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Great
Depression
 The Great Depression
was a massive global
economic
recession (or "depression") that ran from 1929 to approximately
1939. It led to numerous bank failures, high unemployment, as well as
dramatic drops in
Gross Domestic Product (GDP), industrial production,
stock market share prices and virtually every other measure of
economic growth. It is generally considered to have bottomed out in
1933, but it was not until well after the end of World War II before
such indicators as industrial production, share prices and global GDP
surpassed their 1929 levels.
What gave this downturn the
name the "Great Depression" was that it was by far the largest
sustained decline in industrial production and productivity in the
century and a half for which economic records have been regularly
kept, and the fact that its impact was felt throughout the entire
industrialized world and their trading partners in less developed
nations.
The term Great Depression
can refer to the economic event, but it can also refer to the cultural
period, often called simply "The Depression", and to the political
response to the economic events.
1. Causes of
the Great Depression
Economists, historians and
political scientists have posed several theories for the cause, or
causes, of the Great Depression. It remains one of the most studied
events of economic history. Today, it is generally accepted that the
Great Depression was caused by the government's mis-management of
Monetary Policy.
Theories from mainstream
capitalist economics focus on the relationship between production,
consumption and credit, as embodied in
macro-economics and on personal incentives and purchasing
decisions as embodied in
micro-economics. In these theories attempts are made to order the
sequence of events which imploded the industrialized world's monetary
system and its trade relationships. Theories from Marxist economics
focus on the relationships of the control of production and the
concentration of wealth. For Marxists, the Great Depression is the
kind of crisis which capitalism is prone to and its occurrence is not
surprising.
Other heterodox theories of
the Great Depression have been advanced and from time to time gain
favour. These include the theory of long-cycle activity and that the
Great Depression was a period at the intersection of several
concurrent long cycle troughs.
More recently, it has been
the prevailing belief among economists that the stock market crash of
1929 was not the primary cause of the Great Depression, pointing to
telltale signs of an imminent economic disaster in various statistics
leading up to the Depression as well as the downturn in Europe which
was already in progress. Today the most widely accepted theory is the
one advanced by Peter Temin: that the Great Depression was caused by
catastrophically poor
monetary policy pursued by the United States Federal Reserve
during the years leading to the Great Depression. The policy of
contracting the money supply was an attempt to restrain inflation,
which exacerbated the actual problem in the economy, which was
deflation.
2. Responses
 The
Wall Street crash is widely considered to be the event which
marked the start of the world-wide financial crisis. In the United
States between 1929 and 1933, unemployment soared from approximately
3% to over 25%, while manufacturing output declined by one-third.
Governments worldwide sought economic recovery by adopting restrictive
autarkic policies such as high tariffs, import quotas and barter
agreements and by experimenting with new plans for their internal
economies.
Economic crises due to the
depression created great problems throughout the United States and
much of the world. Consumers reduced their purchases of luxury
products and many businesses cut production. Big businesses, such as
General Motors, saw their sales drop by 50% in the late 1920s and the
early 1930s. This caused businesses to cut back on the numbers they
employed, with thousands of workers losing their jobs.
When farm prices fell,
small farmers went bankrupt and in the USA many lost their land due to
bank foreclosure. By June of 1932 the American economy had shed about
55% of the work force. On July 8, 1932, the
Dow Jones Industrial Average
plunged to 41.22. The United States government responded by
instituting the
New Deal policy which was an attempt to restore prosperity by
spending on welfare and public works.
After the stock market
collapse, the New York based banks became concerned over the security
of overseas loans and called in their loans to Germany and Austria.
However, without the American money, Germany was unable to continue
making World War One reparations payments to France and Britain. This
chain reaction meant they in turn could not repay their war loans to
America. Therefore, the depression had spread to Europe. All
governments were forced to cease paying both reparations and war loan
repayments.
The United States
government tried to protect domestic industries from foreign
competition by imposing the highest import duty in American history.
In retaliation, other countries raised their tariffs on imports of
American goods. As a result, global industrial production declined by
36% between 1929 and 1932, while world trade dropped by 62%.
Observers throughout the
world saw in the massive program of economic planning and state
ownership of the Soviet Union what appeared to be a depression-proof
economic system and a solution to the crisis in capitalism.
In Germany, unemployment
increased drastically, fuelling widespread disillusionment and anger.
The institutions of the
Weimar Republic, which had already been unable to maintain order
in Germany, further deteriorated in the years from 1930 to 1932, while
the Chancellor and finance expert Heinrich Brüning attempted to fix
the economy by drastically cutting state spending. At the time the
NSDAP, or Nazi party, gained much popularity, winning the two
general elections in 1932. This eventually led to the appointment of
Adolf Hitler as Chancellor on January 30, 1933. In Nazi Germany, economic recovery
was pursued through rearmament, conscription, and public works
programs. In Benito Mussolini's Italy, the economic controls of his
corporate state were tightened.
