In the 21st century, the Great Depression is commonly used as an
example of how far the world's economy can decline.[2]
The depression originated in the U.S., after the fall in stock prices
that began around September 4, 1929, and became worldwide news with the
stock market crash of October 29, 1929 (known as
Black Tuesday).
Cities all around the world were hit hard, especially those
dependent on
heavy industry. Construction was virtually halted in many countries.
Farming and rural areas suffered as crop prices fell by
approximately 60%.[4][5][6]
Facing plummeting demand with few alternate sources of jobs, areas
dependent on
primary sector industries such as
cash
cropping,
mining
and
logging suffered the most.[7]
Some economies started to recover by the mid-1930s. In many
countries, the negative effects of the Great Depression lasted until the
end of World War II.[8]
USA annual real GDP from 1910–60, with the years of the
Great Depression (1929–1939) highlighted.
The unemployment rate in the US 1910–1960, with the years of
the Great Depression (1929–1939) highlighted.
Start
of the Great Depression
Economic historians usually attribute the start of the Great
Depression to the sudden devastating collapse of US stock market prices
on October 29, 1929, known as
Black Tuesday;[9]
some dispute this conclusion, and see the stock crash as a symptom,
rather than a cause, of the Great Depression.[3][10]
Even after the Wall Street Crash of 1929, optimism persisted for some
time;
John D. Rockefeller said that "These are days when many are
discouraged. In the 93 years of my life, depressions have come and gone.
Prosperity has always returned and will again."[11]
The stock market turned upward in early 1930, returning to early 1929
levels by April. This was still almost 30% below the peak of September
1929.[12]
Together, government and business spent more in the first half of
1930 than in the corresponding period of the previous year. On the other
hand, consumers, many of whom had suffered severe losses in the stock
market the previous year, cut back their expenditures by ten percent.
Likewise, beginning in mid-1930, a severe drought ravaged the
agricultural heartland of the US.
By mid-1930, interest rates had dropped to low levels, but expected
deflation and the continuing reluctance of people to borrow meant
that consumer spending and investment were depressed.[13]
By May 1930, automobile sales had declined to below the levels of 1928.
Prices in general began to decline, although wages held steady in 1930;
but then a
deflationary spiral started in 1931. Conditions were worse in
farming areas, where commodity prices plunged, and in mining and logging
areas, where unemployment was high and there were few other jobs.
The decline in the
US economy was the factor that pulled down most other countries at
first, then internal weaknesses or strengths in each country made
conditions worse or better. Frantic attempts to shore up the economies
of individual nations through
protectionist policies, such as the 1930 U.S.
Smoot–Hawley Tariff Act and retaliatory tariffs in other countries,
exacerbated the collapse in global trade. By late 1930, a steady decline
in the world economy had set in, which did not reach bottom until 1933.
Economic
indicators
Change in economic indicators 1929–32[14]
|
United
States |
Great
Britain |
France |
Germany |
Industrial production |
–46% |
–23% |
–24% |
–41% |
Wholesale prices |
–32% |
–33% |
–34% |
–29% |
Foreign trade |
–70% |
–60% |
–54% |
–61% |
Unemployment |
+607% |
+129% |
+214% |
+232% |
Causes
There were multiple causes for the first downturn in 1929. These
include the structural weaknesses and specific events that turned it
into a major depression and the manner in which the downturn spread from
country to country. In relation to the 1929 downturn, historians
emphasize structural factors like major bank failures and the stock
market crash. In contrast, monetarist economists (such as
Barry Eichengreen,
Milton Friedman and
Peter Temin) point to monetary factors such as actions by the US
Federal Reserve that contracted the money supply, as well as
Britain's decision to return to the
gold standard at pre–World War I parities (US$4.86:£1).
Recessions and
business cycles are thought to be a normal part of living in a world
of inexact balances between
supply and demand. What turns a normal recession or 'ordinary'
business cycle into a depression is a subject of much debate and
concern. Scholars have not agreed on the exact causes and their relative
importance. The search for causes is closely connected to the issue of
avoiding future depressions.
Thus, the personal political and policy viewpoints of scholars greatly
color their analysis of historic events occurring eight decades ago.[citation
needed] An even larger question is whether the
Great Depression was primarily a failure on the part of
free markets or a failure of government efforts to regulate
interest rates, curtail widespread bank failures, and control the
money supply.
Those who believe in a larger economic role for the state believe that
it was primarily a failure of free markets, while those who believe in a
smaller role for the state believe that it was primarily a failure of
government that compounded the problem.[citation
needed]
Current theories may be broadly classified into two main points of
view and several heterodox points of view. There are demand-driven
theories, most importantly
Keynesian economics, but also including those who point to the
breakdown of international trade, and
Institutional economists who point to
underconsumption and over-investment (causing an
economic bubble),
malfeasance by bankers and industrialists, or incompetence by
government officials. The consensus among demand-driven theories is that
a large-scale loss of confidence led to a sudden reduction in
consumption and investment spending. Once panic and deflation set in,
many people believed they could avoid further losses by keeping clear of
the markets. Holding money became profitable as prices dropped lower and
a given amount of money bought ever more goods, exacerbating the drop in
demand.
There are the
monetarists, who believe that the Great Depression started as an
ordinary recession, but that significant policy mistakes by monetary
authorities (especially the
Federal Reserve), caused a shrinking of the money supply which
greatly exacerbated the economic situation, causing a recession to
descend into the Great Depression. Related to this explanation are those
who point to
debt deflation causing those who borrow to owe ever more in real
terms.
