Great Depression of 1929

8/8/2019 Great Depression of 1929

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Report On

Submitted To: Submitted By:

Prof. Nimesh Khandelwal Group No. 5

(Sen Hall)


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Index

S.No Topic Page No.1 Introduction 12

Start Of The Great Depression1

3 Causes

Monetarist Explanations

Cause Of The Debt Deflation

Break Down Of International Trade

2-6

4 Effects On Demand And Supply 7

5Recovery

8

6 Gold Standard 9

7 Roosevelt And The New Deal 9

8 Agriculture 9

9 World War II And Recovery 10

10Consequences

11-13

11 Industrial Policy And Competitiveness In Four Countries 1412 Effect On Employment 15

13 Lessons From The Great Depression 16


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INTRODUCTION

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing

of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late

1930s or early 1940s. It was the longest, most widespread, and deepest depression of the 20th century, and is used in

the 21st century as an example of how far the world's economy can decline. The depression originated in the United

States, starting with the stock market crash of October 29, 1929 (known as Black Tuesday), but quickly spread to

almost every country in the world.

The Great Depression had devastating effects in virtually every country, rich and poor. Personal income, tax revenue,

profits and prices dropped, and international trade plunged by a half to two-thirds. Unemployment in the United

States rose to 25% and in some countries rose as high as 33%.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 percent. 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.

Countries started to recover by the mid-1930s, but in many countries the negative effects of the Great Depression

lasted until the start of World War II.

START OF THE GREAT DEPRESSION

Historians most often attribute the start of the Great Depression to the sudden and total collapse of US stock market

prices on October 29th, 1929, known as Black Tuesday. However, some dispute this conclusion, and see the stock

crash as a symptom, rather than a cause of the Great Depression. 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. The stock

market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30% below the peak of

September 1929. Together, government and business actually spent more in the first half of 1930 than in the

corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock

market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural

heartland of the USA beginning in the summer of 1930.

By mid-1930, interest rates had dropped to low levels, but expected deflation and the reluctance of people to add new

debt by borrowing, meant that consumer spending and investment were depressed. In May 1930, automobile sales

had declined to below the levels of 1928. Prices in general began to decline, but 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


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through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Actand retaliatory tariffs in other countries,

exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.

CAUSES

There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that

turned it into a major depression and the way in which the downturn spread from country to country. In relation to the

1929 downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while

economists (such as Peter Temin and Barry Eichengreen) point to Britain's decision to return to the Gold at pre-World

War I parities (US$4.86:1).

Recession cycles are thought to be a normal part of living in a world of inexact balances between supply and demand.

What turns a usually mild and short recession or "ordinary" business cycle into an actual depression is a subject of

debate and concern. 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, and so the political and policy

viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is

whether it was largely a failure on the part of free markets or largely a failure on the part of government efforts to

regulate interest rates, curtail widespread bank failures, and control the money supply. Those who believe in a large

role for the state in the economy believe it was mostly a failure of the free markets and those who believe in free

markets believe it was mostly a failure of government that compounded the problem.


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Current theories may be broadly classified into three main points of view. First 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.

Second, there are structural theories, most importantly Keynesian, but also including those who point to the breakdown

of international trade, and Institutional economists who point to under and overinvestment (economic

bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The consensus

viewpoint is that there was a large-scale loss of confidence that led to a sudden reduction in consumption and

investment spending. Once panic and deflation set in, many people believed they could make more money by keeping

clear of the markets as prices dropped lower and a given amount of money bought ever more goods, exacerbating the

drop in demand.

Lastly, there are various heterodox theories that downplay or reject the explanations of the Keynesian 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, and how central banking decisions can lead to overinvestment (economic

bubble). The Marxist critique of political economy emphasizes the tendency of capitalism to create unbalanced

accumulations of wealth, leading to over accumulations of capital and a repeating cycle of devaluations through

economic crises. 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.


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MONATERIST EXPLANATIONS

Monetarists, including Milton Friedman and current Federal Reserve System chairman Ben Bernanke, argue that the

Great Depression was mainly caused by monetary contraction, the consequence of poor policymaking by the

American Federal Reserve System and continued crisis in the banking system. 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 to 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. However, 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. 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. 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 laws which required partial

gold backing of that credit. 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. Since a

"promise of gold" is not as good as "gold in the hand", 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.


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CAUSE OF THE 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. He then outlined 9 factors

interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chainof events proceeded as follows:

1. Debt liquidation and distress selling

2. Contraction of the money supply as bank loans are paid off

3. A fall in the level of asset prices

4. A still greater fall in the net worths of business, precipitating bankruptcies

5. A fall in profits

6. A reduction in output, in trade and in employment.

7. Pessimism and loss of confidence

8. Hoarding of money

9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%. 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. 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.Outstanding debts became heavier, because prices and incomes fell by 2050% 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. Bank failures snow balled 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. 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. 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.


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BREAK DOWN 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 United States and was concentrated in a few businesses like farming, it was a much larger

factor in many other countries.[26] The average ad valorem rate of duties on dutiable imports for 19211925 was 25.9%

but under the new tariff it jumped to 50% in 19311935.

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 on small rural banks that characterized the early years of the Great Depression.


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EFFECTS ON DEMAND AND SUPPLY

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.

