Education of the republic of uzbekistan gulistan state university

I CHAPTER  THE GREAT DEPRESSION
1.1 Root Causes of the Great Depression


The Great Depression spanned over a decade from 1929 to 1939 and had rippled effects across nations worldwide. According to Szostak (2003), the Great Depression remains “the longest, deepest, and most pervasive depression in American history”. The Depression produced high levels of unemployment and dislocation. “It is widely accepted that the unemployment rate peaked above 25 percent in 1933 and remained above 14 percent into the 1940s” (Szostak, 2003, p. 44). Resulting from the wide scope of unemployment, poverty and hardship reigned among the American populace. Szostak (2003) further states, “yet these figures may underestimate the true hardship of the times: those who became too discouraged to seek work would not have been counted as unemployed. Likewise, those who moved from the cities to the countryside in order to feed their families would not have been counted”. Root Causes of the Great Depression The American economy witnessed significant growth in the years after WWI with the rise of new businesses. According to Fearon (2004), “this period was an era of stable prices, full employment, high levels of investment, and high company profits”. As a result of the prosperity and confidence in the economy, “big businesses in particular, flourished building on the technological advances that had been adopted during WWI” (Fearon, 2004). Both big and small investors benefitted from the nation’s prosperity and “National prosperity encouraged stock market growth” (Fearon, 2004). However, this era of prosperity would 8 soon collapse plunging the nation into ten years of Depression, which sent shock waves across the world. Contrary to popular belief that the crash of the United States stock market in October 1929 resulted in the Great Depression, no single event can account for the Depression. ¹
The events that led to the Depression intertwined among diverse political, economic, and social factors. The fundamental cause of the economic collapse can be argued against the “efficacy of the unregulated free market”. However, this remains debatable even in the twenty-first century. The United States agricultural industry boomed to meet the demands of European nations after World War I, also known as the Great War, ended. European countries’ economies experienced deflation, which resulted in a “demand for American farm products, especially grains, soared as did prices. Such profitable conditions led American farmers to go deeply into debt to buy additional land and machinery” (McElvaine). However, the European farmers recovered quickly and “the demand for the expanded production of American farms plummeted, (helping along with a sharp contraction in the money supply) to carry the economy into a sharp recession in 1920-21” (McElvaine).
The Great War significantly transformed the international financial sector. The United States emerged the world’s largest creditor. According to McElvaine (2004), “massive war debts owed by the British and French to American creditors were part of the economic landscape of the 1920s, as were the huge reparation payments the European victors demanded from Germany”. The United States assumed the position of world banker, which was initially held by Great Britain. America was not prepared to shoulder the responsibilities that came with this position and “political leaders of the twenties were committed to maintain a favorable balance of trade, meaning that they wanted the nation to export more than it imported”. However, as the world creditor, America could not strike a balance between the two “because other countries had to sell more to the United States than they bought from it if they were to have the funds to repay the debts they owed to American creditors” . According to McNeill, R. Hanes and S. Hanes (2003), “Manufacturing industries had produced more consumer goods than Americans could buy. By 1929, stores and warehouses bulged with goods, so manufacturers began cutting back production and laying off workers”. With widespread factory redundancy, Americans’ spending power decreased, which resulted in a domino effect on various industrial plants as the workers bought fewer manufactured goods. McNeil et al., (2003) further states, “roughly 75 percent of Americans had no money to save after purchasing necessities. Most of America’s wealth was in the hands of a very few. The very wealthy spent money on luxury items, but this spending could not counteract the increasing lack of spending on the part of the majority of people”.
The United States’ economy needed stimulation from the working class to sustain investments in the stock market. As the domino effects trickled down, the “banking system was weakening as thousands of small, rural, undiversified banks failed when farmers could not repay loans. The Federal Reserve (America’s central bank) took little action” . Panic set in and thousands rushed to withdraw their savings from banks but many banks did not have funds to pay out. The United States had endorsed the emergence of numerous holding companies, which engaged in managing other business instead of production. “Americans who invested in holding companies were at risk, because such companies could collapse more easily in this ‘house of cards’ structure”. Another contributing factor resulted from the practice of “investors who were buying stocks with loaned money and assuming the stocks’ value would continue to go higher and higher” . “All of these factors came together in October 1929 to create an uncontrollable slide of the U.S. stock market. The slide signaled the beginning of the Great Depression, the severest economic crisis in the history of the United States”.²