There are also various
heterodox theories that downplay or reject the explanations of the
Keynesians and monetarists. For example, some
new classical macroeconomists have argued that various labor market
policies imposed at the start caused the length and severity of the
Great Depression. The
Austrian school of economics focuses on the
macroeconomic effects of
money supply, and how
central banking decisions can lead to over-investment (economic
bubble).
Demand-driven
US industrial production (1928–39)
US Farm Prices, (1928–35)
Keynesian
British economist
John Maynard Keynes argued in
General Theory of Employment Interest and Money that lower
aggregate expenditures in the economy contributed to a massive
decline in income and to employment that was well below the average. In
such a situation, the economy reached equilibrium at low levels of
economic activity and high unemployment.
Keynes' basic idea was simple: to keep people fully employed,
governments have to run deficits when the economy is slowing, as the
private sector would not invest enough to keep production at the normal
level and bring the economy out of recession. Keynesian economists
called on governments during times of
economic crisis to pick up the slack by increasing
government spending and/or cutting taxes.
As the Depression wore on,
Franklin D. Roosevelt tried
public works,
farm subsidies, and other devices to restart the US economy, but
never completely gave up trying to balance the budget. According to the
Keynesians, this improved the economy, but Roosevelt never spent enough
to bring the economy out of recession until the start of World War II.[15]
Breakdown of international trade
Many economists have argued that the sharp decline in international
trade after 1930 helped to worsen the depression, especially for
countries significantly dependent on foreign trade. Most historians and
economists partly blame the American
Smoot-Hawley Tariff Act (enacted June 17, 1930) for worsening the
depression by seriously reducing international trade and causing
retaliatory tariffs in other countries. While foreign trade was a small
part of overall economic activity in the U.S. and was concentrated in a
few businesses like farming, it was a much larger factor in many other
countries.[16]
The average
ad valorem rate of duties on dutiable imports for 1921–1925 was
25.9% but under the new tariff it jumped to 50% in 1931–1935.
In dollar terms, American exports declined from about $5.2 billion in
1929 to $1.7 billion in 1933; but prices also fell, so the physical
volume of exports only fell by half. Hardest hit were farm commodities
such as wheat, cotton, tobacco, and lumber. 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.
Debt deflation
Irving Fisher argued that the predominant factor leading to the
Great Depression was over-indebtedness and deflation. Fisher tied loose
credit to over-indebtedness, which fueled speculation and asset bubbles.[17]
He then outlined 9 factors interacting with one another under conditions
of debt and deflation to create the mechanics of boom to bust. The chain
of events proceeded as follows:
- Debt liquidation and distress selling
- Contraction of the money supply as bank loans are paid off
- A fall in the level of asset prices
- A still greater fall in the net worths of business,
precipitating bankruptcies
- A fall in profits
- A reduction in output, in trade and in employment.
-
Pessimism and loss of confidence
- Hoarding of money
- A fall in nominal interest rates and a rise in deflation
adjusted interest rates.[17]
During the Crash of 1929 preceding the Great Depression, margin
requirements were only 10%.[18]
Brokerage firms, in other words, would lend $9 for every $1 an investor
had deposited. When the market fell, brokers
called in these loans, which could not be paid back.[19]
Banks began to fail as debtors defaulted on debt and depositors
attempted to withdraw their deposits en masse, triggering multiple
bank
runs. Government guarantees and Federal Reserve banking regulations
to prevent such panics were ineffective or not used. Bank failures led
to the loss of billions of dollars in assets.[19]
Outstanding debts became heavier, because prices and incomes fell by
20–50% but the debts remained at the same dollar amount. After the panic
of 1929, and during the first 10 months of 1930, 744 US banks failed.
(In all, 9,000 banks failed during the 1930s). By April 1933, around $7
billion in deposits had been frozen in failed banks or those left
unlicensed after the
March Bank Holiday.[20]
Bank failures snowballed as desperate bankers called in loans which
the borrowers did not have time or money to repay. With future profits
looking poor,
capital investment and construction slowed or completely ceased. In
the face of bad loans and worsening future prospects, the surviving
banks became even more conservative in their lending.[19]
Banks built up their capital reserves and made fewer loans, which
intensified deflationary pressures. A
vicious cycle developed and the downward spiral accelerated.
The liquidation of debt could not keep up with the fall of prices
which it caused. The mass effect of the stampede to liquidate increased
the value of each dollar owed, relative to the value of declining asset
holdings. The very effort of individuals to lessen their burden of debt
effectively increased it. Paradoxically, the more the debtors paid, the
more they owed.[17]
This self-aggravating process turned a 1930 recession into a 1933 great
depression.
Macroeconomists including
Ben Bernanke, the current chairman of the
U.S. Federal Reserve Bank, have revived the debt-deflation view of
the Great Depression originated by Fisher.[21][22]
Monetarist
Crowd at New York's American Union Bank during a
bank run early in the Great Depression.
