The United States of America has experienced economic crises in the process of economic development. The first crises occurred in 1929 during the Great Depression. It lasted for a considerable period of time, ending in early 1940s. From the United States, the crisis spread to other developing countries that were reliant on each other. It caused a reduction in manufacture of goods and trade as well as loss of employment for many people. This was mainly because the reduced rate of production by industries resulted in the need to retrench some of the workers in order to cut down manufacturing costs. Many financial institutions contributed to unemployment due to closure. The economy had major weaknesses that led to the great depression. People were spending more than what they were earning. Farmers could no longer afford to pay debts in America.
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Most of the economic problems were attributed to World War I. In the aftermath, economies were trying to recover from the losses while nations in Europe strived to repay the debts acquired in the war. The United States was affected by the depression to a large extent and it ended just before the beginning of Second World War which again led to enormous spending to finance the war. Its impact affected the social lives of people even long after it ended. In a bid to conquer the impact of the great depression, President Roosevelt of the United States established a peace time strategy which had wide transformation within the free trade structure thereby encouraging the formation of the welfare states. The government would intervene in to socio-economic activities with the aim of assisting the citizens at a wider perspective.
After the great depression, the government and the citizens learnt to appreciate the role of the government in ensuring the welfare of the people as well in economic development. The programs created by President Roosevelt culminated in political alliances. These alliances were important in the eventual formation of the Democratic Party. The depression played a significant role in shaping the lives of many Americans. None of them would like a repeat of the suffering that they underwent within that period. They could now see the need to save money for future use. This ended up improving their asset ownership in order to secure property that could assist them in such difficult times.
In 2007, the United States was once again hit by financial crisis. The existence of a simple lending system caused an extravagant purchase of property by citizens. They could buy costly houses with loans, regardless of whether under the normal circumstances; they belonged to a class of such spending. The rules that existed then concerning land use made the owners of the land to hike the prices due to the high demand that was prevailing in the market during this time. These two aspects really contributed to the financial crises in America. High mortgage was mainly due to restrictions in land use in a number of urban markets as well as boundaries of metropolitan growth. They caused a rise in the price of houses to unexpected levels. A small rise in prices of homes was only experienced in the areas where the land regulation was not strict (Michael Howard 2008 pp. 16-21).
The major cause of the financial crisis was the issue of housing. Reckless lending was being practiced all over the United States. Accessibility to loans and mortgage was the major driving force for the rising need for homes. Earlier on, the lenders were employing stringent measures for one to qualify for a loan. During this time, people who were until that time not qualified for a loan were allowed to apply. To qualify for a loan, a person was supposed to have minimum monthly earnings of $5,000 that satisfied the underwriting procedures. Many mortgage lenders contributed to the crisis. They would give loans regardless of whether the customers could afford to secure. Most of the loaned people were unable to pay for their mortgage which led to a rise in the number of defaulters creating a situation whereby the lenders could not afford to cover in their provisions. Many lending firms failed because of this occurrence. Bear Stearns and Lehman Brothers were examples of companies that failed because of this extent of defaulters. Appraisals coming from incompetent house appraisers were a common phenomenon, whereby the appraisers never made real house comparison to existing house values. They are said to have been passing by the house instead of making appraisals through the standard ways of valuation (Alan Chapman, 2008 pp. 31-36).
Excessive land use regulations were a major cause of the high prices of mortgage. According to, Michael Howard (2008 p.28), “The immense share of the additional rise of house prices in the United States and mortgage coverage depending on income has took place in the limiting land use markets”. These restrictions in land use accounted for major rise in house prices as high as 80 percent. The mortgages became over inflated. The interest rates were low on the mortgages during lending but later stabilized at the normal rates after two years. The new rates became a burden to the customers, especially the ones with insufficient income to pay for the mortgage. Due to this, foreclosures arose in the housing market, causing a fall in the housing prices. The problem was further amplified by the fact that mortgage insurers hardly ever kept them. They instead they sold them to entrepreneurs who may be interested in investing in the mortgages. This led to further borrowing since the mortgage owners would sell them at a profit, and then borrow some more loans.
