The worldwide slump in output and prices, and the greatly increased levels of unemployment, which developed between 1929 and 1934. It was precipitated by the collapse of the US stock market (the Wall Street crash) in October 1929. This ended American loans to Europe and greatly reduced business confidence worldwide. A major Austrian bank also collapsed, producing destabilization in much of C and E Europe, leading to hyperinflation in Germany and thus contributing to the rise of Hitler and German national socialism.
The Great Depression was an economic downturn which started in 1929 (although its effects were not fully felt until late 1930) and lasted through most of the 1930s.
Cities all around the world were hit hard, especially those based on heavy industry. The Great Depression ended at different times in different countries;
Suggested causes of the depression
Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. First, there is orthodox classical economics, monetarist, Keynesian, Austrian Economics and neoclassical economic theory, which focuses on the macroeconomic effects of money supply, including production and consumption. Second, there are structural theories, including those of institutional economics, that point to underconsumption and overinvestment (economic bubble), or to malfeasance by bankers and industrialists.
There are multiple issues—what set off the first downturn in 1929, what were the structural weaknesses and specific events that turned it into a major depression, and how did the downturn spread from country to country.
Although some believe the Wall Street Crash of 1929 was the immediate cause triggering the Great Depression, there are other, deeper causes that explain the crisis. The vast economic cost of World War I weakened the ability of the world to respond to a major crisis.
The New York stock market crash
Economists dispute how much weight to give the stock market crash of October 1929. According to Milton Friedman, "the stock market (crash) in 1929 played a role in the initial depression."
Debt
Macroeconomists, including the current chairman of the U.S. Federal Reserve Bank Ben Bernanke, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher.
Furthermore, the debt became heavier, because prices and incomes fell 20–50%, but the debts remained at the same dollar amount. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.
Trade decline and the U.S. Smoot-Hawley tariff act
Many economists at the time argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries dependent on foreign trade. Most historians and economists assign the American Smoot-Hawley Tariff Act of 1930 part of the blame for worsening the depression by reducing international trade and causing retaliation. Foreign trade was a small part of overall economic activity in the United States;
In dollar terms, American exports declined from about US$5.2 billion in 1929 to US$1.7 billion in 1933; According to this theory, the collapse of farm exports caused many American farmers to default on their loans leading to the bank runs on small rural banks that characterized the early years of the Great Depression.
U.S. Federal Reserve and money supply
Monetarists, including Milton Friedman and Ben Bernanke, stress the negative role of the American Federal Reserve System in turning a small depression into a large one by cutting the money supply by one-third from 1930 to 1931.
In Milton Friedman's work, A Monetary History of the United States, he writes that the downward turn in the economy starting with the stock market crash would have been just another recession. In general, he states the problem was that some very large, very public bank failures, particularly the Bank of the United States, produced widespread runs on banks, and that the Federal Reserve sat idly by while bank after bank fell. He claims that if the Federal Reserve had acted by providing emergency lending to these key banks or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks that fell after the very large and public ones did would not have, the money supply would not have fallen to the extent it did, and would not have fallen at the speed it did.
Labor force issues
A recent theory based on institutional analysis focuses on the terms of employment for the labor force. For example, in the American agricultural sector farm prices fell about 50% as did farmer income while farm employment and output both rose by about 6% between 1929 and 1933 .
Since farmers had only a residual claim on the revenue they received, the unit cost of a farmer's labor was automatically flexible. Prices were thus free to fall, and they fell far enough to match the roughly 50% drop in national income.
Industry, however, depended on hired labor paid contractually agreed pay rates.
At the time this difference in the behavior of farm and industrial prices was attributed to the fact that farmers were subject to auction markets of perfect competition while the industrial sector was dominated by large oligopolies.
That argument, however, fails to explain why corporate profits vanished. It also raises the question of why, wherever input prices such as oil, wheat, or cotton fell sharply, output prices reflected the drop in costs, and final output fell correspondingly less.
But a more compelling rebuttal comes from Japan, which did not suffer from the Great Depression. Japan's real economy grew by about 6% from 1929 to 1933 and Japan's industrial economy was far more concentrated than the United States economy. At the same time Say's Law appeared inoperable in the United States to explain unemployment where labor sought work at any wage, including in exchange for only food, but with little effect. In the American case it was only government created demand, begun with New Deal programs, and extended with World War II, that brought the nation out of the Great Depression.
The conclusion of this institutional school of thought with the case of Japan is that Say's Law worked as advertised during the Great Depression.
Business
Roosevelt primarily blamed the excesses of big business for causing an unstable bubble-like economy. The problem was that business had too much power, and the New Deal was intended to remedy that by empowering labor unions and farmers (which it did) and by raising taxes on corporate profits (which they tried and failed).