Monetarists, including
Milton Friedman, argue that the Great Depression was mainly caused
by
monetary contraction, the consequence of poor policy-making by the
American Federal Reserve System and continued crisis in the banking
system.[23][24]
In this view, the Federal Reserve, by not acting, allowed the money
supply as measured by the
M2 to shrink by one-third from 1929–1933, thereby transforming a
normal recession into the Great Depression. Friedman argued that the
downward turn in the economy, starting with the stock market crash,
would have been just another recession.[25]
The Federal Reserve allowed some large public bank failures –
particularly that of the
New York Bank of the United States – which produced panic and
widespread runs on local banks, and the Federal Reserve sat idly by
while banks collapsed. He claimed that, if the Fed had provided
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 would not have
fallen after the large ones did, and the money supply would not have
fallen as far and as fast as it did.[26]
With significantly less money to go around, businessmen could not get
new loans and could not even get their old loans renewed, forcing many
to stop investing. This interpretation blames the Federal Reserve for
inaction, especially the New York branch.[27]
One reason why the Federal Reserve did not act to limit the decline
of the money supply was regulation. At that time, the amount of credit
the Federal Reserve could issue was limited by the
Federal Reserve Act, which required 40% gold backing of Federal
Reserve Notes issued. By the late 1920s, the Federal Reserve had almost
hit the limit of allowable credit that could be backed by the gold in
its possession. This credit was in the form of Federal Reserve demand
notes.[28]
A "promise of gold" is not as good as "gold in the hand",
particularly when they only had enough gold to cover 40% of the Federal
Reserve Notes outstanding. During the bank panics a portion of those
demand notes were redeemed for Federal Reserve gold. Since the Federal
Reserve had hit its limit on allowable credit, any reduction in gold in
its vaults had to be accompanied by a greater reduction in credit. On
April 5, 1933, President Roosevelt signed
Executive Order 6102 making the private ownership of
gold certificates, coins and bullion illegal, reducing the pressure
on Federal Reserve gold.[28]
New classical
approach
Recent work from a neoclassical perspective focuses on the decline in
productivity that caused the initial decline in output and a prolonged
recovery due to policies that affected the labor market. This work,
collected by
Kehoe and Prescott,[29]
decomposes the economic decline into a decline in the
labor force, capital stock, and the productivity with which these
inputs are used.
This study suggests that theories of the Great Depression have to
explain an initial severe decline but rapid recovery in productivity,
relatively little change in the capital stock, and a prolonged
depression in the labor force. This analysis rejects theories that focus
on the role of savings and posit a decline in the capital stock.
Austrian School
Another explanation comes from the
Austrian School of economics. Theorists of the "Austrian School" who
wrote about the Depression include Austrian economist
Friedrich Hayek and American economist
Murray Rothbard, who wrote
America's Great Depression (1963). In their view and like the
monetarists, the Federal Reserve, which was created in 1913, shoulders
much of the blame; but in opposition to the monetarists, they argue that
the key cause of the Depression was the expansion of the
money supply in the 1920s that led to an unsustainable credit-driven
boom.[30]
In the Austrian view it was this inflation of the money supply that
led to an unsustainable boom in both asset prices (stocks and bonds) and
capital goods. By the time the Fed belatedly tightened in 1928, it
was far too late and, in the Austrian view, a significant economic
contraction was inevitable.[30]
According to the Austrians, the artificial interference in the economy
was a disaster prior to the Depression, and government efforts to prop
up the economy after the crash of 1929 only made things worse.
According to Rothbard, government intervention delayed the market's
adjustment and made the road to complete recovery more difficult.[31]
However, Hayek, unlike Rothbard, also believed, along with the
monetarists, that the Federal Reserve further contributed to the
problems of the Depression by permitting the money supply to shrink
during the earliest years of the Depression.[32]
Marxist
Karl Marx saw recession and depression as unavoidable under
free-market capitalism as there are no restrictions on accumulations of
capital other than the market itself. In the
Marxist
view,
capitalism tends to create unbalanced accumulations of wealth,
leading to over-accumulations of capital which inevitably lead to a
crisis. This especially sharp bust is a regular feature of the
boom and bust pattern of what Marxists term "chaotic" capitalist
development. It is a tenet of many Marxist groupings that such crises
are inevitable and will be increasingly severe until the contradictions
inherent in the mismatch between the mode of production and the
development of productive forces reach the final point of failure.
At which point, the crisis period encourages intensified class conflict
and forces societal change.[33]
Inequality
Two economists of the 1920s,
Waddill Catchings and
William Trufant Foster, popularized a theory that influenced many
policy makers, including Herbert Hoover,
Henry A. Wallace,
Paul Douglas, and
Marriner Eccles. It held the economy produced more than it consumed,
because the consumers did not have enough income. Thus the unequal
distribution of wealth throughout the 1920s caused the Great
Depression.[34][35]
According to this view, the
root cause of the Great Depression was a global over-investment in
heavy industry capacity compared to wages and earnings from independent
businesses, such as farms. The solution was the government must pump
money into consumers' pockets. That is, it must redistribute purchasing
power, maintain the industrial base, but re-inflate prices and wages to
force as much of the inflationary increase in purchasing power into
consumer spending. The economy was overbuilt, and new factories were
not needed. Foster and Catchings recommended[36]
federal and state governments start large construction projects, a
program followed by Hoover and Roosevelt.
Productivity shock
“It cannot be emphasized too strongly that the [productivity,
output and employment] trends we are describing are long-time trends
and were thoroughly evident prior to 1929. These trends are in
nowise the result of the present depression, nor are they the result
of the World War. On the contrary, the present depression is a
collapse resulting from these long-term trends.”
[37]
M. King Hubbert
The first three decades of the 20th century saw economic output surge
with
electrification,
mass production and motorized farm machinery, and because of the
rapid growth in productivity there was a lot of excess production
capacity and the work week was being reduced.