Social Impact of Economic Crises
The economic crisis adversely affected the people. This was mainly because in the two phenomena, no one had expected that they would occur at such intensity. The level of unemployment rose and very many Americans suffered due to lack of a sustainable source of income. The unemployed Americans amounted to 24.9 percent of the total population (Alan Chapman 2008 p. 47). The crises led to a rise in taxation and wage cuts rose. Part time employment was the major source of income for a substantial number of people. Skilled people were engaged in the informal sector that presented low income generating activities such as fruit vending and shoe shining. The economic crises led to mass unemployment for more than three years. The youth were hard hit due to lack of experience in the job market which turned out to be very selective of the most experienced workers. In the rural areas, unemployment was widespread thereby making people to live in extreme levels of poverty. The few who were lucky to secure employment were underemployed.
Due to illiquidity in banks, people who had deposited their money could not enjoy the utility of their money. The banks could not afford to offer the amounts needed for depositors to cater for their needs. In the social setting whereby money is deposited in the bank for use during hard times, people suffered a lot. Business men were hard hit by the depression and could no longer remit the usual installments to repay their loans. This amplified the financial difficulties that the banks were facing on top of the losses incurred from money they had invested in the stock market. More over, depositors lost confidence in the banks and many withdrew their money from banks. People could no longer afford to pay for mortgage and rented farms. These were deserted and many were closed leading to heavy losses for the owners. Those who had borrowed finances for mortgage could not repay the loans and therefore had the lending financial institutions lose confidence in them. This lowered the possibility of future borrowing. Living conditions worsened as people started erecting make-shift living structures. Anger was felt all over and people started blaming the then President Herbert Hoover. Bitterness was directed upon him for his failure to assist the unemployed population to acquire proper housing.
People experienced food shortage and social disorders became rampant. Discrimination in the society increased as people who were alleged to be rivals in the economic sphere were disguised by the natives. Blame game became the order of the day as people tried to establish the cause of their problems. Multinationals as well as migrants were blamed for the economic collapse. The natives developed hatred towards migrant workers whom they felt competed for the scarce employment opportunities. Jews were among those viewed as outsiders in the economy.
Occupational segregation heightened, with women facing difficulties in their work places and receiving lower pay than the men. Some legislators could even advocate for sacking of married women alleging that with their husbands working, the women were supposed to remain jobless. There were complaints that employing a woman was equivalent to double employment since the two spouses were earning while many people remained unemployed. This phenomenon was largely experienced in Britain and Germany whereby female teachers were retrenched (Michael Howard 2008 p.28-31). Nevertheless, the female employees offered cheap labor and could adapt easily to working overtime with minimal benefits. This made many employers to retain women while they retrenched men.
The depression affected Americans socially in the sense that every body that experienced the repercussions changed in to a living style geared towards accumulating more savings and less spending. No one wished to face the financial difficulties once more and therefore they were more focused in their predictions. Many people engaged in activities aimed at acquiring as much assets as they could so as to avoid as much as possible the impact of being caught off guard by financial crisis. Parents ensured that their children understand the importance of saving as much as possible. The culture of heavy spending during celebrations was replaced by budgeted spending and a reduction in the purchase of unnecessary commodities. People became wealthier due to their cautious spending habits.
For the migrants, the unbearable impact of the financial crisis was amplified by racial discrimination. Asian migrants were faced with discrimination as the Americans felt that they were competing for the scarce resources. The Chinese were disregarded as inferior part of the population and many Americans could not believe that they were not the cause of the depression. Americans felt that their culture had been adversely affected by the Asian migrants. Before the great depression, these differences were not visible to the Americans. It was eventually put in to law by the United States Congress. Many of the Asian migrants could no longer migrate freely in to the United States. The Asian migrants occupied the lowest levels of the labor market hierarchy and therefore were highly susceptible to the financial crisis. This included other groups such as the African Americans as well as the Hispanic population.
The great depression caused mass unemployment amongst the migrants. Those who were lucky to be employed worked under harsh conditions and had their employment rights violated. Even the educated migrants could not gain access to the appropriate employment grades. They worked as unskilled laborers in the job market. This was as a result of the magnified racially prejudiced employment practice. The migrants faced frustrations in their endeavors to get employed. Many could not get a chance to put the skills acquired in to practice. Women were the most vulnerable amongst the migrants. The depression compelled them to seek employment in all sectors of the economy. Most of the women ended up in poorly paid work. They were also overworked and denied their rights by employers. They were engaged in part time jobs that they did after the major one during the day. This was a sign of under employment. However, it was important for them because without work, they could not survive in the United States. They had to withstand the suffering because the major reason for migrating was to evade the poverty that had hit the Asian nations.
