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Great Business Depression

Great Business depressions are periods in the life of a country when many workers are unemployed, factory machinery is not fully used and business activity is at a low ebb. Such depressions tend to alternate in a more or less regular cycle with boom periods of prosperity, when employment is high and factory machinery is in full production. This state of affairs is often called the trade cycle. Sometimes governments intervene in the workings of mainly free enterprise economies to try to even out the booms and depressions. They try to restrict the flow of capital to industry during booms and start government development projects in times of depression. Many economists believe that booms can be dangerous because they often cause depressions later.

Economists do not agree among themselves on what causes depressions or on what the best remedies are. Some think that depressions happen when people do not spend enough money on manufactured goods, and factories have to cut back on production. Others say that depressions occur because not enough money is invested in new machinery and factories. Yet another suggested reason for depressions is changes in the balance between withdrawals and deposits from banks. If everybody decides to withdraw at once, it upsets the economy. The remedy for this could be to control the banking system to prevent sudden changes in the flow of money through banks.

The Great Depression was the worst business slump in the history of the United States. It lasted from 1929 to 1934. The Great Depression began with the Wall Street 'crash' of October 1929. During this crash, prices for stocks and shares on Wall Street's stock exchange fell sharply. Thousands of businesses were ruined. Many banks and factories closed and millions of workers became unemployed. The slump also had disastrous effects in Europe. In the United States, the situation began to improve when President Franklin D. Roosevelt introduced his 'New Deal policies’ in 1934.

Until the crash, the 1920's had been a 'golden age' of prosperity in the United States. During the Republican presidency of Calvin Coolidge (1923-29), America's national wealth increased fast. In 1922, it was estimated at $320 billion. In 1925, it stood at $355 billion.

However, the foundations of this prosperity were unsound in several important ways. Most European nations had been economically depressed since World War I (1914-18). Also, the European allies of the United States during the war had borrowed vast sums of money from the United States. These countries (chiefly Britain, France and Italy) could not repay these debts by exporting goods to the United States because American tariffs were too high. After tariffs were added, European goods were too expensive for Americans to buy. European countries tried to repay their war debts chiefly from their gold reserves. This made the depression in Europe worse.

The economic situation in Europe was also dangerous to the United States. Americans could not export goods to Europe, because the European countries could not afford to buy them. This caused American manufacturers to produce more goods than they could sell. Some economists believe that the problem could have been partly solved by increasing workers' pay to give them enough money to buy the extra goods, but this was not done. The situation also worsened because many people tried to make money through speculation (buying stocks and bonds and selling them at a profit). Much of the money used for this purpose was borrowed from banks or brokers (dealers in stocks and bonds). Speculators were able to buy large numbers of securities with very little of their own money. This was called buying on margin. So long as the value of the securities kept going up, people could continue to buy and sell without actually exchanging much money.

In March, 1929, when Coolidge's successor Herbert Hoover became president, the price of stocks and shares reached a record level. Then, in the autumn of 1929, many businessmen began to think that the income from stocks and shares was too low for what they cost to buy. They began to sell, and the wave of selling became a panic. On October 24, called Black Thursday, nearly 13,000,000 stocks and shares were sold on Wall Street.

Thousands of people who had bought on margin with borrowed money were suddenly asked to repay the loans. Many lost all their savings and some even had to sell their houses and all their other property. Prices continued to fall for nearly two years. Many business corporations, banks and factories closed, and millions of workers became unemployed. International trade, already greatly restricted, nearly broke down. In 1931, Hoover introduced a one-year moratorium (stop) on war-debt repayments by European countries to the United States. This, and other measures taken by Hoover's administration, failed to end the Great Depression. In the presidential elections of November 1932, Hoover was overwhelmingly defeated by the Democratic candidate, Franklin D. Roosevelt.

To deal with the crisis, Roosevelt introduced the series of important reforms known as the 'New Deal'. Unemployment was probably the worst feature of the Great Depression. This finally ended only with World War II, in the 1940's.