The dramatic rise in
productivity of major industries in the U. S. and the effects of
productivity on output, wages and the work week are discussed by
Spurgeon Bell in his book Productivity, Wages, and National Income
(1940).[38]
Turning
point and recovery
The overall course of the Depression in the United States,
as reflected in per-capita GDP (average income per person)
shown in constant year 2000 dollars, plus some of the key
events of the period.
[39]
In most countries of the world, recovery from the Great Depression
began in 1933.[9]
In the U.S., recovery began in early 1933,[9]
but the U.S. did not return to 1929 GNP for over a decade and still had
an unemployment rate of about 15% in 1940, albeit down from the high of
25% in 1933. The
measurement of the unemployment rate in this time period was
unsophisticated and complicated by the presence of massive
underemployment, in which
employers and workers engaged in rationing of jobs.[citation
needed]
There is no consensus among economists regarding the motive force for
the U.S. economic expansion that continued through most of the Roosevelt
years (and the 1937 recession that interrupted it). The common view
among many economists is that Roosevelt's
New
Deal policies either caused or accelerated the recovery, although
his policies were never aggressive enough to bring the economy
completely out of recession. Some economists have also called attention
to the positive effects from expectations of
reflation and rising nominal interest rates that Roosevelt's words
and actions portended.[40][41]
However some economists believe The New Deal had a reversed effect that
caused the depression to last 7 years longer that it should have
[42]
It was the rollback of those same reflationary policies that led to
the interrupting recession of 1937.[43]
One contributing policy that reversed reflation was the Banking Act of
1935, which effectively raised reserve requirements, causing a monetary
contraction that helped to thwart the recovery.[44]
GDP returned to its upward slope in 1938.
According to
Christina Romer, the money supply growth caused by huge
international gold inflows was a crucial source of the recovery of the
United States economy, and that the economy showed little sign of
self-correction. The gold inflows were partly due to
devaluation of the U.S. dollar and partly due to deterioration of
the political situation in Europe.[45]
In their book,
A Monetary History of the United States, Milton Friedman and
Anna J. Schwartz also attributed the recovery to monetary factors,
and contended that it was much slowed by poor management of money by the
Federal Reserve System. Current
Chairman of the Federal Reserve Ben Bernanke agrees that monetary
factors played important roles both in the worldwide economic decline
and eventual recovery.[46]
Bernanke, also sees a strong role for institutional factors,
particularly the rebuilding and restructuring of the financial system,[47]
and points out that the Depression needs to be examined in international
perspective.[48]
Gold standard
The Depression in international perspective.
[49]
Some economic studies have indicated that just as the downturn was
spread worldwide by the rigidities of the
Gold Standard, it was suspending gold convertibility (or devaluing
the currency in gold terms) that did the most to make recovery possible.[50][51][52]
On the other hand, economists such as
Friedrich Hayek and
Murray Rothbard point out that the 19th century panics each had a
shorter duration while also having occurred under the international gold
standard,[53]
and that policies countries followed after casting off the gold
standard, and what results followed, varied widely.
Every major currency left the gold standard during the Great
Depression. Great Britain was the first to do so. Facing
speculative attacks on the
pound and depleting
gold reserves, in September 1931 the
Bank of England ceased exchanging pound notes for gold and the pound
was floated on foreign exchange markets.
Great Britain, Japan, and the Scandinavian countries left the gold
standard in 1931. Other countries, such as Italy and the U.S., remained
on the gold standard into 1932 or 1933, while a few countries in the
so-called "gold bloc", led by France and including Poland, Belgium and
Switzerland, stayed on the standard until 1935–1936.
According to later analysis, the earliness with which a country left
the gold standard reliably predicted its economic recovery. For example,
Great Britain and Scandinavia, which left the gold standard in 1931,
recovered much earlier than France and Belgium, which remained on gold
much longer. Countries such as China, which had a
silver standard, almost avoided the depression entirely. The
connection between leaving the gold standard as a strong predictor of
that country's severity of its depression and the length of time of its
recovery has been shown to be consistent for dozens of countries,
including
developing countries. This partly explains why the experience and
length of the depression differed between national economies.[54]
A female factory worker in 1942,
Fort Worth, Texas. Women entered the workforce as men
were
drafted into the armed forces.
World War
II and recovery
The common view among economic historians is that the Great
Depression ended with the advent of World War II. Many economists
believe that government spending on the war caused or at least
accelerated recovery from the Great Depression, though some consider
that it did not play a very large role in the recovery. It did help in
reducing unemployment.[9][55][56]
The rearmament policies leading up to World War II helped stimulate
the economies of Europe in 1937–39. By 1937, unemployment in Britain had
fallen to 1.5 million. The
mobilisation of manpower following the outbreak of war in 1939 ended
unemployment.[57]
The US' entry into the war in 1941 finally eliminated the last
effects from the Great Depression and brought the U.S. unemployment rate
down below 10%.[58]
In the U.S., massive war spending doubled economic growth rates, either
masking the effects of the Depression or essentially ending 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.
Effects
During the Depression bankers became so unpopular that bank
robbers, such as
Bonnie and Clyde, became folk heroes.
[59]
The majority of countries set up relief programs, and most underwent
some sort of political upheaval, pushing them to the left or right. In
some states, the desperate citizens turned toward nationalist
demagoguery — the most infamous example being
Adolf Hitler — setting the stage for World War II in 1939.
