1. The Great Depression.
The end of the mild depression in the US market in 1920-21 was followed by a period of
intense growth and optimism. The economy grew at a phenomenal rate- the GNP saw a
growth rate of 4.7% and the per capita income increased by 28% . This was a time rife
with speculation and investment in what has been later referred to as the ‘speculative
mania’. There was a general optimism and it was believed that this boom would continue.
However by the end of the 1929 and 1930 the economy witnessed a sharp decline. This
situation was to continue for the next 10 years.
On October 29th 1929 the industrial index fell by 43 points bringing an end to the
previous run of good times. The financial institutions started failing by October 1930.
The U.S GDP was halved from $ 103Bln. to $ 55Bln, GNP declined by 25% the CPI fell
by 25% and the WPI by 32%. Unemployment was 25% and the prices of farming real
estate dropped. This period is referred to as the great depression in the economic history
of US.
A number of factors contributed to the great depression.
First, to examine the so-called boom The phenomenal growth in the US economy was
merely superficial. It had not trickled down and not all sectors gained from it.
1) The agricultural and farm sector was suffering even during the time of the boom. Per
capita income had only increased by 10% in this sector and the farm prices had fallen.
The farm mortgage debt had also increased. Thus there was a disparity in the income of
the people.
2)The purchasing power of the people was highly skewed. At the same time capital
investment was still increasing leading to increased production which could not be
supported by demand. The majority of the economy’s money was being generated from
the automobile and construction Industry where consumption had already begun falling
by 1929.
3)The middle class was borrowing heavily and this led to a fall in the liquidity of the
banks. As a result the banks were not able to sustain themselves during the slump.
4) The boom period had also seen heavy investments in construction which is a very
unstable investment.
5)The American economy was largely dependent on foreign trade majority of which was
European. The European market by itself however was not such a stable economy.
Secondly, the Government policies contributed a great deal.
1)The tax system was one that contributed to the income disparity rather than removing
it.
2)The regulations on the financial institutions were lax resulting in irresponsible
speculation by the banks.
3)The Government had restricted foreign trade by imposing high tariffs. As a result the
export of the economy went down till the only foreign trade was only with the ones that
were subsisting on US loans.

2. 4)The Federal bank decreased the interest rate to 4% in 1930 resulting in such low rates
for deposits that checking and savings deposits fell by almost 33% causing the liquidity
to go down further for the banks which were already hard hit. The result was that a
number of banks had to close down.
In the farms a situation that was already dire was made more so by the stock market
crash, millions of people lost their jobs. The middle class that was sustaining its
speculation on loans now were pushed to below the poverty level. Farms were foreclosed
and people started to migrate from the farms to the cities or to other farms working at
extremely low wages. They became dependent on the local welfare system. However that
also failed as the local authorities cut the welfare or stopped it altogether. The suicide rate
increased drastically during this time.
The rectification policies adapted by the Government during this time also proved highly
ineffective. Hooover, The then President believed that the Government should play an
important role in stabilizing the economy. His initial efforts to stimulate employment
failed. He became convinced that the structure of the International finance was to be
blamed for the depression. As a result he concentrated on the International market instead
of trying to fix the situation back home which prolonged the Depression.
The answer to the depression was provided by Keynes who called upon the government
to pick up the slack by making huge investment and tax cuts. His basic idea was simple:
to keep people fully employed, governments have to run deficits when the economy is
slowing because the private sector will not invest enough to increase production and
reverse the recession. It was only after Roosevelt was inaugurated 1933 that he started
putting in place some policies which had some effects to rectify the situation. His initial
reforms and recovery measures were called the New Deal which tried to increase wages
and hence purchasing power. This was followed by a number of other policies. By May
1938 retail sales began to increase, employment improved, and industrial production
turned up after June 1938.However, only the mobilization that followed U.S.'s entry into
World War II finally brought an end to the Depression