With the world currently experiencing a variety of economic problems, I thought it would be interesting to look at the worst economic crisis in modern history! What was the Great Depression? What caused it? And how did it end? Let’s discuss these questions and more on today’s episode on Thinking in English!
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Recession (n) – a period when the economy of a country is not successful and conditions for business are bad for months
Much of the world fell into recession after the stock market crash in 2007
Depression (n) – a serious economic crisis in which there is very little business activity and little employment for years
The world plunged into depression in the 1930s
Downturn (n) – a reduction in the amount or success of something, such as the economy
There is evidence of a downturn in the housing market
Recklessly (adv) – in a way that is dangerous and shows that you are not thinking about the risks and results of behaviour
She spends her money recklessly
Production (n) –making or growing goods to be sold
Wheat production has fallen over the past 6 months
To trade (v) – buying and selling shares on the stock exchange
The volume of stocks traded today was unusually high
Makeshift (adj) – temporary and of low quality, but used because of sudden need
Thousands of refugees are living in makeshift camps
To stimulate (v) – to encourage something to grow, develop, or become active
The government plans to cut taxes to stimulate the economy
To devalue (v) – to reduce the rate at which money can be exchanged for foreign money
The British pound was devalued and it caused a major economic crisis
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Right now, the world is facing a number of different economic problems. Prices are rising much faster than salaries, stock prices are low, and there are shortages of goods. In fact, quite a few economists are now predicting that we may be facing a global recession in the near future.
I’m not an economist and it is famously difficult (maybe even impossible) to predict the future of the economy. Unpredictable things can happen every day. But what we can do is look at the past. Looking at economic problems and crises from the past can teach us a lot – and what better place to start with than the Great Depression of the 1930s.
Just under 100 years ago the worst economic crisis in the history of industrialised world was about to start. The Great Depression was an economic downturn lasting from 1929 to 1939, and while it started in the US the impact was felt across the world.
Starting as a stock market crash in October 1929, the Great Depression resulted in mass unemployment, industries shut down, and people stopped spending their money. It is still the worst economic crisis in modern financial history – in 1933 15 million Americans were unemployed and around half of all US banks had collapses and failed.
Today, I want to look at the history of the Great Depression. I’ll discuss the causes of the crisis, the consequences, and the end of the depression!
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What Caused the Great Depression?
Now, you probably won’t be shocked to hear that there is no one clear cause of the Great Depression. Considering it was the worst economic crisis in history, it is not surprising to hear that there are a series of complex reasons for why it happened! Overall, there are generally considered to be four major factors behind the Depression – a stock market crash in 1929, banking panics in the 1930s, the gold standard, and government policies.
The Roaring Twenties
The 1920s in America are often described as the “roaring twenties” – the economy was growing fast, people were getting richer, and some of the most influential art, music, and culture was developed. A side effect of the roaring twenties was that more people had more money. Between 1920 and 1929, the USA’s total wealth more than doubled! And with this money, millions of Americans began to invest in the stock market.
The stock market in question here was the New York Stock Exchange on Wall Street. In the 1920s, millions of Americans invested recklessly – and not just rich businessmen. Working class Americans also invested their entire life savings in the stock market. The stock market expanded with all the extra money from regular Americans and reached its peak in August 1929.
However, while stock prices were increasing the US economy had problems. Unemployment was higher than usual, and the country’s industrial production was down. Wages were low, personal debt was increasing, American banks had far too many large loans, and environmental problems had badly hurt the agricultural sector! Stock prices were overvalued – meaning that they were too high, and it was clear future earnings would not cover the price.
Wall Street Crash
On the 24th of October 1929, after months of nervousness, investors began to sell their shares in large numbers. That day became known as “black Thursday” and a record number of shares were sold – 12.9 million in one day. 5 days later the panic returned and over 16 million shares were traded on “black Tuesday.” Eventually, the value of the stock market would fall around 90% compared to the price in August 1929. Shares became worthless and people who borrowed money or used high risk investment strategies lost everything.
Outside of the stock market, people stopped spending money freely and there was a lack of new investments. The wall street crash had destroyed people’s confidence. Business and factories had to slow down production, or stop entirely, and fire employees. Wages fell and money became less valuable.
Problems Continued into the 1930s
In the 1930s, most of the world still used something described as the gold standard to determine the value of their currencies. In simple terms, the value of money was based off the value of gold. As the depression in the US affected the price of gold, this meant that crisis spread around the globe!