Australia
Australia's dependence on agricultural and industrial
exports
meant it was one of the hardest-hit countries in the
Western world.[60]
Falling export demand and commodity prices placed massive downward
pressures on wages. Further,
unemployment reached a record high of 29% in 1932,[61]
with incidents of
civil unrest becoming common. After 1932, an increase in wool and
meat prices led to a gradual recovery.
Canada
Harshly affected by both the global economic downturn and the
Dust
Bowl, Canadian industrial production had fallen to only 58% of the
1929 level by 1932, the second lowest level in the world after the
United States, and well behind nations such as Britain, which saw it
fall only to 83% of the 1929 level. Total
national income fell to 56% of the 1929 level, again worse than any
nation apart from the United States. Unemployment reached 27% at the
depth of the Depression in 1933.[62]
Chile
The
League of Nations labeled
Chile the
country hardest hit by the Great Depression because 80% of government
revenue came from exports of copper and nitrates, which were in low
demand. Chile initially felt the impact of the Great Depression in 1930,
when GDP dropped 14%, mining income declined 27%, and export earnings
fell 28%. By 1932, GDP had shrunk to less than half of what it had been
in 1929, exacting a terrible toll in unemployment and business failures.
Influenced profoundly by the Great Depression, many national leaders
promoted the development of local industry in an effort to insulate the
economy from future external shocks. After six years of government
austerity measures, which succeeded in reestablishing Chile's
creditworthiness, Chileans elected to office during the 1938–58 period a
succession of center and left-of-center governments interested in
promoting economic growth by means of government intervention.
Prompted in part by the devastating
1939 Chillán earthquake, the
Popular Front government of
Pedro Aguirre Cerda created the Production Development Corporation
(Corporación de Fomento de la Producción,
CORFO) to
encourage with subsidies and direct investments an ambitious program of
import substitution industrialization. Consequently, as in other
Latin American countries,
protectionism became an entrenched aspect of the Chilean economy.
France
The Depression began to affect France around 1931.[63]
France's relatively high degree of self-sufficiency meant the damage was
considerably less than in nations like Germany. Hardship and
unemployment were high enough to lead to
rioting and the rise of the
socialist
Popular Front. Ultra-nationalist groups also saw increased
popularity, although democracy prevailed into
World War II.
Germany
Germany's
Weimar Republic was hit hard by the depression, as American loans to
help rebuild the German economy now stopped.[64]
Unemployment soared, especially in larger cities, and the
political system veered toward
extremism.[65]
The unemployment rate reached nearly 30% in 1932, bolstering support for
the Nazi (NSDAP) and Communist (KPD) parties, which both rose in the
years following the crash to altogether possess a Reichstag majority
following the
general election in July 1932.[66]
Repayments of the war reparations due by Germany were suspended in
1932 following the
Lausanne Conference of 1932. By that time, Germany had repaid one
eighth of the reparations.
Hitler and the
Nazi Party came to power in January 1933, establishing
a totalitarian single-party state within months and initiating the
path towards
World War II, the
most devastating conflict in world history.
Japan
The Great Depression did not strongly affect Japan. The Japanese
economy shrank by 8% during 1929–31. Japan's Finance Minister
Takahashi Korekiyo was the first to implement what have come to be
identified as
Keynesian economic policies: first, by large fiscal stimulus
involving
deficit spending; and second, by devaluing
the currency. Takahashi used the Bank of Japan to sterilize the
deficit spending and minimize resulting inflationary pressures.
Econometric studies have identified the fiscal stimulus as especially
effective.[67]
The devaluation of the currency had an immediate effect. Japanese
textiles began to displace British textiles in export markets. The
deficit spending proved to be most profound. The deficit spending went
into the purchase of munitions for the armed forces. By 1933, Japan was
already out of the depression. By 1934, Takahashi realized that the
economy was in danger of overheating, and to avoid inflation, moved to
reduce the deficit spending that went towards armaments and munitions.
This resulted in a strong and swift negative reaction from
nationalists, especially those in the army, culminating in his
assassination in the course of the
February 26 Incident. This had a
chilling effect on all civilian bureaucrats in the Japanese
government. From 1934, the military's dominance of the government
continued to grow. Instead of reducing deficit spending, the government
introduced price controls and rationing schemes that reduced, but did
not eliminate inflation, which would remain a problem until the end of
World War II.
Family during the Great Depression, California, 1936.
The deficit spending had a transformative effect on Japan. Japan's
industrial production doubled during the 1930s. Further, in 1929 the
list of the largest firms in Japan was dominated by light industries,
especially textile companies (many of Japan's automakers, like
Toyota,
have their roots in the textile industry). By 1940
light industry had been displaced by heavy industry as the largest
firms inside the Japanese economy.[68]
Latin America
Because of high levels of U.S. investment in Latin American
economies, they were severely damaged by the Depression. Within the
region, Chile,
Bolivia
and Peru
were particularly badly affected.
Netherlands
From roughly 1931–1937, the
Netherlands suffered a deep and exceptionally long depression. This
depression was partly caused by the after-effects of the Stock Market
Crash of 1929 in the U.S., and partly by internal factors in the
Netherlands. Government policy, especially the very late dropping of the
Gold Standard, played a role in prolonging the depression. The Great
Depression in the Netherlands led to some political instability and
riots, and can be linked to the rise of the Dutch national-socialist
party
NSB. The depression in the Netherlands eased off somewhat at the end
of 1936, when the government finally dropped the Gold Standard, but real
economic stability did not return until after World War II.[69]
Buried machinery in a barn lot;
South Dakota, May 1936. The
Dust Bowl on the Great Plains coincided with the Great
Depression.