The women all over the country had to work tirelessly to maintain their families during the difficult times presented by the great depression. Culture was ignored during the financial crisis as women played a significant role in economic matters. Many played the role that was predominantly male through working to feed their families. These social changes culminated in women participating in politics and reform agendas. To them this was an opportunity to present their capabilities in public affairs. Since then women have actively participated in politics and organization. It is through the great depression that Germany fell under the autocratic rule of Hitler. This culminated in the Second Word War.
Unemployment is known to cause psychological stress. Due to the mass unemployment that extended for a long period of time, the society comprised of people who were mentally stressed. They could not afford the basic commodities for existence and therefore had no reason to be happy. The health of the population was affected largely because of lack of proper feeding. Malnourishment in children was rampant. Local politicians gained foothold as they engaged in the blame game. Parties lost to their competitors due to the inability to find a solution to the escalating financial problems. This occurred mainly in Central and Eastern Europe. The politicians were able to convince the people about the source of their predicament, thereby winning the confidence of many people who anticipated for changes in the financial system.
The people who were hardest hit by this financial crisis were on the lowest level of the economic ladder. With payment of rent becoming a problem, some people went to stay with relatives. The make-shift settlements that people lived in were branded Hoovervilles, which was a satirical name derived from President Hoover by those who felt that the President was responsible for their predicament. The living conditions of the people were harsh, coupled with the general dissatisfaction due to lack of house ownership. It was shameful for men to be dependent on others or their spouses while indeed the society expected them to be the bread winners. This brought stress and anger in the unemployed people.
Homelessness was a major problem in the society. People could do all that they could in order to be sheltered including working for meager pay in order to afford rent. The increased competition in the job market raised the levels of discrimination against non Americans. The lowest paying jobs that were initially left for the ethnic minorities were taken up by the Americans. The unemployment led to malnourishment and poor health within the country’s population. This was because those who lacked jobs could not afford their own food making them susceptible to poor health. With food being given the first priority, other issues such as sanitation contributed to ill health because there was not enough money for all these minor requirements. The shacks were congested and therefore presented a high risk of contagious diseases. Children suffered most due to lack of proper diet as well as the necessary medical care.
The impact of the Great Depression in other nations was also overwhelming. Australia was one of the nations that were hard hit by the crisis. People lacked a steady income and many had to establish makeshift residence with improper heating and poor sanitation. They were compelled to engage in a variety of tricks to facilitate their survival. The society comprised of people who engaged in unnecessary activities in a bid to earn some income. Families disintegrated as men went out in search of employment. They moved from place to place where they did short time work. Social evils cropped up as youth engaged in betting games in order to acquire something for their meals. Activities such as cards games, petty crimes and drug abuse emerged amongst men and the youth. Other social evils became rampant in the society in a bid to acquire some money for subsistence. Education was no longer a priority and many children dropped out of school at an early age.
The crisis led to women becoming bread winners in many families, which was an additional task to child bearing and care. Women had to play their normal role according to their culture. Even after a day of hard labor, they were still expected to do the house hold chores. Casual jobs were available for the youth, but held no future since people could be retrenched at an early age of twenty years. Migrants were disliked by the natives because they accepted low wages due to the fact that they had no relatives who could come to their aid during these hard times. They had no choice but to take whatever was offered to them in order to survive. Political tensions in Australia heightened as people could no longer have confidence in their political leaders representing them in the government. With great communal dissatisfaction, some organizations that were headed by extremists gained footage in the society.
The current financial crises have to a great extent affected the society. The current credit crunch has had almost similar impact on the society. The major difference is that the interventions that are being used to solve this problem are stronger than those of the Great Depression. Predictions by the International Labor Organization indicate that more than twenty million workers may loose employment due to the current economic crisis. People are working hard and ensuring that they save enough while reducing the level of expenditure especially for the unnecessary commodities. The recession has led to desertion of day care services by parents. Children are being taken care of at home rather than being taken to these establishments which are being deemed unnecessary expenditures during this hard time. The aged are playing an important role in caring for the children as their parents go to work. All this is being done in order to cut down on the day to day expenditure. People are changing their lifestyles and working harder in order to meet the essential needs such as rent and food.