In the United Kingdom, the
Labour government of Ramsay MacDonald, and later the
Conservative-dominated coalition "National Government", responded to
the depression by imposing tariffs on all imports from outside the
British Empire (arguably worsening the global situation), by cutting
public spending, and by abandoning the
Gold Standard which reduced the cost of British exports (see
Great Depression in the United Kingdom).
In the Netherlands some
projects were started to give people employment and boost the economy,
such as the Amsterdamse Bos, a reforestation project near Amsterdam.
In Heerlen fabric merchant Schunck commissioned a new building in 1934
for his business, the hypermodern Glaspaleis (Crystal Palace)
the tallest building in the city at the time.
In the United States,
President Herbert Hoover made efforts to control the situation.
However he gravely underestimated the severity of the crisis, even
announcing to U.S. Congress on December 3, 1929, that the worst
effects of the recent
stock market crash were behind them, and that the U.S. public had
regained faith in the
economy. Having realized his mistake, Hoover went before Congress
again on December 2, 1930, to ask for a $150 million public works
program to help generate jobs. However, one of the major problems was
that with deflation, the currency that you kept in your pocket could
buy more goods as prices went down. Another was that there had been no
federal oversight of the stock market or other investment markets, and
with the collapse many stock and investment schemes were found to be
either insolvent or outright frauds. Unfortunately, many banks had
invested in these schemes and this may have precipitated a collapse of
the banking system in 1932; Milton Friedman's monetary theories
suggest that the inexperience of the newly-created
Federal Reserve in managing the money supply exacerbated the
problem. With the banking system in shambles, and people holding on to
whatever currency that they had, there was minimal cash available for
any activities that would cause positive change.
The response of the Hoover
administration helped little; instead of increasing the money supply,
the Hoover administration did the exact opposite and raised interest
rates, falsely believing that
inflation was the real danger. Many in the Hoover administration
believed that as wages fell, the cost of production would drop and, as
a result, production would pick up again--the depression would be
self-correcting. Nobody at that time foresaw the effects of a
calamitous drop in the money supply. For this reason, they saw no need
for the government to intervene in the economy, a policy which proved
disastrous.
Like their counterparts
abroad, many Americans were disillusioned with their system of
government, believing that Hoover's policies had driven the country to
ruin. Shanty towns populated by unemployed people at the time were
often dubbed Hoovervilles, highlighting the President's fading
popularity. During this period, several alternative political
movements saw a considerable increase in membership. In particular, a
number of high-profile figures embraced the ideals of Communism. Radio
speakers, such as Father Charles Coughlin, saw their listening
audiences swell into the millions as they sought easy scapegoats for
the country's woes.
Upon accepting the
Democratic nomination for president (July 2, 1932), Franklin D.
Roosevelt promised "a new deal for the American people", a phrase that
has endured as a label for his administration and its many domestic
achievements. Upon being elected in 1932 he proposed the "New
Deal", a platform of government programs based on
Keynesian economics and intended to stimulate and revitalize the
economy. The British and French governments also intervened in their
economies to escape the worst effects of the depression.
3.
Life during
the Depression
 In the so-called
'Dust Bowl',
a massive area of the Great Plains consisting mainly of Kansas,
Oklahoma, and parts of Texas, people found themselves unable to make a
living. On top of the economic crisis, the earth withered and blew
away in a series of massive dust storms. For a farming people this was
disastrous, and these migrants were led westward by advertisements for
work put out by agribusiness in western states such as California. The
migrants came to be called Okies, Arkies, and other derogatory names
as they flooded the labour supply of the agricultural fields, driving
down wages and increasing competition for jobs in areas which couldn't
afford it. This story was dramatized in the famous novels The
Grapes of Wrath and Of Mice and Men by John Steinbeck. Life
was challenging for those in Southern states also and many migrated
north by train to work in auto plants around Detroit.
Many nations experienced an
economic decline, though the severity and timing differed from country
to country. For example, Britain hit its trough in the third quarter
of 1932, while France did not reach its low point until April of 1937.
Charles P. Kindleberger has provided the best international account of
the Depression so far in his book The World in Depression.
Asia was also hit by the
Great Depression due to its dependence on the export of raw materials
with Europe and America, predominantly rubber and tin for the
automotive industry. Asian trade fell sharply as America and Europe
were gripped by the depression. Firms in Asia responded by cutting
their workforce and reducing wages.
