The Economic Side of the Roaring Twenties and the Great Depression

The US economy had major impacts on the Western world. The US economic model was applied throughout Europe. The industrial production system benefited from Taylor’s organization of work and consumers were able to buy and invest on credit, meaning they could borrow money to buy or invest.

The United States’ prosperity had been increasing since the end of World War I. The major European empires were hit hard by the impacts of this Great War and they struggled to rebuild their  economies. This led the US economy to become a major part of the global economy. The country’s production was progressing quickly. American products were sold all over the world, making the US economy very rich and one of the world’s leading economies.

Despite this unprecedented growth, US leaders implemented protectionist measures to create barriers to trade with other countries.

From 1925 onwards, the mechanization of farming resulted in overproduction. Small-scale agricultural producers experienced significant wage cuts, causing many of them to leave the countryside and move to the city. The rural exodus was so strong that an estimated 60 000 people left the countryside each year.

In 1926, the economic situation began to show signs of weakness. Growth was too fast, credit was disorganized and consumers and leaders had absolute faith in liberalism. So, the government didn’t intervene in the economic system.

Speculation was on the rise. Investors borrowed money to buy shares in the stock market, hoping that prices would increase. By selling their shares, they could repay their loan and still make a profit. In 1927, due to the  increased  use of credit to borrow money and the export of capital abroad to invest money outside the United States, banks had no choice but to raise their interest rates.

Factories produced more than the population could buy. Stocks of available products rose, while industrial production fell sharply, leading to lower prices and profits. Spending in construction fell and auto sales dropped, followed quickly by other areas of production. Meanwhile, foreign trade was still limited by protectionist measures, which did not help surplus stocks sell. Consumers and financial institutions gradually lost confidence and were reluctant to invest again.
 
Despite the government’s attempt to correct the situation by imposing price decrees and introducing public works programs to keep employment up, the situation worsened. The day before the economic crisis, the stage was set for a stock market crash, which started on October 24, 1929.

Investors were the first people affected by the stock market collapse. Most of them borrowed money to invest in the stock market. The fire sale of their shares didn’t earn them enough money to repay the loans they had borrowed from the banks. Since investors couldn’t repay their loans, many banks went bankrupt because they no longer had enough funds to stay in business. 

People who had put their savings in banks lost faith in the economic system and wanted to withdraw all their assets. Several banks were unable to keep up with all the withdrawal requests and declared bankruptcy.
 

The poor economic situation caused consumption (the demand for goods and services) to fall drastically. This caused companies to stop producing goods. Industrial production  rapidly collapsed. The prices of factory-made goods and agricultural products fell soon after.

As factories closed down, thousands of employees lost their jobs. Within a few months, at least 13 million people were unemployed in the United States. This represented 25% of the labour force, or one in four workers.

Because US industrial production played an important role in international markets, the US crisis spread rapidly throughout the industrialized world. For example, unemployment hit the population in Germany as hard as in the United States. This increased the popularity of Adolf Hitler and his ideology. 

The US crisis also caused a sharp decline in exports. As a result, countries whose economies depended on US production were ruined. At the same time, US investors took back the capital (money) they had invested abroad. Consequently, foreign banks were affected by the crisis and this led to further bankruptcies.

At the time of the Great Depression, the reference currency was the British gold standard, but following all the bankruptcies, British currency rapidly lost value. As a result, all currencies whose value was set according to the gold standard were also devalued. The decreased value of the reference currency, declining exports and bankrupt banks practically put an end to world trade.
 
As the reference currency was abandoned, various countries rallied around several other reference currencies. North American countries united around the US dollar, while the United Kingdom and its empire used the pound sterling. Other countries resorted to the value of gold. This fragmentation caused the entire network of economic relations between countries to fall apart. The international monetary system collapsed, with serious repercussions.

Given all the impacts of the economic crisis, the situation did not improve. Consumption, investment and production all faced a downturn. The economic crisis then became an economic depression.

US President Herbert Hoover, who served from 1929 to 1933, tried to introduce emergency measures. However, the president was confident that business would pick up on its own. In the midst of the depression, the 1932 elections brought a new president, Franklin D. Roosevelt, to power.

When Roosevelt entered the White House, he implemented a series of reforms and national programs called the New Deal. These programs were created to reduce the negative impacts of the crisis by adding rules to the banking sector to prevent another collapse like the one that occurred in 1929 and by setting up assistance programs for widows and the elderly.
 

It is hard to distinguish between the impact the New Deal had on ending the crisis in the United States and the effects of the war economy set up during World War II. So, it is not simple to determine what exactly ended the Great Depression. The New Deal had only been active for 2 years when World War II broke out.

The war economy and the arms industry played a major role in the global economy’s recovery. Germany and Italy established major weapons and national construction programs, helping them recover from the economic crisis even before the war began. In the United States, the war helped put an end to the crisis as it boosted industrial production, which created jobs and wealth in the country. The war-time economy also boosted Canada’s economy.

The Great Depression was the most serious economic crisis of the 20th century. Its enormity made people question capitalism. Communist countries were not affected by the crisis, which served as an argument for this political and economic regime.
 
After the crisis, governments started to intervene in the economy to prevent future catastrophic stock market crashes. A new economic model was developing to replace pure economic liberalism. This crisis also led states to develop social measures such as unemployment insurance and social security. Since then, the capitalist system has become more regulated and better organized by the government, institutions and unions.

Even today, the root causes of the Great Depression are up for debate. Economists who advocate for government involvement in the economy argue that the crisis was caused by its lack of involvement. On the other hand, economists who favour liberalism without government involvement argue that government involvement at the time caused the crisis.