Strategies used to overcome the Economic Crisis
The government responded ineffectively in its first attempt to overcome the Great depression. This was because President Hoover initially felt that the financial crisis could not have adverse impact in the long run. He believed that it was short lived and that the financial status would get back to normal. The major efforts were geared towards rebuilding the people’s confidence in order to establish investment as well as increase production. This was viewed as a measure that could provide more employment opportunities thereby enabling the people to afford basic needs such as food and shelter. This would be the beginning of the journey towards restoration of the economy. However, manufacturers could not raise production where as the already manufactured goods were lacking market due to the poverty that had hit their customers.
Failing in its first attempt, the government turned towards balancing the federal budget in order to re-establish the lost confidence in business. This was done through cutting the overall government spending while on the other hand taxes were raised. This too did not work because the economy was in the verge of collapse. With increased taxes, the demand for products lowered thereby plunging the economy in to further crisis. The financial conditions became worse. After the second attempt failed, the government opted to give loans to financial institutions and manufacturers as well as financing the expansion of the public works. States were given assistance in order for them to offer relief to investors. These efforts were again futile because they came when it was too late.
President Hoover resorted to encouraging people to volunteer to give away some of their money and assets as a way of solving the economic crisis communally. This ideology was accepted and private property owners gave out most of their assets and cash. By 1932, the voluntary donations were quite high. However, the number of needy people was overwhelming making the charitable trusts unable to meet their expectations. They once more turned to the government to offer assistance to the people.
The President could not give in to the idea of offering relief assistance to the people. He felt that such kind of relief could hamper the efforts of ensuring independence amongst the people. He insisted on self reliance and therefore other measures to counter the economic crisis had to be sought. Within a few years, the welfare budget of the United States declined. The schemes that existed in the United States to assist the unemployed were overwhelmed by the number of people who depended on them. After the government failed to provide a solution through its programs, private charitable organizations assisted the people together with small scale assistance schemes. These were distributed all over the United States.
The migrants who were mainly from Asian-American communities had to take action in order to counter the problems they were facing. Many of them left the United States for their home countries where they could get assistance. They hoped to return when conditions improved in the United States. Some of the migrants moved to South and Central America where living conditions were a bit conducive. Before the Great Depression, there existed ethnic based organizations that offered assistance to their people when financial crisis worsened. Community networks assisted their members during these emergency conditions. They provided basic commodities and shelter. However, they were located in large cities and therefore not all the migrants could get assistance.
The Chinese population was assisted by the tourist industry in San Francisco to acquire employment. The growing tourism industry provided employment to Chinese nationals in the restaurants and various sections of the industry. On the other hand, Japanese migrants who lived in little Tokyo which was a small town in Los Angeles were assisted by Japanese businessmen and community leaders to acquire basic commodities and shelter. They promoted ethnic loyalty in order to re-establish their businesses.
In finding a solution to the current economic crisis, there are several steps that have been taken in the developed countries. These are aimed at achieving economic recovery in the short run. The United States has reduced the interest rates. Many other countries in Europe have also reduced their interest rates. The developed nations agreed to work towards strengthening the global economic system through supporting funding of the International Monetary Fund, accord on an internal financial package for Brazil as well as expansion of a protective credit access by the international community (Michael Howard 2008 pp.32-34). The industrial nations have approved communal policy and reforms in their institutions in order to reduce the recurrence of financial crises. They are promoting controlled spending and avoidance of unnecessary expenditure. Saving is also being encouraged as well as debt reduction. People are working for longer periods of time in order to earn more.
Institutional reforms are necessary in order to avoid the unnecessary suffering that people have been facing due to the occurrence of economic crises. Economies should learn from the experience of the United States which has been hit twice by economic crises. In order to succeed in future, key decision-makers should draw clear motivation, development and organizational transformation. These are essential in ensuring that financial crises do not recur. The crisis has taught the global economies on the need for better risk management.
- Alan Chapman. Social Economic History of Developing Countries: Impact of Economic Crises, Longman Publishers, 2008
- Michael Howard. “Crises in the Housing sector: The Next Generation”. Studies on Social Integration 2 (2008)” 22-54.