The Great Depression Story

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UntitledThe whole world of Macroeconomics was drawn upon learning points and experiences and the fact that not one of the books fails to mention of the Great Depression gives it all the more relevance to be known about and realized upon.  As a layman’ approach and for the ones who would like to know of this phenomenon called “The Great Depression”  in simpler terms, knowing the meaning of macroeconomics is important. First the word Economics is derived from the Greek words-‘oikos’ meaning house and ‘nomos’ meaning ‘custom or law’ together joining to form the meaning ‘rules of the house’ and the Greek word ‘oikonomia’ means ‘management of a household, administration’. Now combining it with the word ‘Macro’ derived from the Greek word ‘makros’ meaning large it gives us the meaning of the word macroeconomics  which means ‘management of a large house or administration’ . Now macroeconomic scenario of a country refers to a country as a large household being managed or administered.

The Great Depression, a macroeconomic phenomenon was dated in particular on the 29th of October,1929 alsoblack_tuesday_22 known as ’The Black Tuesday’  and was engraved as a day of despair for the people of the United States. The stock market had crashed and marked the official beginning of the Great Depression.

In the 1920’s there was a so called ‘boom’ but this boom enriched only a fraction of the American people. It can be best described as ‘the rich got richer while the farmers and poor workers stagnated or fell’. Although this gave lower production costs to companies it heavily precluded demand of goods and services. However the ‘great bull market’ in the New York Stock Exchange masked this up with the growing prices of stocks in the stock market which were flared up and not in proportion to the industries they represented.

This phenomenon was further worsened by over-investing and speculating (gambling) by investors giving indications of the economy being robust. Not only that, banks started lending loans to stock-buyers, since stocks were the hot selling commodities in the marketplace.  Stocks were even used as collaterals and if the investors lost money banks would be left with nearly worthless collaterals leading banks to go broke. The analysts and politicians laughed it off calling it a ‘New Era’ where stocks and prices would go up. However the myth was broken and the stock exchange crashed. People were willing to sell and nobody was willing to buy.

As a result of bank failures who are the prime circulator of money in the market the conditions worsened in between 1929 to 1933 -

Banks in operation

Prime interest rate Volume of stocks sold (NYSE) Privately earned income Personal and corporate savings

25,568

5.03%

1.1 B

$45.5B

$15.3B

14,771

0.63%

0.65 B

$23.9B

$2.3B

The stock market which was once the surest way to become rich became the path to bankruptcy.  So, despite the40166863 banks and the efforts, the banks were closed. As a result of the banks going down into bankruptcy people rushed to draw their savings. People who did not reach the banks before they crashed became bankrupt.

Businesses having lost money kept in banks or in stocks they started cutting on wages of workers. Spending got affected and people started refraining.

Amidst this chaos in the economy what further worsened the condition was the “The Dust Bowl”. The Great Plains were hit by a dust storm as a result of which the top layer of the soil was washed away and what was left over came to be known as “The Dust Bowl”. Years of grazing and drought had exposed the top soil. The exposed top soil was blown off for miles leaving the land barren.

Banks themselves in poor condition had to foreclose on the small farms as a result of which they were rendered homeless and unemployed. This led them to travel in search of work. Most of them “rode the rails”. They would board freight trains and crisscross the country in search of jobs where thousands had applied.”Hoovervilles” was the place for the jobless to stay- a town built of cardboard and any other stuff found. The farmers coming from Oklahoma and Arkansas were even given derogatory names like ”Okies” and “Arkies” mentioned in a book by John Steinbeck.All the blame was shoved on the then president of the United States Herbert Hoover. People named the town “Hoovervilles” after him, emptied their pockets inside out to symbolize “Hoover flags”, newspapers as blankets “Hoover blankets” and broken down cars pulled by horses were called “Hoover wagons”.

In 1932 Franklin D. Roosevelt won in a out of the despair of people and started a new program called “The New Deal” which included programs like AAA(Agricultural Adjustment Administration) and WPA(Works Progress Administration). Whatever the after effects it instilled new hope into people.

In actual effect the depression for the United States ended with the country entering into World War II where men were trained to become soldiers and the women engaged to keep the factories going.

The Depression’s impact on people

Consumer spending (in billions) on selected items, 1929-33

1929 1933
Food $19.5 $11.5
Housing $11.5 $  7.5
Clothing $11.2 $  5.4
Automobiles $  2.6 $  0.8
Medical care $  2.9 $  1.9
Philanthropy $  1.2 $  0.8
Value of shares on the NYSE $89.0 $19.0

                   Source: Historical Statistics of the United States, p. 319.

The scars were great and learning points many. As a result, the world leaders took deep insights and the banking system reformed and so did the stocks and trading markets evolve over a period of time. So now you know why stocks are not accepted as collaterals in banks. The period was one of great agony for the people and that of despair. It is very important therefore for a country to look at sustainable economy rather than “raging in like a bull” without a ‘bird’s view’ which could land people into a condition as bad as “The Great Depression”.

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Priyo Ranjan

The author is an ex-employee of Infosys and he is currently pursuing MBA from Xavier’s Institute Of Social Service (XISS).

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