[70]
Portugal
Already under the rule of a dictatorial junta, the
Ditadura Nacional, Portugal suffered no turbulent political effects
of the Depression, although
Antonio de Oliveira Salazar, already appointed Minister of Finance
in 1928 greatly expanded his powers and in 1932 rose to
Prime Minister of Portugal to found the
Estado Novo, an
authoritarian
corporatist dictatorship.
With the budget balanced in 1929, the effects of the depression were
relaxed through harsh measures towards
budget balance and
autarky,
causing social discontent but stability and, eventually, an impressive
economic growth. The regime outlived Salazar himself before being
overthrown in the
Carnation Revolution in 1974, initiating a road towards the
restoration of democracy.
South Africa
As world trade slumped, demand for South African agricultural and
mineral exports fell drastically. The
Carnegie Commission on Poor Whites had concluded in 1931 that nearly
one third of
Afrikaners lived as
pauper. It is believed that the social discomfort caused by the
depression was a contributing factor in the 1933 split between the
"gesuiwerde" (purified) and "smelter" (fusionist) factions within the
National Party and the National Party's subsequent fusion with the
South African Party.[71]
Eventually, the gesuiwerde faction of
Daniel Malan would go on to form its own party and take over the
government after the
1948 election, bringing about the doctrine of
apartheid, instituting and extending racial segregation, which would
see an end only in 1994.
Soviet Union
Many Western intellectuals looked upon Soviet Union with sympathy.
Jennifer Burns wrote, "As the Great Depression ground on and
unemployment soared, intellectuals began unfavorably comparing their
faltering capitalist economy to Russian Communism. ... More than ten
years after the Revolution, Communism was finally reaching full flower,
according to the New York Times reporter
Walter Duranty, a Stalin fan who vigorously debunked accounts of the
Ukraine famine, a man-made disaster that would leave millions dead."[72]
Spain
Greatly due to impopular economic policies, Prime Minister
Jose Primo de Rivera resigned in 1930, followed by the ousting of
King
Alfonso XIII in the following year. A fragile democracy was
established, torn at by economic problems and social discontent,
culminating in the divisive
general election of 1936 and the subsequent
Spanish Civil War, culminating in an
authoritarian regime under general Francisco Franco which was
gradually disestablished following his death in 1975, with the
first elections since Depression held in 1977.
Sweden
Taking place in the midst of a short-lived government and a
less-than-a-decade old Swedish democracy, events such as those
surrounding
Ivar Kreuger (who eventually committed suicide) remain infamous in
Swedish history. Eventually, the
Social Democrats under
Per Albin Hansson would form their first long-lived government in
1932 based on strong
interventionist and
welfare state policies, monopolizing the office of
Prime Minister until 1976 with the sole and short-lived exception of
Axel Pehrsson-Bramstorp's "summer cabinet" in 1936. During forty
years of hegemony, it was the most successful political party in the
history of Western liberal democracy.[73]
Thailand
In Thailand, then known as the
Kingdom of Siam, the Great Depression contributed to the end of the
absolute monarchy of King Rama VII in the
Siamese revolution of 1932.
Unemployed men hop train, Canada, c.1933
United Kingdom
The effects on the northern industrial areas of Britain were
immediate and devastating, as demand for traditional industrial products
collapsed. By the end of 1930 unemployment had more than doubled from 1
million to 2.5 million (20% of the insured workforce), and exports had
fallen in value by 50%. In 1933, 30% of
Glaswegians were unemployed due to the severe decline in heavy
industry. In some towns and cities in the north east, unemployment
reached as high as 70% as shipbuilding fell 90%.[74]
The
National Hunger March of September–October 1932 was the largest[75]
of a series of
hunger marches in Britain in the 1920s and 1930s. About 200,000
unemployed men were sent to the work camps, which continued in operation
until 1939.[76]
In the less industrial
Midlands and
Southern England, the effects were short-lived and the later 1930s
were a prosperous time. Growth in modern manufacture of electrical goods
and a boom in the motor car industry was helped by a growing southern
population and an expanding
middle class. Agriculture also saw a boom during this period.[77]
United States
Shacks, put up by the
Bonus Army (World War I veterans) on the Anacostia
flats, Washington, D.C., burning after the battle with the
1,000 soldiers accompanied by tanks and machine guns, 1932.
[78]
Bennett buggies, or "Hoover wagons", cars pulled by
horses, were used by farmers too impoverished to purchase
gasoline.
