Understanding the 1929 Economic Crisis and Its Impact

The 1929 World Economic Crisis

2. Background Leading to the Crisis of 1929
The economy, finance, and national treasury of the United States seemed to be in order after World War I. However, negative symptoms began to emerge:

• There was an increase in raw materials and industrial goods, leading to an imbalance. Consumption did not reach the levels needed to maintain a balance between supply and demand.
• Businessmen preferred to invest their income in the stock market rather than in the production of goods, thus dangerously increasing financial speculation (earning money in the short term).
• The world economy was virtually dependent on the state of the U.S. economy, which was the main financier of Europe, Latin America, and Asia.

2.2 Immediate Background of 1929

• Steady decline in the prices of agricultural products due to low levels of consumption.
• The government attempted to curb stock market speculation by imposing interest rates of over 10% on short-term loans, creating uncertainty among stock market speculators.
• For three months, prices and production experienced a steady decline, prompting investors to sell 16 million shares in a short time.
• The last element that triggered the financial meltdown and the collapse of the financial system of the United States was the cessation of payments by Germany.

2.3 Immediate Consequences
Financial Panic: The volume of shares on sale could not be absorbed due to a lack of buyers, causing prices to drop drastically, which ultimately resulted in the breakdown of the New York Stock Exchange (Wall Street), the world's financial center.

Immediate Effects:

• Cessation of payments from investors.
• Bank failures.
• Cessation of productive activities and the construction industry, leading to large-scale unemployment.
• Ruin for business owners, who lost their savings, and for investors, who faced a collapse in the value of their stocks.

Long-Term Effects: One of the longer-term effects produced after the fall of Wall Street in 1933 was the damage to the foundations of the capitalist economic system, including international trade and the international monetary system.

The Recovery Plan

President Franklin Delano Roosevelt
The package for U.S. economic recovery was known as the New Deal.

Strengths of the New Deal:

• The government took control of all banks, decreased interest rates, and consumption began to recover.
• Support for farm families through subsidies, even if they did not produce food.
• Implementation of a vast public works program, which decreased the unemployment rate.
• A logical restoration of the American banking system occurred.