Causes and Effects: The Great Depression and Subsequent Recovery
The 1930s in United States history were in stark contrast to
the decade immediately preceding. The
Roaring 20s had been an age of growth and excess during which the horrors of
modern warfare were exorcised from memory.
Life in the moment and the expansion of credit to fuel this view, per
the Austrian Cycle Theory, set the stage for the Great Depression.[1]
The boom in the economy was followed by a
period of stagnation, which in turn was followed by the bust of the Great Depression. Many economic theories and models have been
created to determine the cause and ultimate correction of the Great
Depression. Bernstein outlined many groups
or types of these theories in his article “The Great Depression as Historical
Problem.” While all of the strongest
theories modeled some aspects of the Great Depression, the work of Josef
Steindl may have provided the closest theoretical model. As capital is concentrated overtime. Holding of capital instead of reinvestment,
or other means of dispersal, squelches potential economic growth. As in other closed systems, entropy sets in
and the system falters. However, an
influx of capital into the market or system can trigger revitalization and
growth.
While the market crash of 1929 is popularly considered to be
the trigger of the Great Depression, the stage had been set by the years leading
up to October 1929. Steindl’s theory used
the “behavior of capitalist enterprise” to model how this seemingly sudden
economic turn occurred.[2] This would be particularly rigid in areas where
there is a concentration of industry. As
an example, Sam Insull had built an extensive, regional monopoly in the utility
supplies for northern Illinois and Chicago during the first three decades of the
20th century. Hogan describes
how the companies themselves survived the initial harsh blast of the Depression
due to increasing demand for electricity and natural gas in the rural
areas. These areas were predominately focused
on agriculture or coal mining, base necessities for modern society that were not
directly affected by the downturn in industry.
Borrowing led to vulnerability of the companies to takeover, which occurred
in 1931.[3] Another example of how the Austrian Cycle
Theory models the Depression, also from Chicago, is given by Foldvary. “So much construction occurred during the
1920s boom that no new office buildings were erected and no new large hotels
were built in Chicago from 1931 to 1950.”[4]
An event in 1931 may have been the first in a series of
events which led to the recovery of the United States’ economy. Not the takeover of Commonwealth Edison, but
an event that was closely related. In
the summer of 1931, England went off the gold standard. While this precipitated a stock plummet for
Insull’s companies, it also triggered the movement of gold into the United
States from Europe beginning two years later in 1933.[5][6]
Similar to the teaching that the 1929 Crash caused the Great
Depression, popular opinion is that the Depression was only resolved by the
outbreak of the Second World War. Romer shows
that this is an oversimplification of a longer cycle. Worldwide in the 1930s, tensions were rising. In 1931, Japan invaded Manchuria. Germany saw the rise of the Nazi regime. The United States was seen as a refuge for people
and wealth. As fascism spread across
Europe, fearful business leaders and investors moved their gold supplies and
other wealth into the US markets. This
influx of money, not triggered by governmental policies or market manipulations
but rather by human events, fueled the further recovery of the United States economy. Per Romer’s simulation results, “it is
possible to conclude that independent monetary developments account for the
bulk of the recovery from the Great Depression in the United States.”[7] While the expansion of US manufacturing
capabilities to support the war effort reduced unemployment, the capital to
perform this expansion came ashore due to the rising conflict itself.
Important to note is that the Depression was still existent
in Europe. The ripples from the
faltering US economy also caused failures of the struggling German, French, and
English economies. These nations would
only see economic recovery after the war.
The necessary capital was injected into these economies through
investment or other means such as the Marshal Plan.
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