Analyzing the Great Depression: Causes, Crisis, and New Deal Reforms

The Causes of the Great Depression

First, it should be noted that industrial overproduction was already evident before the collapse of the stock market. Many industrial activity indicators show that growth was slowing in the U.S. before 1929. Thus, the economy would probably have gone into recession even without the stock market crash.

Second, the liquidity crisis following the stock market crash favored the expansion of the overall economic crisis. In turn, the desperate desire to sell goods at any price accelerated deflation.

Third, the fall in consumption, caused by the deterioration of the economic situation, worsened the crisis. This decrease in purchasing power was compounded by several factors:

• Fear of being fired (rising unemployment).
• The fall in agricultural prices.
• Increased difficulty in obtaining credit and borrowing.

The Banking and Industrial Crisis

Overproduction, lack of liquidity, and the fall in consumption caused the stock market crisis to quickly become a systemic crisis affecting all sectors of the economy.

Fear of bank failures frightened the population, leading to a massive banking crisis: over 4,000 banks failed and disappeared. Millions of families were ruined, and thousands of Americans lost everything they had. The ruin of equity investors led to a sharp decline in consumption, which further aggravated overproduction. This drop in consumption and investment induced the industrial crisis.

The sharp drop in industrial activity led to a large increase in unemployment. The Depression had severe social consequences, and poverty spread rapidly. High unemployment further aggravated the contraction in demand. The deepening crisis exacerbated the overall situation.

Roosevelt's New Deal Policies

The New Deal was an economic plan implemented by Franklin Delano Roosevelt to overcome the crisis and mitigate its severe social effects.

A key focus of the New Deal was not primarily an increase in public spending, but rather a concerted effort to fight deflation and stabilize prices.

Roosevelt's administration took several major actions:

• Created agencies to promote price agreements between companies and prevent cutbacks and layoffs.
• Established agencies to promote infrastructure projects that would reduce unemployment and increase demand.
• Instituted rigid state control over banks.
• Formed the Securities and Exchange Commission (SEC) to regulate financial markets.
• Eventually prompted a monetarist policy to stimulate the economy.