In 1930, banking panics started. A banking panic, or bank run, is where many clients of banks attempt to take their money out of the bank. Usually this is because the customers lose confidence in the bank and believe the bank may soon fail. This is a problem for banks (as they generally use client’s savings to provide loans or for other activities) and meant that thousands of US banks had to find ways to get more cash.
By 1933, in total four different banks runs had occurred and around half of all US banks had been forced out of business. With less banks, and less money in banks, it meant there was now less money for loans in the USA.
In 1930 the government, which was led by President Hoover, tried to introduce policies to fix the economic crisis. The Smoot-Hawley Tariff Act was one such policy – but this has actually been described as one of the causes of the crisis. The law was basically a massive tariff, imposing large taxes on hundreds of foreign products. The result was that between 1929 and 1934, international trade fell by 66% – contributing to the worsening economy.
In summary, a combination of the 1929 Wall Street crash, the banking crises, the global gold standard, and government policies caused the only depression in modern history. But what was life like in the Great Depression?
What was Life Like During the Great Depression?
Life in depression era America was difficult. Millions of Americans lost their jobs, people were evicted from homes, and for those lucky enough to keep jobs wages fell. In cities across America people were made homeless and forced to sleep on the streets. Shanty towns, a type of settlement consisting of makeshift homes, sprung up across the country. These became known as “hoovervilles” – named after President Hoover.
Soup kitchens offering free food became an essential part of life of millions of people. Charities and local governments gave out bread and food – it was common to see lines of people waiting for their daily food.
In the countryside, many farmers lost their farms as agriculture prices collapsed completely. At the same time, a major drought hit Midwestern states in the 1930s destroying crops and farms, forcing even more farmers out of work. Previously fertile land became the “dust bowl” – and thousands of unemployed farmers moved to California in search for work.
The impact of the Great Depression was felt around the world. Pretty much every developed country in the world experienced declines in production and severe economic consequences. Western Europe and the UK were particularly badly affected. France, Germany and the UK all fell into depression, and Germany’s economic problems were one of the contributing factors behind the rise of the Nazi party.
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How Did the Great Depression End?
How did the Great Depression end? In 1932, President Hoover (the do-nothing president) was replaced by Franklin D Roosevelt. These two presidents had very different approaches to economic policymaking. With 15 million unemployed Americans, Roosevelt won the election with the promise to use government programmes to end the depression – something Hoover was reluctant to do!
Roosevelt’s economic policies were loosely based on the work of economist Keynes, who believed that government should be actively involved in stimulating and regulating the economy.
In his first 3 months as President, Roosevelt signed the incredibly famous New Deal, changing American government forever by creating over 40 new departments and agencies. The role of the government was expanded to help job creation, allow unions, and assist the unemployed.
Leaving the gold standard for currencies was also a source for recovery. Britain, for example, abandoned the gold standard and made their currency less valuable in 1931 which helped them recover much faster the US (who didn’t devalue their currency until 1933). Countries like France and Belgium kept their reliance on gold for currency value and therefore struggled to recover at all.
World War II also helped the US economy to recover. Although the US economy was already improving, defence spending in the war added billions of dollars and, most importantly, vastly reduced unemployment. Millions of American men were now employed in the armed forces instead of struggling to find jobs.
Could it Happen Again?
Although the world has faced many economic crises and recessions since the Great Depression, it is still the only “depression” in modern history. Could we experience another one?
Well, it is pretty unlikely. Banks and governments around the world have learned lessons from the past. There are better protections against complete economic collapse, and better understandings of how to recover.
The recession that began in the 2007 was very serious, but it had nowhere near the same impact as the Great Depression.
The Great Depression was the result of a combination of different factors – weak government policies, tariffs, stock market crashes, environmental problems, the gold standard, and more. If any one of these factors were different, the Great Depression may not have happened!
This episode of Thinking in English has looked at the history of the Great Depression – the worst economic crisis in modern economic history. The impact was felt around the world, trade collapsed, and millions of people lost their jobs and savings.
While economists and historians still debate whether Roosevelt’s New Deal was the right policy, many of the New Deal’s reforms are still present in America today – things like Social Security, unemployment insurance, and agricultural subsidies. The belief that the government should act in times of economic crisis is also widely accepted now.
In fact, you might still hear reference to the New Deal in today’s news. A number of American politicians have been trying to introduce a “Green New Deal” – a number of major economic policy changes designed to make the US more environmentally friendly.
What is the worst economic crisis in your country’s history? What is the best way to recover from Economic crisis?
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