Mitigating the Global Financial Crisis: Lessons from the Great Depression

Introduction

A financial crisis involves adverse activities that have catastrophic outcomes globally in the event that they occur. The great depression of 1929 is one of the economic depressions that occurred in late 1929 that affected most countries. The crisis emanated from the United States and spread across different nations, and was considered the longest depression within the 20th Century. The devastating effects of the crises such as a drop in prices, reduced economic performances, increased rates of unemployment and low income earning among other outcomes were experienced in different countries. Farming and construction were at a halt in many nations and the prices of crops reduced with more than 60% owing to the plummeting demand with reduced supply for the same and the lack of jobs (Eichengreen and Irwin 2010). However, initiatives engaged by each nation and with the collaboration of leaders helped to mitigate the financial crisis and restored proper economic balance for better outcomes.

Factors Resulting in the Great Depression

The emergence of great depression is often attributed to the collapse of the Stock Market Prices within the United States. According to Postel-Vinay, (2016, p.480), the depreciation on stock prices begun on 29th October 1929; a day that is commonly referred to as the ‘Black Tuesday.’ Due to these depreciations, Wall Street panicked, which resulted in a wipe of millions of investments; this caused the consumers to spend more on various products while decreasing investments in different companies. The reduced investment resulted in a decline in the industrial output and hence leading to a lack of employment opportunities for the citizens (Chari, Kehoe and McGrattan 2002, p. 22). The pertinent factors that are renowned to have instigated the Great depression, include;

Stock Market Crash in 1929

The Black Tuesday Stock Market Crash in the United States is considered to be the primary cause of the great depression. It is evident that Two months after the crash, more than $40 billion was lost by stockholders, which had a great impact on the economy (Mitchell, 2017, p.55). Furthermore, despite the stock market regaining some of the losses they had made by the end of 1930, it was not near enough the loss made by the investors, hence leading to the great depression.

Recognition of the elements of financial statements involves comprising in the balance sheet items that fits the definition of an element, there is a chance that economic benefit will flow from it and the cost or value can be measured with consistency. Similarly, measurement of elements of financial statements encompasses the assignment of monetary amount at which the elements are to be recognized and reported. Subsequently, the measurements of elements of financial statements should be correct at all times since it contains synthesized and specific information regarding the position of the concerned business (Lys et al., 2015).

Reduction in Purchasing Across the Board

Owing to the Stock Market Crash and the increased fear among investors on economic shifts, it became paramount that individuals would not purchase items or invest in companies. The reduction in purchases made companies reduce the number of items they produce, thereby causing the need to cut of the workforce as to accommodate only a few that they would compensate. These adjustments, therefore, caused a rise in the unemployment rates due to loss of jobs, especially if they were unable to keep up with the reduced payments. According to Coen-Pirani, and Wooley, (2018, p.35), loss of jobs also caused the repossession of items that individuals had bought through installment plans as they would not have enough money to facilitate for the continued payment. In the United States, the unemployment rates rose to above 25%, which means that there was less spending by the public as to alleviate the economic crisis, hence continued depression.

Drought Conditions

Drought, while not a direct cause of the Great Depression, was a constant instigator of the economic crisis. In the Mississippi Valley especially in 1930, drought had extended to great proportions that inhibited any farming activities. According to Ohanian, (2017, p.1588), the majority of the locals were affected by these draught activities, which meant that they were unable to pay their taxes and other debts, which resulted to their selling of farms at a loss to meet these financial demands. As a result, the Mississippi Valley was named the Duds Bowl for the region would not yield any crops over the draught period.

Bank Failures

The decrease in investments and low production meant that many firms were at a loss rather than making profits. Over 9,000 banks failed within 1930 due to limited savings and lack of banking operations that inhibited the smooth running of these financial businesses (Mitchell, 2017, p.57). Furthermore, due to the uninsured deposits that were made to these banks, their failure meant that people lost their savings without any refunds. The remaining banking facilities stopped their willingness to provide new loans to businesses and individuals due to the shifting economic situations and the concerns they had for their survival in the industry. Therefore, less expenditure was available for the people, and hence spending was limited which led to the exacerbating of the Great Depression.

American Economic Policy with Europe

Less trade was experienced between the United States and foreign countries owing to the development of the Smoot-Hawley Tariff in 1930. The tariff was enacted to protect the American Companies from engaging in business losses along with various economic retaliation that caused high taxations for imports (Postel-Vinay, 2016, p.488). As a result, less trade was experienced as the high taxation reduced the interests earned by businesses, hence instigating the Great Depression.

Impact of the Great Depression

The economic crisis had catastrophic impacts on the globe, with the majority of these effects being felt within the United States. Cases of poor wages, lack of savings and hindrance of trade owing to the Smoot-Hawley Tariff, among other activities transpired. Some of these issues are inclusive of:

Increased Rates of Unemployment

Unemployment rates rose to worry rates owing to the fall of many companies and the inability of banks to provide savings for the people. According to Benmelech, Frydman, and Papanikolaou, (2019 p.74), the Great Depression caused the unemployment rates in the United States to rise to about 25% by 1933. This meant that the remaining companies employed few workers due to limited productions and the wages they received were low. Furthermore, due to the accompanying drought activities, individual small businesses and crop farming would not yield proper earnings, hence many people remained unemployed.