President
Herbert Hoover started numerous programs, all of which failed to
reverse the downturn.[79]
In June 1930 Congress approved the
Smoot–Hawley Tariff Act which raised tariffs on thousands of
imported items. The intent of the Act was to encourage the purchase of
American-made products by increasing the cost of imported goods, while
raising revenue for the federal government and protecting farmers. Other
nations increased tariffs on American-made goods in retaliation,
reducing international trade, and worsening the Depression.[80]
In 1931 Hoover urged the major banks in the country to form a
consortium known as the National Credit Corporation (NCC).[81]
By 1932, unemployment had reached 23.6%, and it peaked in early 1933 at
25%,[82]
drought persisted in the agricultural heartland, businesses and families
defaulted on record numbers of loans,[83]
and more than 5,000 banks had failed.[84]
Hundreds of thousands of Americans found themselves homeless, and began
congregating in
shanty towns - dubbed "Hoovervilles"
- that began to appear across the country.[85]
In response, President Hoover and Congress approved the
Federal Home Loan Bank Act, to spur new home construction, and
reduce foreclosures. The final attempt of the Hoover Administration to
stimulate the economy was the passage of the
Emergency Relief and Construction Act (ERA) which included funds for
public works programs such as dams and the creation of the
Reconstruction Finance Corporation (RFC) in 1932. The RFC's initial
goal was to provide government-secured loans to
financial institutions, railroads and farmers. Quarter by quarter
the economy went downhill, as prices, profits and employment fell,
leading to the
political realignment in 1932 that brought to power
Franklin Delano Roosevelt.
Unemployed men queued outside a depression soup kitchen
opened in Chicago by
Al Capone, 1931.
The storefront sign reads "Free Soup, Coffee and
Doughnuts for the Unemployed."
Shortly after President
Franklin Delano Roosevelt was inaugurated in 1933, drought and
erosion combined to cause the Dust Bowl, shifting hundreds of thousands
of
displaced persons off their farms in the Midwest. From his
inauguration onward, Roosevelt argued that restructuring of the economy
would be needed to prevent another depression or avoid prolonging the
current one. New Deal programs sought to stimulate
demand
and provide work and relief for the impoverished through increased
government spending and the institution of financial reforms.
The
Securities Act of 1933 comprehensively regulated the securities
industry. This was followed by the
Securities Exchange Act of 1934 which created the
Securities and Exchange Commission. Though amended, key provisions
of both Acts are still in force. Federal insurance of
bank deposits was provided by the
FDIC, and the
Glass–Steagall Act. The institution of the
National Recovery Administration (NRA) remains a controversial act
to this day. The NRA made a number of sweeping changes to the American
economy until it
was deemed unconstitutional by the
Supreme Court of the United States in 1935.
CCC workers constructing road, 1933. Over 3 million
unemployed young men were taken out of the cities and placed
into 2600+ work camps managed by the CCC.
[86]
Early changes by the Roosevelt administration included:
- Instituting regulations to fight deflationary "cut-throat
competition" through the
NRA.
- Setting minimum prices and
wages, labor standards, and competitive conditions in all
industries through the NRA.
- Encouraging unions that would raise wages, to increase the
purchasing power of the
working class.
- Cutting farm production to raise prices through the
Agricultural Adjustment Act and its successors.
- Forcing businesses to work with government to set price codes
through the NRA.
These reforms, together with several other relief and recovery
measures, are called the
First New Deal. Economic stimulus was attempted through a new
alphabet soup of agencies set up in 1933 and 1934 and previously
extant agencies such as the
Reconstruction Finance Corporation. By 1935, the "Second
New Deal" added
Social Security (which did not start making large payouts until much
later), a jobs program for the unemployed (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. The national debt as a proportion of GNP rose under Hoover from
20% to 40%. Roosevelt kept it at 40% until the war began, when it soared
to 128%.
WPA employed 2-3 million unemployed at unskilled labor.
By 1936, the main
economic indicators had regained the levels of the late 1920s,
except for unemployment, which remained high at 11%, although this was
considerably lower than the 25% unemployment rate seen in 1933. In the
spring of 1937, American industrial production exceeded that of 1929 and
remained level until June 1937. In June 1937, the Roosevelt
administration cut spending and increased taxation in an attempt to
balance the federal budget.[87]
The American economy then took a sharp downturn, lasting for 13 months
through most of 1938. Industrial production fell almost 30 per cent
within a few months and production of
durable goods fell even faster. Unemployment jumped from 14.3% in
1937 to 19.0% in 1938, rising from 5 million to more than 12 million in
early 1938.[88]
Manufacturing output fell by 37% from the 1937 peak and was back to 1934
levels.[89]
Producers reduced their expenditures on durable goods, and
inventories declined, but personal income was only 15% lower than it had
been at the peak in 1937. As unemployment rose, consumers' expenditures
declined, leading to further cutbacks in production. By May 1938 retail
sales began to increase, employment improved, and industrial production
turned up after June 1938.[90]
After the recovery from the Recession of 1937–1938, conservatives were
able to form a bipartisan
conservative coalition to stop further expansion of the New Deal
and, when unemployment dropped to 2% in the early 1940s, they abolished
WPA, CCC and the PWA relief programs. Social Security remained in place.
Political
consequences
The crisis had many political consequences, among which was the
abandonment of classic
economic liberal approaches, which Roosevelt replaced in the U.S.
with
Keynesian policies. These policies magnified the role of the federal
government in the national economy. Between 1933 and 1939, federal
expenditure tripled, and Roosevelt's critics charged that he was turning
America into a
socialist state.[91]
The Great Depression was a main factor in the implementation of
social democracy and
planned economies in European countries after World War II (see
Marshall Plan). Although
Austrian economists had challenged Keynesianism since the 1920s, it
was not until the 1970s, with the influence of Milton Friedman that the
Keynesian approach was politically questioned.[92]
Literature
And the great owners, who must lose their land in an upheaval,
the great owners with access to history, with eyes to read
history and to know the great fact: when property accumulates in
too few hands it is taken away. And that companion fact: when a
majority of the people are hungry and cold they will take by
force what they need. And the little screaming fact that sounds
through all history: repression works only to strengthen and
knit the repressed.
