social lives and in more government control over private businesses. And although Roosevelt, with his New