Sept12

The Great Depression

The Great Depression was the longest and most severe period of economic depression ever experienced by the United States. It began with a collapse of price on the New York Stock Exchange (NYSE) in October 1929, and recovery from the depths of this economic decline was excruciatingly slow. It did not end until the United States entered World War II in late 1941. At its verge of total collapse. National income had declined by almost one-half in a little over 3 years, captial investment had dropped to the point where net investment was negative, and one out of three people in the labor force was out of work.

 The stock-market crash which began on October 24, 1929, was not confined to a single day; the decline in asset prices was a process of continual erosion for almost 3 years. By late 1932 stock prices on the NYSE had fallen to only 20 percent of their values in late 1929, and the prices of other assets had similarly declined. This individual fortunes and savings, it also placed serious pressures on the stability of financial institutions, particularly banks.

 The so-called spending thesis analyzes the Great Depression in terms of the enormous fall in both consumption and investment expenditures between 1929 and 1933 and in terms of the failure of these expenditures to recover after 1933. In this view, the interrelationship of income, consumption, and investment, together with the pessimistic expectations following the financial collapse, acted to discourage spending and thus to hinder the recovery of economy. Not until goverment spending increased dramatically following the 1937-1938 slump did aggregate spending return to a level sufficient to restore employment to a normal level.

 Most significant was the absence of any institutional arrangements to cushion the effect that loss of income due to unemployment had on aggregate spending.

 The experience of the Great Depression shattered Americans' faith in their laissez faire economic philosophy. The inability of the economic system to stem the economic decline after 1929 produced increasing pressures for action by the government-- pressures which undoubtedly contributed to Rossevelt's election in 1932. Roosevelt responded with a variety of programs for income maintenance; goverment-sponsored price and wage codes designed to limit the harmful effects of cut-throat competition and, finally, programs of public works to provide jobs for the unemployed. This last approach -- public works -- increasingly became the mainstay of the government's effort to reduce unemployment. The notion that goverment should play an active role in maintaining economic stability was a major tenet of New Deal thinking.

 The New Deal, in response to the pressoures at the time, began a process of economic reform which was to continue for the next fifty or hundred years. Finally, the experience of the Great Depression servers as a continual reminder of the potential instability of the market economy, a memeory which spurs a continued search for economic stability.


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