Special Topic 6. Lessons from the Great Depression.
The Great Depression is considered to be the longest, and most severe of the many depressing economic conditions in US history. The period was that of not only farm disclosures, bank failures but also unemployment lines and more so of declining birthrate. Though 1920s had been a remarkable decade of innovation and technological advancement where the stock market was also registering a remarkable growth and development of decade, it is considered that the stock market crash of October 1929 became the major cause of Great Depression. The Great depression resulted in reduction of wealth and thereby in demand and real output. But data of other recessions reveal the fact that stock prices had fallen during such times as well by 50 percent or more but still the economy recovered within a year or two. Thus fall in stock prices did become a factor for the economic decline in the initial phase but it should be noted that a host of other factors became the reasons for the length and severity of the Great Depression.
It was the bad policies of the government that led to the length and the severity of the Great Depression. The fault in the policy worsened the downturn of the economy and enhanced the continuation of the depression. The operation of the markets runs smooth if the monetary and price stability maintained. However, the policy makers introduced such policies that brought about monetary instability, the tariffs rise led to a sharp decline in world trade, demand reduced significantly with imposition of high taxes, and several other structural policy changes that were brought about by the Roosevelt administration only undermined investment activity and discarded business planning. Indeed, the defect in the market operations did come about because of the failure in the government policy. The various policies as controlling the prices, raising high taxes, following restrictive monetary policy, restricting trade etc undermined and weakened the investment climate and created a climate of uncertainty in the business planning. It lengthened the severity of the Great Depression and prolonged its duration.
The New Deal policies of Roosevelt have been credited to bring Great Depression to an end. He brought several policy changes. For example, he revalued the price of gold from $20 per ounce to $35 per ounce, which contributed to the expansion of the money supply. Its administration passed the Federal Deposit Insurance program providing the depositors with adequate protection against bank failures. It helped to lessen the 'bank run' incidences. The Agricultural Adjustment Act (AAA) and National Tribunal Recovery Act (NIRA) of 1933 were among the other New Deal efforts and part of the persistent policy change carried out by the Roosevelt administration to keep the prices high. While AAA succeeded in depriving the American consumers from millions of dollars of agricultural products, NIRA reduced competition and led to the promotion of monopoly pricing. This weakened the market process. Large-scale new programs and regulations created an environment of uncertainty and undermined the business planning. Therefore, the credit that has been given to Roosevelt since ages for his policy that helped to end the Great Depression seems fallacious. It only dampened productive activity and did not make a marked improvement in the rate of unemployment. The credit should go to the increase in the demand for military goods of the English and Russians and of own US as well before World War II.