Insufficient government deficit spending
The British economist John Maynard Keynes argued that the lower aggregate expenditures in the economy contributed to a multiple decline in income, well below full employment. Keynesian economists were increasingly calling for government to take up the slack by increasing government spending.
Capitalism - a Marxist point of view
The revolutionary left saw the Great Depression as the beginning of capitalism's final collapse.
Effects
Canada
Canada is sometimes considered to be the country hardest hit by the Great Depression. The economy fell further than that of any nation other than the United States, and it took far longer to recover.
Germany
Germany was also among the nations that were hit hardest by the depression, owing mostly to debts to the United States. One of the effects of the ensuing economic crisis was, arguably, Hitler's coming to power in 1933.
Responses in the United States
Initial reaction in the United States
Treasury Secretary Andrew Mellon advised President Hoover that a shock treatment would be the best response: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.
Hoover did not believe that the government should directly aid the people, but insisted instead on "voluntary cooperation" between business and government. Hoover believed that the stock market crash was a regular hiccup in the capitalistic cycle, and that it need not affect the greater economy. Business leaders agreed initially, but in practice no business wanted to put their neck out and risk complete failure for the good of the economy. Hoover also promoted a centralized bank — led by business, not the government like the eventual FDIC — that would hold money in reserve to secure against bank runs. Hoover's "voluntary cooperation" failed, but his policies during his tenure proved that the government needed to take an active role in the economy if it was to recover from this depression.
New Deal in the United States
From 1932 onward President Roosevelt argued that a restructuring of the economy—a "reform" would be needed to prevent another depression. New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending, by:
reforming the financial system, especially the banks and Wall Street. setting minimum prices and wages and competitive conditions in all industries (NRA) encouraging unions that would raise wages, to increase the purchasing power of the working class (NRA) cutting farm production so as to raise prices and make it possible to earn a living in farming (done by the AAA and successor farm programs)The most controversial of the New Deal agencies was the National Recovery Administration (NRA) which ordered:
businesses to work with government to set price codes;These reforms (together with relief and recover measures) are called by historians the First New Deal. It was centered around the use of an alphabet soup of agencies set up in 1933 and 1934, along with the use of previous agencies such as the Reconstruction Finance Corporation, to regulate and stimulate the economy. By 1935, the "Second New Deal" added Social Security, a national relief agency the Works Progress Administration (WPA), and, through the National Labor Relations Board a strong stimulus to the growth of labor unions.
In 1929, federal expenditures constituted only 3% of the GDP.
Recession of 1937 in the United States
In 1937, the American economy took an unexpected nosedive that continued through most of 1938.
But the administration's other response to the 1937 deepening of the Great Depression had more tangible results. Ignoring the pleas of the Treasury Department, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power.
On the other hand, according to economist Robert Higgs, when looking only at the supply of consumer goods, significant GDP growth only resumed in 1946 (Higgs does not estimate the value to consumers of collective goods like victory in war) (Higgs 1992). To Keynesians, 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, it would return to Depression conditions and industrial output would fall to its pre-war levels. That is, Keynesians predicted a new depression would start after the war—a false prediction.
Keynesian models
In the early 1930s, before John Maynard Keynes wrote The General Theory, he was advocating public works programs and deficits as a way to get the British economy out of the Depression. Keynes's basic idea was simple: in order to keep people fully employed, governments have to run deficits when the economy is slowing because the private sector will not invest enough to increase production and reverse the recession.
As the Depression wore on, Franklin D. Roosevelt tried public works, farm subsidies and other devices to restart the economy, but he never completely gave up trying to balance the budget. With fiscal policy, however, government could provide the needed Keynesian spending by decreasing taxes, increasing government spending, increasing individuals' incomes. Keynesian ideas of the consumption function have been challenged, most notably in the 1950s (by Milton Friedman and Franco Modigliani.)
Gold standard
Britain departed from the gold standard in September 1931, allowing the pound sterling to float.
Rearmament and recovery
The massive rearmament policies to counter the threat from Nazi Germany helped stimulate the economies of many countries around the world.
In the United States, the massive war spending doubled the GNP, masking the effects of the depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts. These events magnified the role of the federal government in the national economy. However, spending on the New Deal was far smaller than on the war effort.
Political consequences
The crisis had many political consequences, among which the abandonment of classic economic liberal approaches, which Roosevelt replaced in the U.S. with Keynesian policies. It was a main factor in the implementation of social-democracy and planned economies in European countries after the war.
User Comments Add a comment…