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  Wikipedia: Great Depression

Wikipedia: Great Depression
Great Depression
From Wikipedia, the free encyclopedia.

The Great Depression is the period of history that followed "Black Thursday", the stock market crash of Thursday, October 24, 1929 (the actual panic did not begin in earnest until Black Tuesday on October 29). The events in the United States triggered a world-wide depression, which led to deflation and a great increase in unemployment. On the global scale, the market crash in the US was a final straw in an already shaky world economic situation. Germany was suffering from hyperinflation of currency, and many of the Allied victors of World War I were having serious problems paying off huge war debts. In the late 1920s the American economy at first seemed immune to the mounting troubles, but with the start of the 1930s it crashed with startling rapidity.

Causes of the Great Depression

International finance never recovered from the strains of World War I, which caused a dramatic increase in productivity capacity, particularly outside Europe, without a corresponding increase in sustained demand. Fixed exchange rates and free convertibility gave way to a compromise—the Gold Exchange Standard—that lacked the stability to rebuild world trade.

In 1929 the world's most prosperous nation was the United States. But despite the confidence in the United States and the apparent economic well-being in other countries, the world economy was in an unhealthy state. One by one, the pillars of the prewar economic system—multilateral trade, the gold standard, and the interchangeability of currencies—were crumbling.

The US economy had thus been showing some signs of distress for months before October 1929. Commodity prices had been falling worldwide since 1926, reducing the capacity of exporters in the peripheral, undeveloped economies of Latin America, Asia, and Africa to buy products from the core industrial countries, such as the United States and the United Kingdom. Business inventories of all types were three times as large as they had been a year before (an indication that the public was not buying products as rapidly as in the past); and other signposts of economic health—freight carloads, industrial production, wholesale prices—were slipping downward.

A Maldistribution of Purchasing Power

A fundamental maldistribution of purchasing power, the greatly unequal distribution of wealth throughout the 1920s, was a factor contributing to the depression. Wages increased at a rate that was a fraction of the rate at which productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into profits. As industrial and agricultural production increased, the proportion of the profits going to farmers, factory workers, and other potential consumers was far too small to create a market for goods that they were producing. Even in 1929, after nearly a decade of economic growth, more than half the families in America lived on the edge or below the subsistence level-too poor to share in the great consumer boom of the 1920s, too poor to buy the cars and houses and other goods the industrial economy was producing, too poor in many cases to buy even the adequate food and shelter for themselves. As long as corporations had continued to expand their capital facilities (their factories, warehouses, heavy equipment, and other investments), the economy had flourished. And thanks to pressure from the Coolidge administration and the business, the Federal Reserve Board kept the rediscount rate low, encouraging excessive investment. By the end of the 1920s, however, capital investments had created more plant space than could be profitably used, and factories were pouring out more goods than consumers could purchase.

A Lack of Diversification

Another factor was the serious lack of diversification in the American economy of the 1920s. Prosperity had been excessively dependent on a few basic industries, notably construction and automobiles; in the late 1920s, those industries began to decline. Between 1926 and 1929, expenditures on construction fell from $11 billion to under $9 billion. Automobile sales began to decline somewhat later, but in the first nine months of 1929 they declined by more than one third. Once these two crucial industries began to weaken, there was not enough strength in other sectors of the economy to take up the slack. Even before, while the automotive industry was thriving in the 1920s some industries, agriculture in particular, were declining steadily. While the Ford Motor Company was reporting record assets, farm prices plummeted, and the price of food fell precipitously. Also prospering during the 1920s were businesses dependent upon the radio industry.

Postwar Deflationary Pressures

During World War I many nations of Europe abandoned the gold standard in an attempt to use inflationary policies to fund government expenditure. This had a number of economic consequences in its own right. However what is of particular relevance is that following the War most nations returned to the gold standard at the pre-war gold price. Monetary policy was in effect put into a deflationary setting that would over the next decade slowly grind away at the viability of many European enterprices. Modern advocates of the gold standard such as proponents of supply-side economics maintain that the correct policy response following World War I would have been to return to the gold standard at the prevailing market price of gold rather than at the pre-war price.

Deflation's impact is particularly hard on sectors of the economy that are in debt. One typical group that is adversely affected is the farm sector. Deflation erodes the price of commodites while increasing the real value of debt.

It should be noted, however, that deflationary forces alone do not fully account for the Great Depression and must be considered in the context of other political factors.

The Credit Structure

Farmers, already deeply in debt, saw farm prices plummet in the late 20s; their land was already mortgaged, and crop prices were too low to allow them to pay off what they owed. Small banks, especially those tied to the agricultural economy, were in constant crisis in the 1920s as their customers defaulted on loans; there was a steady stream of failures among these smaller banks throughout the decade.

Although most American bankers in this era were staunchly conservative, some of the nation's largest banks were failing to maintain adequate reserves and were investing recklessly in the stock market or making unwise loans. In other words, the banking system was not well prepared to absorb the shock of a major recession. The banking system as a whole, moreover, was only very loosely regulated by the Federal Reserve System at this time.

The Breakdown of International Trade

Another factor contributing to the Great Depression was America's position in international trade. Protectionist impulses would drive nations to protect domestic production against competition from foreign imports by erecting high tariff walls. President Herbert Hoover and the Republican Congress managed to do just this when they enacted the Hawley-Smoot Tariff Act of June 1930 which raised American tariffs to unprecedented levels. It practically closed U.S. borders and, with retaliatory tariffs from US trading partners, caused the immediate collapse of the most important export industry, American agriculture. American foreign trade seriously declined, and the volume of world trade steadily decreased.

