The recent financial crisis of 2007 was so severe that the U.S. economy still has not fully recovered from it after more than half a decade. It is not usually to read in print media or hear on the electronic media that there is still a long way to go before the unemployment rate falls to an acceptable level. But the recent financial crisis, as severe it may be, doesn’t compare to the Great Depression of the 1930s when the unemployment rate was significantly higher and there was unprecedented drop in economic activity. It is important to understand the causes of the Great Depression so that the lessons could be used to prevent crisis of such magnitude from happening again.
One of the causes of the Great Depression was the high levels of economic optimism is the country which in addition to economic activities, had also been shaped by the rhetoric of the politicians such as the U.S. President Calvin Coolidge (Document B) The business leaders painted a very rosy picture of the future and some like General Motors executive John T. Raskob claimed that investing in stock market was a sure way to become rich and there is no excuse why one should not invest in the stock market (Document C). Thus, it is not surprising that the overall trend in the stock market was extremely bullish and just before the market crash, bull market had reached its highest level since the beginning of the century (Document A). When stock market reaches extremely high valuations, there is a good chance that high degree of speculation has taken hold of the market and such high valuations are unsustainable. As expected, stock market eventually crashed and was one of the major contributors towards the Great Depression of the 1930s.
The Great Depression of the 1930s was not only the result of the failed government policies but might also have become prolonged due to such policies. First of all, government didn’t adequately monitor the financial markets which instead of primarily focusing on connecting providers and suppliers of capital became betting ground for speculators (Document F). Similarly, speculation was also encouraged by liberal margin requirements which allowed investors to significantly increase the scale of investment (Document G). This in a way was quite similar to the housing boom before the recent financial crisis in which applicants could become homeowners by borrowing significantly more than what could be justified by their financial circumstances.
Another policy mistake by the government was anti-import policies. Through emergency tariff in 1921 and the Fordney-McCumber Tariff Act of 1922, the U.S. Government didn’t make it difficult for other countries to export their products to U.S. but also weakened the paying ability of debtor countries who owed to the U.S. In addition, these measures by the U.S. Government, often opposed by significant proportion of economists, resulted in retaliatory measures from other countries (Document O) who made it more difficult for the U.S. manufacturers to do business abroad.
The Great Depression also occurred because the consumers had borrowed far more than they could afford to fund their consumption lifestyles. Borrowing may help one consume more but sooner or later (Document M), debt has to be repaid because the party doesn’t last forever. Similarly, high unemployment rate and low incomes levels also made the things worse during the Great Depression. When people have more income, they spend more and as a result, there is a greater economic activity due to suppliers of goods and services producing more to meet the rising demand. But more than half of the U.S. population or 60 percent of Americans were making $2,000 or less per year. In other words, they were living at or below the poverty line since an income of $2,000 was considered the minimum amount per year to meet the basic demands of an average American family (Document K).
Not only most of the American families had inadequate income to support high levels of economic activity but high unemployment rate also made the matters worse. The unemployment rate was 3.2 percent among civilian labor force including farmers in 1929 and 5.3 percent among nonfarm employees but the corresponding rates had jumped to 8.9 percent and 14.2 percent just a year later in 1930. By 1932, unemployment rate was 24.1 percent among civilian labor force including farmers and 36.3 percent among nonfarm employees. The unemployment rates remained in the double digits for both groups until 1940 (Document E). High unemployment rate does not result in lower demand for goods and services due to obvious reason of low income but also make people less optimistic about the future and influence them to save more, only further reducing demand for goods and services.
The Great Depression was the worst financial crisis faced by the country since the beginning of the 20th century and even recent financial crisis, though quite severe, doesn’t compare to the Great Depression. The Great Depression doesn’t occur as a result of single factor but multiple factors such as speculation in the stock market, easy access to credit, over-optimism, poor government policies, and high unemployment rate for long period of time. It is important to understand the factors behind the Great Depression so that a crisis of such a magnitude doesn’t occur again even though recent financial crisis shows society does repeat some of the mistakes.