Economic Crisis


It is an evident fact that the world economy is cyclical. There have been many examples of the economic crisis in world history comparing which one can notice certain regularity. Based on these findings, it is possible to predict the situation in the economic sphere, as well as to avoid the catastrophic effects of the crisis. The Great Depression of 1929-1933 has been among the most sensitive issues discussed by researchers. Scientists and economists have been increasingly comparing this tragedy that occurred 80 years ago with the current financial and economic crisis. The study of this problem is particularly relevant since events that are still happening are evaluated ambiguously by both historians and economists. In particular, the most debatable is the topic of the causes of the global economic crisis in 1929. The main reason for the phenomenon of the Great Depression was the exchange bubble, the destruction of which brought not only tremendous social and economic upheavals but also a valuable experience, which was the basis for further regulation of the U.S. economy.

Pre-Crisis Situation of the U.S. Economy

In the period before the Great Depression, the United States experienced extensive financial progress. The 1920s entered American history as a time of affluence, while 1929 was a great point of economic accomplishment. For example, the Gross National Product increased over the decade by almost 50% while the entire population grew by 16% (from 105.7 to 122.8 million), and the number of people employed in the national economy by 14% (from 42.2 to 48.7 million). The growth of GNP was carried out primarily due to an increase in labor productivity, which had risen in the United States over the decade by 43%. In industry, along with energy, engineering, oil, steel, and chemicals sector was at the leading positions. In addition, the successes of the automotive industry were impressive since automobile production increased from 1.5 million in 1921 to 4.8 million in 1929. In 1929, there were 23 million cars in the United States which means that every fifth American had a car while in the United Kingdom, one car accounted for 43 people, in Italy for 325, and in the USSR for 7,000 people. The radio industry was developing even more rapidly; in particular, less than one percent of Americans had radio receivers in 1920 while in 1929, the number of owners of the radio was twice as high as the number of car owners. Among the new industries, film production took one of the leading positions since investment in picture making grew from $ 78 million in 1921 to $ 850 million in 1929. Moreover, American miners mined nearly 40 percent of the world’s hard coal, and the American economy accounted for more than half of the finished goods in the world. Finally, by 1929, at least 1 million people had been engaged in the game on the stock exchange. 90 percent of all transactions were non-investment and speculative. Thus, in the pre-crisis period, the economy of the United States experienced a comprehensive development.
Despite the economic upturn, the one-sided development of economic sectors was obvious. For example, in the 1920s compared with the previous period, there was a sharp increase in investment in the industry aimed at the mass consumer. During that decade, the foundations of a consumer society and popular culture emerged in the United States, which became the paradigm of American society throughout its subsequent development up to the present day. Moreover, in this period, consumer consciousness was shaped as a fundamental phenomenon of a nationwide social culture. At the same time, not only for lower strata but also for moderately well-to-do Americans, the possibility of acquiring the most family and individual comfort goods was associated with buying them on credit. Consequently, the start of the economic crisis resulted in the so-called “Black Thursday” on October 24 and “Black Tuesday” on October 29, 1929. In turn, it gave a push to the New York stock conversation a quick monetary downfall that was maintained very soon by an entire financial collapse. The overall deterioration in manufacture over four years was 30%. In several businesses, the deterioration was much more solemn; for example, it amounted to 72% in building, 42% in the coal mining industry, and 400% in steel production. Nationwide revenue was reduced by more than twice. Job loss increased by 8 times with fractional unemployment being much more complex. In particular, according to the American Federation of Labor, only 10% of the workforce was completely employed in 1932. The manifestations and consequences of the financial crisis were dramatic. Over the years, 130 thousand commercial insolvencies followed, and 5760 banks closed that implying 20% of their entire amount in the United States. Thus, one-sided regulation of the U.S. economy had become a prerequisite for the development of the economic crisis.

Views on the Causes of the Great Depression

Among scientists, there is still no consensus on the causes of the Great Depression in the United States. In the literature of the post-crisis period, the emphasis was placed on the fundamental contradiction between the social nature of production and the private mode of appropriation under capitalism. It reached extreme forms at the monopolistic stage and naturally gave rise to the most severe global economic crisis of 1929-1933. Thereafter, the concept of a plurality of causes of the crisis was established in the literature. The monetarist explanation of the Austrian Economic School, emphasizing on the inept management of the circulation of money by the Ministry of Finance and the diminishing supply of gold on which the entire economic system was worthy, deserves attention. Rendering to this concept, the failure of the state to manage the extensive downfall of banks led to a mass dread and instigated the crisis. The following explanation is based on the Keynesian theory, namely the drop in purchasing power due to the overproduction caused by the excessive investment of money in the economy had deprived buyers of confidence in the system. The world of Versailles created a situation where Europe, to help America, is forced to take money from a defeated Germany, which became angry and resisted due to the bonded conditions. Thus, panic and deflation produced a crisis.

