The Great Depression and the New Deal 1929’“1939
The Great Depression and the New Deal
[Student’s Full Name]
Great Depression was a worldwide economic debacle that began in 1929 and lasted almost ten years. The 1929 recession was the longest and most severe economic downfall the western world has suffered. In economic terms, the most affected institutions were the banks and the stock market. Nevertheless, the downfall replicated in almost all the establishments in the country. In the same way, the American depression affected virtually all countries in the world. During the depression, the world experienced severe unemployment; and acute deflation. Also, its effects were not only economical, as a series of social repercussions existed as well. For instance, after the debacle, the public opinion was favorable toward banks, after 1939, not so much. Besides, in a country such as the United States, the great depression represented one of the harshest economic situations since the Civil War.
The events that led to the Great Depression are often blamed on the bankers who did not protect their financial institutions. After the first crash in 1929 the federal government injected cash into the banks, creating the illusion of health among the savers. In the same way, weaker banks were absorbed by bigger banks, to protect the savings and keep the economy floating. However, the real failure came in 1931 when the Austrian government let one of its most major banks go bankrupt because it did not meet the conditions for an international loan (The Economist, 2015). This situation created an economic vacuum where gold fled the countries; this created a harsh economic situation where the governments responded with monetary and fiscal austerity. This economic in Europe made possible the election of the Nazi government. In the U.S., this led to the election of Franklin Roosevelt, and the application of the “new deal”.
In July of 1932, in the middle of the greatest economic debacle of all U.S. history, President Roosevelt accepted the nomination proposed by the Democratic Party. Roosevelt promised “a new deal for the American people” (LOTC, 2012). This promised plan, was meant to provide a series of economic measures to relieve the poor; assist the unemployed, and revamp the financial system to prevent a new economic debacle. The excessive deflation brought by the depression created an economic bubble that turned into inflation as the contraction of the economy and the lack of goods, created an inflationary bubble. In this way, the New Deal, created a boost of confidence that improved the economy but created inflation. Nevertheless, this increase was necessary to reestablish economy, and during 1933 to 1937, the country’s GDP grew by 39 percent. This was the greatest expansion of the American economy outside wartime (Eggertsson, 2008)
Situation before the New Deal
Before the implementation of the New Deal, streets were full of homeless and unemployed people trying to make a living. In the same way, deflation made prices so low that there was no point on harvesting the fields, as the price would not be enough to guarantee farmers a living. In the same way, given the fact that people had no money to play their mortgages, they lost their homes. The banking system was also collapsing, since panicked depositors withdrew their money from banks, creating distrust in the financial system. This distrust created a situation where barter replaced money (Rose, 1994). This situation created a decline in tax revenues, and an improvement in unemployment rates. Also, the ineffectiveness of the measures taken, created a situation of distrust that lasted until the election of Franklin Roosevelt.
The New Deal and the Great Depression
After the Great Depression, the New Deal impacted and created a stimulus to economic growth. The New Deal created and regulated the fiscal creation and job regulation to help ending the depression. In a strict sense, Hoover was not able to address the crisis properly and created a power vacuum that lasted until Roosevelt’s election. The primary concern of the newly elected president was to instill hope to the nation. After giving hope, he realized that the country needed to undergo a profound series of economic changes to leave the crisis behind. That is why, the president decided to create the National Recovery Administration to address the depression, and find a mechanism that could revert it.
The New Deal as a Recovery Tool
Roosevelt considered that one of the main ways to recover economy was raising prices and wages (Cole & Ohanian, 2003). To do that, Congress passed laws to limit competition and increase labor bargaining power. The first phase of the New Deal was the NIRA that lasted from 1933 to 1935. The NIRA created rents by limiting the competition, and allowing unionized workers to raise wages and improve conditions. In the same way, the NIRA had a code of fair competition that ruled the possibilities of competition to adopt trade practices that helped to raise prices. In 1934, the National Recovery Administration covered 500 industries that accounted for the 80 percent of the private employment (Cole & Ohanian, 2003).
The beginning of World War II marked the end of the New Deal. After his reelection, Roosevelt considered that many changes still needed to be made to turn the country to its former glory. In the same way, the war, and the Japanese threat forced him to turn his attention to the foreign policy rather than to the economic changes in the country. There is no doubt that the New Deal helped the country, and that the measures of austerity and fiscal control contributed to steering away from a complete recession (Murphy, 2009).
Many philosophers have said that history repeats itself, and we consider it is true. The economic downturn of 2008 was a proof of it. However, it looks like the politicians and economists have learned the lessons of the depression and were able to avert the crisis, and turn it into an opportunity.
Cole, H., & Ohanian, L. (2003, February 1). New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis. Retrieved June 18, 2015, from http://hlcole.bol.ucla.edu/NewDealucla.pdfEggerstsson, G. (2008, June 1). Was the New Deal Contractionary? Retrieved June 18, 2015, from http://www.econ.wisc.edu/workshop/Eggertsson paper.pdfLessons from the 1930s. (2015, January 17). The Economist. Retrieved June 17, 2015, from http://www.economist.com/news/books-and-arts/21639431-lessons-1930s-root-causesMurphy, R. (2009). The politically incorrect guide to the Great Depression and the New Deal. Washington, DC: Regnery Pub.
Rose, N.E. (1994). Put To Work: Relief Programs in the Great Depression. New York: Monthly Review Press.
The New Deal. (2012). Retrieved June 18, 2015, from http://www.loc.gov/teachers/classroommaterials/primarysourcesets/new-deal/pdf/teacher_guide.pdf