Closure of Banks

The Market Crash in the United States instilled fear among the Citizens and the majority of investors, who decided to withdraw all the money they had invested and saved from the banks before the economy depreciated. According to Coen-Pirani, and Wooley, (2018, p.44), most of the Americans preferred to hold on to the money while others would purchase gold, whose value was constantly appreciating. In this regard, due to the constant withdrawals in masses, banks would not have enough cash to accommodate for withdrawal transactions. This caused over 9,000 banks to be closed and the depositors were unable to recoup their savings which were not insured.

Mitigation Attempts and Recovery

Recovery practices were instigated and accelerated by the policies introduced by Roosevelt after his immediate entry into office that was known as the New Deal. The first New Deal presented a focus on the economy and particularly in the banking sectors with the attempts on improving and strengthening their systems. According to Anderson, Bordo, and Duca, (2017, p.35), stabilization of the banking system was strengthened by the Emergency Bank Act that aimed at reducing the risks of bank closures within the states. Furthermore, the Agricultural Adjustment Act and the Farm Mortgage Act were developed to help the farmers invest more in their corps and to support the farming activities across the United States.

In 1935, Roosevelt released the Second New Deal that was purposed on helping poor and unemployed Americans. These initiatives would aid these individuals in obtaining job opportunities and for those with farms, they were offered compensation to plant specific crops that would be essential in the development of the country’s farming practice. The Social Security Act was also involved in the Second New Deal, which was aimed at providing social benefits to the old-aged, unemployment insurance and other benefits to victims of an industrial accident (Postel-Vinay, 2016, p.497). Aid for the blind and dependent mothers and children along with the handicapped was also provided, and this increased the labor availability within the United States, hence enhancing production.

Within the rural areas, the roles of the women expanded and they would offer various products and services to the community. It became evident that these females would provide their services to vegetable gardens and sponsored programs from agricultural organizations were developed to educate housewives on how they would optimize their gardens and raise poultry for monetary income. The shortage of money led to the use of cheap foods such as beans, noodles, and soups as an approach to save the little they earned (Ohanian, 2017, p.1598). Furthermore, activities such as sewing, laundry, and exchange of services inclusive of repairs were some of the interventions that the women had in the interest of resolving the economic crisis. This meant that they could assist in providing meals for the family and hence having better savings.

Lessons Learned from the Great Depression

Debts Increase Expenses

Living in debts is an approach that increases the expenses that one can incur at any time. From the catastrophic economic depreciation in 1929, individuals who were in debt were forced to sell their land at relatively lower prices than they had bought them, hence incurring losses while having to pay their debts in full. Due to the great depression, the lenders were in need of monetary possessions and hence they would force the debtors to get in losses for their own benefits (Hamilton 1987, p. 145). It is thus evident that living with debts not beneficial and can lead to accumulated losses rather than benefits.

Savings are Important

From the great depression that occurred in 1929, individuals who had savings and that withdrew them in advance faced the benefit of reinvesting the same in other products such as gold. Additionally, for those who did not invest their savings, they would have enough to spend during the financial crisis that had unpredictable outcomes. Anderson, et al., (2017, p.39), therefore, enforces the notion that saving in banks is essential and can help to avoid unprecedented risks.

Investing in Different Facilities is better

The people who had investments in one company succumbed to the loss of all their monetary possession especially if the funds were in banks without any planned method of obtaining the same. It thus becomes essential to understand the assessment of the economic and potential shifts that can occur due to various factors. As a result, individuals should learn to predict economic shifts and have their investments in different facilities. This is because different companies have different policies, and their risk management practices outline the various ways of re-accessing any amounts deposited within the same (Romer 1990, p. 602). Therefore, in the event of one of these firms failing, not all the monetary investments will be lost, and some can be regained, thus is better to invest in different financial businesses.

It is possible to live with less

The economic insurgency led to less cash flow, low wages, increased unemployment and lack of crops for the community. This caused lack of food and hence even families that were dependent on expensive meals had to cut off their budgets to accommodate for more meals to last them through the depression. The lesson, therefore, is that it is possible to survive with less than what people have (Wecter 1948, p. 44). Notably, people can sustain their basic needs with a portion of their earnings, thus leaving more for saving which can be of importance in the future.

Conclusion

Initiatives presented by different nations in mitigating the great depression were successful and they led to proper economic balance in every country. The Great Depression had resulted from various factors inclusive of the deteriorating stock markets in the United States, closure of banks due to lack of enough finances to sustain their activities and draught. Unemployment was the most notable impact of the insurgency, coupled with reduced production, low wages, and increased taxation on foreign trade that reduced a number of imports in the United States from other countries, among others. However, Roosevelt along with his New Deals helped to not only mitigate some of the economic issues pertinent from the Great Depression but also aided the United States in recovering from the situation. The mitigation methods were effective and enhanced the economic practice within the country for better outcomes.

References

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• Wecter, D., 1948. The age of the great depression, 1929-1941(p. 44). New York: Macmillan.
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• Eichengreen, B. and Irwin, D.A., 2010. The slide to protectionism in the Great Depression: Who succumbed and why?. The Journal of Economic History, 70(4), pp.871-897.