The Great Depression has been the subject of much writing, as authors
have sought to evaluate an era that caused financial as well as
emotional trauma. Perhaps the most noteworthy and famous novel written
on the subject is
The Grapes of Wrath, published in 1939 and written by
John Steinbeck, who was awarded both the
Nobel Prize for literature and the
Pulitzer Prize for the work. The novel focuses on a poor family of
sharecroppers who are forced from their home as drought, economic
hardship, and changes in the
agricultural industry occur during the Great Depression. Steinbeck's
Of Mice and Men is another important novel about a journey
during the Great Depression. Additionally, Harper Lee's
To Kill a Mockingbird is set during the Great Depression.
Margaret Atwood's Booker prize-winning
The Blind Assassin is likewise set in the Great Depression,
centering on a privileged socialite's love affair with a Marxist
revolutionary. The era spurred the resurgence of social realism,
practiced by many who started their writing careers on relief programs,
especially the
Federal Writers' Project in the U.S.[94][95][96][97]
Naming
The term "The Great Depression" is most frequently attributed to
British economist
Lionel Robbins, whose 1934 book The Great Depression is
credited with formalizing the phrase,[98]
though Hoover is widely credited with popularizing the term,[98][99]
informally referring to the downturn as a depression, with such uses as
"Economic depression cannot be cured by legislative action or executive
pronouncement" (December 1930, Message to Congress), and "I need not
recount to you that the world is passing through a great depression"
(1931).
The term "depression"
to refer to an economic downturn dates to the 19th century, when it was
used by varied Americans and British politicians and economists. Indeed,
the first major American economic crisis, the
Panic of 1819, was described by then-president
James Monroe as "a depression",[98]
and the most recent economic crisis, the
Depression of 1920–21, had been referred to as a "depression" by
then-president
Calvin Coolidge.
Financial crises were traditionally referred to as "panics", most
recently the major
Panic of 1907, and the minor
Panic of 1910–1911, though the 1929 crisis was called "The Crash",
and the term "panic" has since fallen out of use. At the time of the
Great Depression, the term "The Great Depression" was already used to
referred to the period 1873–96 (in the United Kingdom), or more narrowly
1873–79 (in the United States), which has retroactively been renamed the
Long Depression.
Other
"great depressions"
Other economic downturns have been called a "great depression", but
none had been as widespread, or lasted for so long. Various nations have
experienced brief or extended periods of economic downturns, which were
referred to as "depressions", but none have had such a widespread global
impact.
British economic historians used the term "great depression" to
describe British conditions in the late 19th century, especially in
agriculture, 1873–1896, a period now referred to as the
Long Depression.[100]
The collapse of the
Soviet Union, and the breakdown of economic ties which followed, led
to a severe economic crisis and catastrophic fall in the
standards of living in the 1990s in
post-Soviet states and the former
Eastern Bloc,[101]
which was even worse than the Great Depression.[102][103]
Even before Russia's
financial crisis of 1998, Russia's GDP was half of what it had been
in the early 1990s,[103]
and some populations are still poorer as of 2009 than they were in 1989,
including
Ukraine,
Moldova,
Central Asia, and the
Caucasus.
Some journalists and economists have taken to calling the
late-2000s recession the "Great
Recession" in allusion to the Great Depression.[104][105][106][107]
Comparison with the late-2000s recession
The causes of the Great Recession seem similar to the Great
Depression, but significant differences exist. The current chairman of
the
Federal Reserve,
Ben Bernanke, had extensively studied the Great Depression as part
of his doctoral work at MIT, and is implementing policies to manipulate
the money supply and interest rates in ways that were not done in the
1930s. Bernanke's policies will undoubtedly be analyzed and scrutinized
in the years to come, as economists debate the wisdom of his choices.
Generally speaking, the recovery of the world's financial systems tended
to be quicker during the Great Depression of the 1930s as opposed to the
late-2000s recession.
If we contrast the 1930s with the Crash of 2008 where gold
went through the roof, it is clear that the US dollar on the
gold standard was a completely different animal in
comparison to the fiat free-floating US dollar currency we
have today. Both currencies in 1929 and 2008 were the US
dollar, but in an analogous way it is as if one was a
Saber-toothed tiger and the other is a Bengal tiger; they
are two completely different animals. Where we have
experienced inflation since the Crash of 2008, the situation
was much different in the 1930s when deflation set in.
Unlike the deflation of the early 1930s, the US economy
currently appears to be in a "liquidity trap," or a
situation where monetary policy is unable to stimulate an
economy back to health.
In terms of the stock market, nearly three years after the
1929 crash, the DJIA dropped 8.4% on August 12, 1932. Where
we have experienced great volatility with large intraday
swings in the past two months, in 2011 we have not
experienced any record-shattering daily percentage drops to
the tune of the 1930s. Where many of us may have that '30s
feeling, in light of the DJIA, the CPI, and the national
unemployment rate, we are simply not living in the '30s.
Some individuals may feel as if we are living in a
depression, but for many others the current
global financial crisis simply does not feel like a
depression akin to the 1930s.
[108]
1928 and 1929 were the times in the 20th century that the wealth gap
reached such skewed extremes;[109]
half the unemployed had been out of work for over six months, something
that was not repeated until the late-2000s recession. 2007 and 2008
eventually saw the world reach new levels of wealth gap inequality that
rivalled the years of 1928 and 1929.
See also
General: