In the late 1920s, United States economy was backbone of the world’s economic system. But it collapsed in 1929. Despite prosperity, three weaknesses in the U.S. economy caused serious problems: uneven distribution of wealth, overproduction by business and agriculture, and low consumer demand (demand-supply gap).
High Production -> Low Demand -> pilling up of stocks -> shutting down of factories -> employment increased -> non-payments of loans -> failure of banks.
During the 1920s, worldwide surplus of agricultural products drove prices and profits down.
At Wall Street’s New York Stock Exchange, optimism about the booming U.S. economy showed in soaring prices for stocks. Middle-income people began buying stocks on margin. This meant that they paid a small percentage of a stock’s price as a down payment and borrowed the rest from a stockbroker.
In September 1929, some investors began to feel that stock prices were unnaturally high. They started selling their stocks, believing the rates would soon go down. By Thursday, October 24, the gradual lowering of stock prices had became an all-out slide downward. A panic resulted. Everyone wanted to sell stocks, and no one wanted to buy. Prices sank quickly. Then the market collapsed.
The Great Depression, as it came to be called, touched every corner of the American economy. Thousands of businesses failed, and banks closed. Around 9 mil-lion people lost the money in their savings accounts when banks had no money to pay them. Many farmers lost their lands when they could not make mortgage payments. By 1933 one-fourth of all American workers had no jobs.
A Global Depression
Worried American bankers demanded repayment of their over-seas loans, and American investors withdrew their money from Europe. Moreover, when the United States raised tariffs, it set off a chain reaction. Many countries who depended on exporting goods to the United States also suffered. World trade dropped which contributed further to the economic downturn. Unemployment rates soared. Because of war debts and dependence on American loans and investments, Germany and Austria were particularly hard hit. In Asia, the Japanese economy also slumped.
The World Responds to the Crisis
Britain: British voters elected a multi-party coalition known as the National Government. It passed high protective tariffs, increased taxes, and regulated the currency. It also lowered interest rates to encourage industrial growth. These measures brought about a slow but steady recovery.
France: The Popular Front, as it was called, passed a series of reforms to help the workers. These reforms included pay increases, holidays with pay, and a 40-hour work week. Unfortunately, price increases quickly offset wage gains. Unemployment remained high.
Recovery in the United States- Roosevelt immediately began a program of reform that he called the New Deal. Large public works projects helped to provide jobs for the unemployed. New government agencies gave financial help to businesses and farms. Large amounts of public money were spent on welfare and relief programs.
