We continue with our post on the history of the crisis:
The reason for the crisis
As prosperity increased, entrepreneurs sought new businesses to invest their profits. They lent money to Germany and other countries and installed their industries abroad (Argentina and Brazil, among others).
They also invested in machinery that allowed to increase production. Since they realized that they would have difficulty selling so much merchandise, they began to invest in luxury goods , such as jewelry or yachts, and in speculative businesses .
The purchase of shares in the stock market became one of the most profitable. Many times, to buy shares, entrepreneurs asked banks for loans. Because the profit on the shares could reach 50% per year and the interest they had to pay on bank loans was 12%, the benefits they obtained were enormous.
As a continuation of the post "Other previous crises: the 29th and the Wall Street stock market crash - Part I" we are going to continue with the second part of this event in world economic history.
In 1928, some symptoms suggested that the economy was in danger . The income of the population had not risen so much that consumption continued to grow. The warehouses had excess merchandise that could not be sold and many factories began to lay off their workers. However, the speculative party continued on the stock market. The sale prices of the shares did not reflect the real economic situation of the country and its companies. Although the growth of many of them had stopped, their shares continued to rise because there was a great demand from speculators. No one was able or willing to realize the seriousness of the situation. When the New York Stock Exchange failed in October 1929 , the crisis was inevitable and spread to the American banking system , industry, commerce, and agriculture. Its consequences were also felt around the world and lasted until the Second World War.
On Thursday, October 24, 1929, the Wall Street stock market crash occurred. More than 13,000,000 of securities that were trading in decline did not find buyers and caused the ruin of thousands of investors, many of whom, had bought the shares with credits that they could no longer pay. This caused people to panic, and those who had money in bank accounts rushed to withdraw it. Banks were unable to cope with such large repayments, and furthermore, since the United States had tried to cope with the decline in demand with an expansion of credit to ordinary citizens, they were overwhelmed by bad debts. . Given this, they refused to give new loans and to refinance existing debts , but nevertheless, approximately 600 American banks failed, similar to our current reality.
From that moment began a period of global economic contraction, known as " The Great Depression ".
In the United States, the decline in consumption caused accumulated stocks to grow, investments to stall, and many companies had to close their doors.
The fall in industrial activity led to widespread unemployment , in such a way that it is estimated that by 1932, there were about 13,000,000 unemployed in the United States.
The depression also brought hardship in the countryside, as many farmers went bankrupt as a result of falling prices and agricultural markets. As a desperate solution to pay their debts, large numbers of farm workers sold their land at ridiculous prices and went west to work .
Poverty did not only affect peasants and workers, but spread to bankrupt employees, professionals and capitalists. No one could escape.
Extension of the crisis
The existing connections in the international economy, but especially the dependence that the United States had on the European economy , caused the Great Depression to spread throughout the world.
The fall in prices in America affected industries in other parts of the world that had higher prices than those of the United States and, unable to compete, saw their exports drastically reduced . At the same time, the decline in North American demand slowed the exports of many countries, thus reducing world trade.
The United States also tried to repatriate capital that it had invested in different countries. This had a special impact on Germany, which had large credits taken to North America , since that country had practically been forced to borrow to face the war reparations stipulated in the Treaty of Versailles , which had to be paid in cash . The crisis also affected Austria, Great Britain, France, Latin America, Southeast Asia, Australia, and many more, since except in the Soviet Union, its consequences had repercussions in one way or another throughout the planet.
The New Deal
The crisis had led to rethinking the role of the State in the economy of a nation. In March 1933, Franklin Roosevelt assumed as his main objective after becoming president of the United States, to rebuild the economy of his country.
For this, he developed a plan known as the "New Deal" , which consisted of regulating the economy, favoring investment, credit and consumption, which would reduce unemployment. Public spending should be directed towards social security and education.
The model was inspired by the ideas of economist John Keynes who set out his principles in the book "The General Theory of Employment, Interest, and Money." Keynes upheld the principles of classical liberalism, but proposed the intervention of the state in those cases where it was harmed. He believed that a redistribution of income and an increase in the employment rate would reactivate the economy . Thus was born the Keynesian theory.
The measures adopted by Roosevelt were: helping the banks, subsidizing farmers, increasing wages and reducing working hours, creating new jobs in public administration and in public works, which would give a strong boost to construction and its derivative industries. Health care plans were also established and a new retirement and pension system was organized ”.
The results of the New Deal were uneven, achieving stabilization instead of growth . Full employment was not achieved and the permanence of a high number of unemployed, made the 1930s a period of tension and social confrontation.
History indicates that if a people does not learn from it, it is condemned to repeat it.
For this reason, let us remember history and reflect on it.
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