In Japan, unemployment and
poverty rose, disproportionately affecting the lower classes; these
hardships were a factor in the rise of Japanese nationalism.
4. End of the
Great Depression
(In the
United States)
It was not until the U.S.
entered World War II that Roosevelt's ideas for massive public
expenditures and
deficit spending truly began to bear fruit. Roosevelt's
administration, of course, had little choice but to increase
expenditures, given the war effort. Even given the special
circumstances of war mobilization, New Deal policies seemed to work
exactly as predicted, winning over many Republicans, who had been the
New Deal's greatest opponents. When the Great Depression was brought
to an end by the Second World War, it was obvious that the turnaround
had been caused primarily by the reinforcement of business through
government expenditure.
In truth Roosevelt had
foreseen from early in his Presidency that only a solution to the
international trade problem would finally end the depression, and
that the New Deal was, to no small extent, a "holding action". He
contemplated precipitating a war with Japan early on, in hopes of
dealing with the problem early. However, the intensity of the economic
crisis convinced him that before the world situation could be dealt
with, the United States would have to put its own fiscal house back in
order. His original conception was that the New Deal would restore
circumstances which would allow for a return to balanced budgets and
an international gold standard. It was only gradually that he came to
the conclusion that it was essential to remake the U.S. economy in a
more extensive fashion, particularly because of the "Roosevelt
Recession" of 1937, when he had balanced the budget by restricting
fiscal support to the economy.
Thus the statement "it was
World War II that ended the Depression", while often asserted by
partisans as proof that the New Deal "failed" is, in fact, the view
that the architects of the New Deal themselves saw as the reality:
that as long as Europe was marching towards war, Japan was engaged in
imperial conquest, and the international debt and trading system were
still organized in an attempt by creditors to be paid back for World
War I at pre-war values for gold, that a full solution to the economic
crisis was impossible.
New Deal programs sought to
stimulate demand and provide work and relief for the impoverished
through increased government spending, by:
-
instituting regulations which ended what was called "cut throat
competition" (in which large players supposedly used
predatory pricing to drive out small players);
-
creating
regulations which would raise the wages of ordinary workers, to
redistribute wealth so that more people could purchase products.
The original
implementation, in the form of the
National Recovery Act, brought in direct unemployment relief, and
allowed:
-
business
to set price codes;
-
the NRA
board to set labour codes and standards;
-
the
Federal government to insure the banking system and provide
price supports for agriculture and mining.
This is referred to as the First New Deal. It was
centred around the use of the alphabet soup of agencies set up in
1933 and 1934, along with the use of previous agencies, to regulate
and stimulate the economy.
The theories behind the New
Deal matched the later prescriptions of British economist
John Maynard Keynes, who advocated increased government spending
in a financial crisis. In 1929 federal expenditures constituted only
3% of the
GDP. Between 1933 and 1939, federal expenditure tripled, and
Roosevelt's critics accused him of turning America into a socialist,
or even Stalinist state. The primary purpose of the New Deal were as
follows: to prevent the economy and banking system from going into a
free fall; to provide effective relief until larger economic forces
would end the slump; and to prevent those factors which had
exacerbated the slump. The New Deal was both a program of national
recovery and of reform. An interesting insight into what motivated
Roosevelt came from the transition from the Hoover administration —
both men agreed that it was a global maladjustment of prices, debts
and production that was causing the slump. The disagreement came over
whether the US government should act first to try and negotiate an end
to the root causes internationally, which was Hoover's view, or act
for domestic recovery and reform until the international situation
could be resolved, which was FDR's view.
The New Deal was rooted in
new ideas, but also in economic orthodoxy of balanced budgets, and
restraint of federal power. It represented bigger and broader
government than ever before, but not as big as government would later
become: spending on the New Deal was far smaller than on the war
effort. In short, federal expenditures went from 3% of the GDP in 1929
to about 33% in 1945. The big surprise was just how productive America
became: spending financially cured the depression. Between 1939 and
1944 (the peak of wartime production), the nation's output more than
doubled. Consequently, unemployment plummeted—from 19% in 1938
(already down from 1933's 24.9% peak) to 1.2% in 1944—as the labour
force grew by ten million. The war economy showed just how large the
fiscal stimulus required to end the downturn of the Depression was,
and it led, at the time, to fears that as soon as America demobilized,
that it would return to Depression conditions and industrial output
would fall to its pre-war levels. There is general agreement that it
was World War II which finally provided the United States Federal
Government with the political will to buy its way out of the
Depression and resolve the global
monetary crisis by the imposition of the
Bretton Woods system.
5. See also
6. External
links
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