The Great Depression

The Great Depression

The Great Depression is a significant world crisis that influenced every developed country of the interwar period. As a crisis, it revealed the inconsistency of the gold standard system, which was already too archaic and could not effectively perform the functions necessary in the industrial society. Through this prism, the Great Depression showed the evidence of contradiction between the financial approach of the previous economic epoch and the modern means of production. It led to negative consequences such as many examples of bankruptcy, suicide, and economic decline. However, it brought many advantages as well, because the need of reforming became clear, and the system of the gold standard was replaced. On the global level, the Great Depression meant the way to move the world economic system in a progressive direction.

The Great Depression was the result of contradiction between the stable, rigid system of the gold standard and the flexibility of the productive forces of the world economy (Rothbard 1963, 261). Development of the means of production allowed bringing new goods to the market and in much bigger amounts. The results of technical progress such as planes, cars, and other expensive units of merchandize became available for everyone. Besides, there was another cause of such an increase of the development: World War I with its military-technical needs as the war of the 20th industrial century was more of a conflict between the industrial potentials of the warring nations rather than between their soldiers. Each nation did its best to gain the technical advantage over the enemies. It was the first war when the soldiers used tanks, planes, submarines, and other innovations. Besides, after the end of the war, there was no way to stop the tempo of technical development. A good illustration of this process was the activity of Henry Ford, who invented a cheap way to manufacture such expansive products as automobiles. That made the output production cheap so that everyone could fford it. Such phenomena appeared too frequently in comparison with the previous century. These phenomena were especially noticeable in the USA; that is why it became the first victim of the crisis (Romer 2003).

The contradiction was in the small amount of cash as the feature of the gold standard system. Certainly, when all people became able to buy the new goods in enormous amounts, there was not enough cash for that. The first form of the crisis realization was the crash of the stock market in 1929. When all brokers demanded their money for their stock, the stock market could not survive such a pressure because the necessary amount of cash did not exist anywhere at that time. It led to the bankruptcy of many influential and economically strong banks because of the banking panic in 1930, when those who wanted to save their money from the banks realized the same scenario as it was with the stock market. It sped up the processes that began, which resulted in the beginning of downturn that lasted from 1929 to 1933 in the USA and affected the entire economic world in the third decade of the twentieth century.

The anatomy of the crisis was not clear for the most economists and political leaders of that time. The Great Depression with its influence on the world economy lasted until 1939 in the USA. In European developed countries, its end came a few years earlier. Some researchers connect this effect with the mistakes of Franklin Delano Roosevelt’s “New Deal”. The Roosevelt Administration offered the course of different reforming actions that had to change the difficult situation in the USA. For example, Friedman and Schwartz claimed that the state had to support the banks in order to save the world from the Great Depression wave. Indeed, the administration did nothing, and the result of this irresponsibility was the global crisis (Friedman and Schwartz 1963, 331). Besides, support for the banks could not eliminate the contradictory state between the flexibility of the industrial productivee forces and the rigidity of the gold standard system. The last one had to be denied in order to find a new way to realize the finances of the industrial world without strong correlation with the gold. Through this prism, the way that Friedman and Schwartz offer does not overcome Roosevelt’s misunderstanding of the global transformational processes. The “New Deal” was the complex of the reforms that in general allowed the state to control the economic life of the USA. Roosevelt violated the constitutional limits of his power in order to resolve the crisis (Romer 2003).

Franklin Delano Roosevelt and his administration did their best in order to save the USA, especially, with their activity regarding particular rejection of the gold standard. However, these measures did not have enough power for the crucial changes. Therefore, the Great Depression lasted until 1939 when, in fact, it was not overcome. World War II helped the military potential to find the way for its use. All goods the people could not afford found their place on the battlefield. In such a way, on the one hand, World War II paradoxically became the remedy for the world economy. On another hand, the developed states provided the policy of the gold standard refusal – these different activities became the steps toward the modern financial system, in which gold still plays an important role as a gold reserve, but does not determine the global economy in total.

The main innovation of those economists who learned the lessons of the Great Depression became the today’s financial system of the floating rate courses. It corresponds to the demands of postindustrial society in much higher degree than the system of the fixed courses. That is why modern economy is more resistant to the financial challenges brought by technical development. Certainly, the Great Depression claimed many lives, but it also brought a positive effect of understanding the interrelation between the industrial and financial segments of the economic life.