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Wall Street Crash of 1929

Wall Street Crash of 1929, black tuesday, crisis 1929, wall street crisis

Wall Street Crash of 1929, black tuesday, crisis 1929, wall street crisisIn the first post-war period, grew up considerably the United States economy, owing to the significant investment demand coming from Europe for the resumption of the various powers that had participated in the First World War. Indeed, in America from 1922 to 1929, industrial production increased by 64%, labour productivity by 43%, profits by 76% and salaries by 30%.

The high difference between increasing profits and production and that of wage earnings created a noticeable imbalance in the distribution of incomes, which American trade unions could not balance because they were weakened. To these imbalances, a psychological driving factor was added: the conviction that a natural enrichment was possible, apparently not linked to work or production, but from daring speculative activities.

The situation in the United States had created such a feeling of euphoria as to make everyone believe that this industrial development would never have ended; in fact, everyone bought shares on the stock market.

Towards the end of the 1920s, euphoria turned into a general unconsciousness because America had embarked the impasse of overproduction. When the population began to be alarmed by now it was too late, in fact, on October 24, 1929, there was the collapse of Wall Street.

The collapse of the stock market, which is not the cause of the economic crisis, is the first sign of it. Its origins are to be found in international economic and financial relations in the post-war period.

The First World War, in addition to causing severe human and artistic losses, also breaks down the monetary equilibrium within Europe. Indeed, until the outbreak of the war, the currencies of the various Western States had reached a value of legal equality. But during the conflict, many states had exceeded in the issue of notes, which they were devalued, except for the United States that maintained unchanged the gold convertibility of the dollar, with which the other coins, then, had to confront.

The United States recorded a continuous economy boom (except in 1924 and 1927) until October 1929 as it was stimulated by several factors:

  1. The expansion of the construction industry;
  2. Innovations based on the exploitation of new products (e.g. the car);
  3. Development of the electrical industry;
  4. Rationalization of production processes through Taylorism, aimed at eliminating dead times (assembly line).

There was a sharp increase in national income, unmatched from that of the general population, and therefore by the workforce. The United States, therefore, became the most prosperous country in the world and was able to grant loans to post-war European nations.

The biggest beneficiary was Germany, which could recover quickly from the collapse of the Mark. So in the autumn of 1929, the United States, which maintained the international economic system, allowed to the crisis that was hitting them, to spread like wildfire.

In March 1929, signals from a possible collapse of the stock market had been warned by the Federal Reserve, which nevertheless decided not to act.

Starting in June 1929, American domestic demand faces a decline, and the overproduction crisis began to strike the key industries and agricultural activities.

The crisis of the real economy leads since September to a race to the bottom, instead of the upside. The stock market index began to move irregularly but always with a downward trend. Until, after weeks of oscillations on October 24, 1929 (black Thursday) thirteen million of shares were sold at low prices. Except for short periods of recovery, the downturn will continue until July 8, 1932.

This crisis, however, has its origins in the real economy and Wall Street's collapse worked as a detonator of a very fragile and decompensated general economic situation.

The effects of the crisis within capitalist society are manifold:

  1. Salaries declined, and this did not contribute to the growth of production through investments, but only led to a reduction in prices;
  2. As a consequence, industrial profits decreased;
  3. In industrial countries where trade unions were more solidly organised, wages received a minor cut, also because the number of salaried workers had been reduced.

The crisis, other than on stock market, industrial, agricultural and commercial, was also a banking crisis. Indeed, both industry and agriculture were heavily indebted to the banks. During the "roaring years," banks had surpassed their loans, forecasting a regular return, and confidence in savers who would have to increase their deposits.

But with the crisis, a considerable number of companies were unable to pay debts at maturity, and meanwhile, the banks were under pressure by the depositors, that now demanded the repayment of the sums deposited. Consequently, faced with the stress of depositors and the impossibility of lending money, many banks were forced to close.

Also, order to protect themselves, the United States started to remove investment from the international market to which customs policy was added. The "Hawley-Smoot", the severe customs tariff that the United States adopted since June 1930, had harshly protective features, leading them to choose the path of isolationism or economic nationalism.

Like all the crises, also this has discharged its effects in the mass, and the most evident of all was unemployment. It was exacerbated by the deflationary policies adopted to avoid incalculable repercussions in the state budget, such as wage reduction, direct taxation on wages and the reduction in public spending. The political process undertaken by Hoover, a Republican candidate, to safeguard the value of the currency that was the primary cause of world unemployment.

The stock market collapse and the economic crisis disqualified, in the face of American public opinion, the capitalist environments that during the "roaring years" had been exalted for their spirit of initiative. This mistrust fell even on the Republican Party which was the highest representative of the capitalist world. Thus, in the 1932 elections, the Republican Party was defeated by the Democratic Party, represented by Franklin Delano Roosevelt, who was mainly supported by the workers.

The covenant that Roosevelt presented to the Americans, the New Deal, was not inspired by a specific economic-political doctrine. Within this program, there were some crucial points, such as the decision to tackle the crisis through the intervention of the State, and the commitment to directing economic activity and mediating classroom conflicts to demonstrate the compatibility between the capitalist system and the democratic regime.

Through the Brain Trust, which is a group of competent collaborators, during the first period of his presidency Roosevelt has implemented a series of measures:

  1. To reduce unemployment, the Government promoted a wide range of public works (building houses, roads, bridges, etc.) and founded the Civilian Conservation Corps that employed about 3 million young people in natural heritage conservation, with the dual aim of combating youth unemployment and enhancing US natural resources. It founded, also, the famous Tennessee Valley Authority, which, in about twenty years, completed the Tennessee Valley fitting-out work, building dams and power plants for providing electricity at lower costs than those charged by private industries;
  2. Roosevelt granted subsidies to farmers for diminishing production or for destroying part of the crop to avoid a fall in prices;
  3. He entrusted to the National Industrial Recovery with the task of eliminating "cut-throat competition" by bringing industry, labour, and government together to create codes of "fair practices" and set prices. On the other hand, companies had to give workers a minimum wage and did not have to increase the number of working hours per week;
  4. To find the funds needed for this new policy, based on the expansion of state spending, was increased the public debt and was accepted the state deficit without pretending the balanced budget. It was printed more notes in relation to the amount of the gold reserves, creating a controlled inflation that devalued the dollar but allowed easier export.

Stopped the most dangerous aspects of the crisis, it was established since 1935 a reform program to consolidate that system. The Social Security Act set significant benefits for unemployment, disability and old age. A tax reform made tax revenues very progressive and made tax evasion more difficult. The National Labor Relations Act legally recognised the trade unions.

But if at first the New Deal had been accepted by all as the only solution to the crisis, the successive reforms encountered a strong opposition to the capitalist milieu that, to safeguard their interests, accused the chairman of authoritarianism and concessions to collectivism.

In spite of this, in 1936 Roosevelt has been re-elected, but in 1937, while the Government reduced public spending so as not to over-increase the deficit of the state, capitalist hostility manifested itself in a so-called "white" capital strike, which consisted in a reducing of investment. Followed a recovery in unemployment, in response to which, the Government, again resorted to the expansion of public spending.

In 1938, New Deal's policy can be considered to be over. In fact, the threats of Nazi and Japanese imperialism prompted the government to multiply the expenditure on arms, which alone managed to overcome the crisis, so that unemployment disappeared quickly.

 

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