Prior to the Great Depression, a petition signed by over 1000 economists was presented to the US government warning that the Hawley-Smoot Tariff Act would bring disastrous economic repercussions, however, this did not stop the act from being signed into law.

Beginning late in the 1920s, European demand for US goods began to decline. That was partly because European industry and agriculture were becoming more productive, and partly because some European nations (most notably Germany, under the government of the Weimar Republic) were suffering serious financial crises and could not afford to buy goods overseas. However, the central issue causing the destabilization of the European economy in the late 20s was the international debt structure that had emerged in the aftermath of World War I.

When the war came to an end in 1918, all European nations that had been allied with the United States owed large sums of money to American banks, sums much too large to be repaid out of their shattered treasuries. This is one reason why the Allies had insisted (to the consternation of the perhaps historically vindicated Woodrow Wilson) on demanding reparation payments from Germany and Austria. Reparations, they believed, would provide them with a way to pay off their own debts. But Germany and Austria were themselves in deep economic trouble after the war; they were no more able to pay the reparations than the Allies were able to pay their debts.

The debtor nations put strong pressure on the United States in the 1920s to forgive the debts, or at least reduce them. The American government refused. Instead, US banks began making large loans to the nations of Europe. Thus debts (and reparations) were being paid only by augmenting old debts and piling up new ones. In the late 1920s, and particularly after the American economy began to weaken after 1929, the European nations found it much more difficult to borrow money from the United States. At the same time, high US tariffs were making it much more difficult for them to sell their goods in US markets. Without any source of revenues from foreign exchange with which to repay their loans, they began to default.

The high tariff walls critically impeded the payment of war debts. As a result of high US tariffs, only a sort of cycle kept the reparations and war-debt payments going. During the 1920s the former allies paid the war-debt installments to the United States chiefly with funds obtained from German reparations payments, and Germany was able to make those payments only because of large private loans from the United States and Britain. Similarly, US investments abroad provided the dollars, which alone made it possible for foreign nations to buy US exports.

By 1931 the world was reeling from the worst depression of all time, and the entire structure of reparations and war debts collapsed.

In the scramble for liquidity that followed the Great Crash, funds flowed backed from Europe to America and Europe's fragile economies crumbled.


This family, the Wares, squatted on
Terminal Island in California in 1930 because of the Great Depression.

The Wall Street crash had ushered in a world-wide financial crisis. In the United States between 1929 and 1933 unemployment soared from approximately 3 percent of the workforce to 25 percent, while manufacturing output declined by one-third. Governments worldwide sought economic recovery by adopting restrictive autarkic policies (high tariffs, import quotas, and barter agreements) and by experimenting with new plans for their internal economies.

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 standing on shaky ground, started cracking in the years from 1930 to 1932, while Chancellor and finance expert Heinrich Brüning was trying to fix the economy by drastically cutting state spending. At the time, the NSDAP gained much popularity, winning the two general elections in 1932, which eventually led to the appointment of Adolf Hitler as Chancellor on January 30, 1933. (See Weimar Republic for details.) In Nazi Germany economic recovery was pursued through rearmament, conscription, and public works programs. In Mussolini's Italy the economic controls of his corporate state were tightened.

In Great Britain, the Labour government of Ramsay MacDonald, and later the conservative-dominated "National Government" responded to the depression by imposing tariffs on all imports except those of the British Empire (which arguably worsened 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 United States, President Herbert Hoover made only half-hearted efforts to control the situation, and hindsight shows that at first, he gravely underestimated the severity of the crisis, (even announcing to Congress on December 3, 1929 that the worst effects of the recent stock market crash were behind them and that the American people had regained faith in the economy). Having realized his mistake, Hoover went before Congress again on December 2, 1930 to ask for a US$150 million public works program to help generate jobs and stimulate the economy. 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. The other 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 precipitated a collapse of the banking system in 1932. 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, and the depression would be self-correcting. 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. (Shantytowns populated by unemployed people at the time were often dubbed Hoovervilles to highlight the President's fading popularity). During this period, several alternative and fringe political movements saw a considerable increase in membership. In particular, a number of high-profile figures embraced the ideals of Communism, though this would subsequently be used against them during the Red Scare of the 1950s. Radio speakers such as Father Charles Coughlin saw their listening audiences swell into the millions, as they sought for (and often found) easy scapegoats to blame the country's woes upon.

Upon accepting Democratic nomination for president (July 2, 1932), 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.

End of the Great Depression

For details, see the main New Deal article.

Despite this rhetoric, it was not until the US 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 Keynes had 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.

New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending: The theories behind the New Deal were backed up later by the writings of British economist John Maynard Keynes. In 1929 federal expenditures constituted only 3 percent of the GDP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics accused him of turning America into a socialist state. However, spending on the New Deal was far smaller than on the war effort. In the first peacetime year of 1946, federal spending still amounted to $62 billion, or 30 percent of GDP. In short, federal expenditures went from 3 percent of the GDP in 1929 to about a third 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 almost doubled. Consequently, unemployment plummeted—from 14 percent in 1940 to less than 2 percent in 1943 as the labor force grew by ten million. The war economy was not so much a triumph of free enterprise as the result of government/business sectionalism, of the Federal government bankrolling business. While unemployment remained high throughout the New Deal years, consumption, investment, and net exports—, the pillars of economic growth—remained low. It was World War II, not the New Deal, which finally ended the crisis. Nor did the New Deal substantially alter the distribution of power within American capitalism; it had only a small impact on the distribution of wealth among the population.

External links

See also


From Wikipedia, the free encyclopedia. 
Modified by Geona