Theories of the Great Depression
- Andrew Olesky
- Jul 27, 2023
- 3 min read
Most people understand the Great Depression as the period between the stock market crash of 1929 and the end of World War II. To historians, the Great Depression was far more complex. The cause of this event and the reasons for its end have been debated by scholars for decades. What most agree on is that the crash of the market in October of 1929, was an inevitable answer to the rapid economic growth occurring throughout the 20s. Government regulations set in the late nineteenth century limited the way in which banks could furnish long term loans to companies. Companies sought alternative methods of financing. The industrial securities that were issued in the 1890’s came of age in the 1920s. [1] The industrial securities were a way for companies to place equity in the developing market. Prior to the 1890s, this process was limited to certain industries such as coal or railroad, but it had become a method for all industries to finance their business.[2]
With many governmental limitations set in place, smaller companies were seeking many of the opportunities that larger corporations could afford. The answer was what we would call mutual funds today. The number of mutual funds in 1929 was more than 18X of those that existed in 1921.[3] Financial opportunities for business, small as well as large, and the increase in the demand for goods resulted in an economic boom. This sudden economic growth is commonly referred to as a “bubble.” The bubble as it grows is expected to burst, as we saw in October of 1929. By this time, U.S. exports had declined significantly. Many U.S. banks were failing, as a result of unsustainable practices. This ultimately harmed the confidence of the American public who began hoard money rather than circulating it into the economy.
Prior to the 1930s, the U.S. government as well as much of the civilized world, had monetary systems based on the gold standard. This meant paper money that any government under this system prints, directly corresponds to real physical gold. The downside is, paper money can’t be printed and put into circulation unless there are gold reserves to give that money value. Countries in Europe began abandoning the gold standard. This allowed governments to take more control over the amount of paper money that could be distributed and put back into the economy. The countries that left the gold standard recovered more quickly than those who didn’t.[4] The goal was to simulate the events of the “Great War” to raise prices and demand labor.[5] This helped to stabilize the economy but did not necessarily pull the U.S. or other countries out of the depression.
The true end of the depression came in the following decade. There was a steady increase in the GNP throughout most of the decade after 1933.[6] The unemployment rate had not yet recovered and Americans were still suffering economically. Romer points out that the economy in the 1930s did see substantial, steady growth. However, it was not enough to offset the loss that the economy suffered during the onset of the depression and again in 1938.[7] What the economy needed was an employment boost. America would find the boost they so desperately needed after the outbreak of World War II. Even before America was pulled into the Second Great War, employment opportunities increased as European countries had a demand for weapons of war, food, and other goods. When America eventually entered the war, additional opportunities were available as the need for soldiers overseas and personnel replacements for jobs at home. Had World War II not occurred, The United States economy and the world economy would have had a much slower recovery from the depression. Historians and economists can only speculate how long the economic hardships would have carried on. However, by 1946 America’s output of goods and unemployment rate returned to manageable levels.
Bibliography:
[1] White, Eugene N. "The Stock Market Boom and Crash of 1929 Revisited." The Journal of Economic Perspectives (1986-1998) 4, no. 2 (Spring, 1990): 67, https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-journals/stock-market-boom-crash-1929-revisited/docview/208971271/se-2.
[2] Navin, Thomas R., and Marian V. Sears. “The Rise of a Market for Industrial Securities, 1887-1902.” The Business History Review 29, no. 2 (1955): 105–38. https://doi.org/10.2307/3111383. 116
[3] White, Eugene N. "The Stock Market Boom and Crash of 1929 Revisited." The Journal of Economic Perspectives (1986-1998) 4, no. 2 (Spring, 1990): 67, https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-journals/stock-market-boom-crash-1929-revisited/docview/208971271/se-2.
[4] Bernanke, Ben S. “The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1 (1995): 1–28. https://doi.org/10.2307/2077848.
[5] “Gold Reserve Act of 1934: Hearings before the Committee on Coinage, Weights and Measures House of Representatives.” 73rd Congress, 2nd Session. HR6976. Retrieved from https://fraser.stlouisfed.org/files/docs/historical/house/1934hr_goldresact.pdf. 3
[6] Romer, Christina D. “What Ended the Great Depression?” The Journal of Economic History 52, no. 4 (1992): 757–84. http://www.jstor.org/stable/2123226. 757
[7] Ibid. 759
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