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In addition, the theory of a stock bubble should be investigated more specifically. Several researchers made efforts to identify whether the phenomenon of 1929 was a “bubble” of exchange based on the so-called balance effect of wealth discovered by Tobin. According to it, the value of assets affects aggregate demand. If a “bubble” inflated in 1929, it would inevitably distort the ratio of consumption and investment. The increase in the value of shares was supposed to affect the number of guarantees and collateral, which allowed firms to attract more loans. The result of a “bubble” is a reinvestment meaning an investment in projects that, in reality, do not have a positive internal rate of return. In addition to this theory, Milton Friedman and Anna Schwartz believe that the U.S. Federal Reserve is to blame for the crisis of confidence, which did not come in time to help banks and launched waves of bankruptcies. According to the aforementioned economists, the reason for the contraction of the money supply was not the liquidity trap but rather inept and insufficiently effective control actions. However, there is an opinion in defense of the state policy of regulating the economy of the United States. For example, William Foster, a chairman of the National Committee of the Communist Party of the United States, considering the period of crisis, argues that the global economic crisis was cyclical and exacerbated by the impact of the general crisis of the world capitalist system. He states that the main reason was the robbery of workers through capitalist exploitation. It was reflected in the rapid growth of industrial output on the one hand and in the narrowing of markets on the other hand. Several other researchers share a similar opinion. In particular, Polanyi in examining the causes of the crisis argues that the major cause of the crisis was the daunting collapse of the international economic system based on the gold standard. Due to the turn of the century (XIX-XX), this system worked with large interruptions, and the Great War and Versailles destroyed it completely. It became quite obvious in the 1920s when almost every internal crisis in European states reached its climax for reasons of a foreign economic nature. Thus, there is still no consensus on the causes of the economic crisis in the United States.

The Phenomenon of “Soap Bubble”

Despite the different approaches to determining the roots of the Great Depression, an obvious factor that contributed to the emergence of the crisis was the exchange bubble. Important events that directly prepared the crisis of 1929 took place in the securities market and the sphere of corporate financial organizations. In the second half of the 1920s, there was a large increase in stock prices. Moreover, the incomes of the population increased, production grew, and unemployment decreased. Between 1927 and January 1929, the stock price index doubled and added another 20 percent until the autumn of 1929. This position in the financial market created the prerequisite for the formation of an exchange bubble.

A financial bubble is a rapid increase in the price of assets that occurs without a corresponding fundamental reason such as reports about the launch of a new product or the discovery of oil. The bubble is considered by three constituents, namely the speedy upsurge in prices for monetary properties, the increase of commercial commotion, and the continuous intensification in money stock and credit. The justification of the bubble is based on the “balance effect.” Variations in the fees of commercial assets are directly replicated in the balance expanses of families, companies, and financial mediators. Inflating the bubble leads to an increase, and its collapse results in a reduction in the cost of providing loans. At the peak of the financial boom, players are actively using loans for stock speculation. When the tendency changes its course, the influence proportions jump abruptly. Borrowers are beginning to demand additional collateral, and banks tend to increase capitalization to comply with capital adequacy standards. Dropping passages on the stock marketplace deteriorate fiscal outcomes and the balance sheets of all companies without exclusion, which forces them to diminish recent expenditures. The costs are not on consumption but rather on debt servicing. The rearrangement of the revenue originates a decrease in the cumulative request and economic progression. Thus, the financial bubble objectively leads to a crisis.

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Some aspects concerning the functioning of the American stock exchange during the pre-crisis period indicate the presence of a stock bubble. The period between 1921 and 1928 to this day remains the longest period in the history of America when stable earnings per share were observed. The average real earnings per share for these eight years reached 25% per annum. Since 1924, there were practically no bears left on the market, and everyone was playing only for promotion. In the period from May 1928 to September 1929, the average stock price increased by 40% per annum. The trade turnover jumped from 2-3 million shares a day to more than 5 million. On October 24, the market began to fall, taking a catastrophic scale on Black Tuesday on October 29. For the first month since the beginning of the stock exchange collapse, the cumulative losses of investors amounted to 16 billion dollars. According to some economists, the rise in stock prices resulted from a combination of the “new economy” of its time and “irrational liveliness.” In the 1920s, a whole series of innovations was launched in mass production, including automobiles as well as radio, cinema, aviation, and the electric power industry. The range of banking services expanded considerably, and the shares of banking companies grew on par with, or even faster than high-tech ones. Thus, new participants were rapidly drawn into the market investing seemed to be safe due to decreased macroeconomic risks as well as high and fairly stable incomes received both from rising stock prices and from paid dividends.

Many researchers of the time argued that a higher exchange rate was the product of the higher marginal capital productivity as a result of a wave of innovations. It increased profits and consequently, led to an increase in dividends. In particular, the well-known economist Irving Fisher explains the stock market boom as a reasonable response to the increase in profits due to the systematic application of science and inventions in the industry and the introduction of Taylor’s management methods there. It is also worth mentioning that other researchers sought to indicate whether the 1929 phenomenon was a stock bubble relying on the so-called balance effect of Tobin’s wealth, according to which the value of assets affects aggregate demand. It was revealed that in 1929, the stock bubble distorted consumption and investment. In addition, the increase in the value of shares affected the number of guarantees and collateral, which allowed the firms to attract more loans. The result of the bubble was re-investment which implies an investment in projects that did not have a positive internal rate of return. Thus, assessments by various economists, including the most reputable researchers during the Great Depression, showed that most likely, there was indeed an excessive level of consumption and investment by 1929. For that reason, the market crash itself played the role of a serious recession triggering sharply reduced consumption and investment and thus becoming the main cause of the Great Depression.


The market bubble became the main cause of the economic crisis in the United States, which resulted in not only tremendous social and economic upheavals but also a valuable experience, which was the basis for regulating the economy at the present stage. Describing the position of the United States before the Great Depression, it should be noted not only an active economic growth but also one-sided regulation of the economy with a priority on consumer goods. Regarding the causes of the Great Depression, there is still no consensus. However, the most obvious reason is the formation of a stock bubble, the destruction of which sharply reduced consumption and investment and caused a rapid recession.

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