According to this view, wages increased at a rate lower than productivity increases. Most of the benefit of the increased

productivity went into profits, which went into the stock market bubble rather than into consumer purchases. Say's

law no longer operated in this model (an idea picked up by Keynes).

As long as corporations had continued to expand their capital facilities (their factories, warehouses, heavy equipment,

and other investments), the economy had flourished. Under pressure from the Coolidge administration and from

business, the Federal Reserve Board kept the discount rate low, encouraging high (and excessive) investment. By the

end of the 1920s, however, capital investments had created more plant space than could be profitably used, and

factories were producing more than consumers could purchase.

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

rein late 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 recommendedfederal and

state governments start large construction projects, a program followed by Hoover and Roosevelt.

Franklin D. Roosevelt, elected in 1932 and inaugurated March 4, 1933, blamed the excesses of big business for

causing an unstable bubble-like economy. Democrats believed the problem was that business had too much money,

and the New Deal was intended as a remedy, by empowering labor unions and farmers and by raising taxes on

corporate profits. In addition, excess price and entry competition, integrated banking, and the sheer size of

corporations were viewed as contributing factors. Regulation of the economy was a favorite remedy to this problem.


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RECOVERY

Various countries around the world started to recover from the Great Depression at different times. In most countries of

the world recovery from the Great Depression began in 1933. In the United States recovery began in the spring of

1933. However, the U.S. did not return to 1929 GNP for over a decade and still had an unemployment rate of about15% in 1940, albeit down from the high of 25% in 1933.

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 sharp contraction of the 1937 recession that interrupted it). 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. In

their book, A MonetaryHistoryofthe 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 ReserveSystem. Current Chairman of the Federal Reserve Ben Bernanke agrees that monetary factors played important roles

both in the worldwide economic decline and eventual recovery. Bernanke, also sees a strong role for institutional

factors, particularly the rebuilding and restructuring of the financial system, and points out that the Depression needs to

be examined in international perspective. Economists Harold L. Cole and Lee E. Ohanian, believe that the economy

should have returned to normal after four years of depression except for continued depressing influences, and point

the finger to the lack of downward flexibility in prices and wages, encouraged by Roosevelt Administration policies such

as the National Industrial Recovery Act. Some economists have called attention to the expectations of deflation and

rising nominal interest rates that Roosevelt's words and actions portended.

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 most to make recovery

possible. What 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.


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GOLD STANDARD

The Depression in international perspective, Great Britain, Japan, and the Scandinavian countries left the gold

standard in 1931. Other countries, such as Italy and the United States, 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 19351936.

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 earlierthan 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.

Roosevelt and the New Deal

In 1933 the new president, Franklin Roosevelt, brought an air of confidence and optimism that quickly rallied the

people to the banner of his program, known as the New Deal. When Roosevelt took the presidential oath, the banking

and credit system of the nation was in a state of paralysis.

The administration adopted a policy of moderate currency inflation to start an upward movement in commodity prices

and to afford some relief to debtors. New governmental agencies brought generous credit facilities to industry and

agriculture. The Federal Deposit Insurance Corporation (FDIC) insured savings-bank deposits up to $5,000, and

severe regulations were imposed upon the sale of securities on the stock exchange.

Agriculture

The New Deal years were characterized by a belief that greater regulation would solve many of the country's problems.

In 1933, for example, Congress passed the Agricultural Adjustment Act (AAA) to provide economic relief to farmers.

The AAA had at its core a plan to raise crop prices by paying farmers a subsidy to compensate for voluntary cutbacks

in production. Funds for the payments would be generated by a tax levied on industries that processed crops. By the

time the act had become law, however, the growing season was well underway, and the AAA encouraged farmers to

plow under their abundant crops. Secretary of Agriculture Henry A. Wallace called this activity a "shocking commentary

on our civilization." Nevertheless, through the AAA and the Commodity Credit Corporation, a program which extended

loans for crops kept in storage and off the market, output dropped.

Between 1932 and 1935, farm income increased by more than 50 percent, but only partly because of federal

programs. During the same years that farmers were being encouraged to take land out of production -- displacingtenants and sharecroppers -- a severe drought hit the Great Plains states, significantly reducing farm production.

Violent wind and dust storms ravaged the southern Great Plains in what became known as the "Dust Bowl," throughout

the 1930s, but particularly from 1935 to 1938. Crops were destroyed, cars and machinery were ruined, people and

animals were harmed.

The government provided aid in the form of the Soil Conservation Service, established in 1935. Farm practices that

had damaged the soil had intensified the severity of the storms, and the Service taught farmers measures to reduce

erosion. In addition, almost 30,000 kilometers of trees were planted to break the force of winds.


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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. However, some consider that it did not play a great role in the recovery, although it did help in reducing

unemployment.

The massive rearmament policies leading up to World War II helped stimulate the economies of Europe in 193739.

By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of manpower following the outbreak of war

in 1939 finally ended unemployment.

America's late entry into the war in 1941 finally eliminated the last effects from the Great Depression and brought the

unemployment rate down below 10%. In the United States, 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.

Productivity soared: most people worked overtime and gave up leisure activities to make money after so many hard

years. People accepted rationing and price controls for the first time as a way of expressing their support for the war

effort. Cost-plus pricing in munitions contracts guaranteed businesses a profit no matter how many mediocre workers

they employed or how inefficient the techniques they used. The demand was for a vast quantity of war supplies as

soon as possible, regardless of cost. Businesses hired every person in sight, even driving sound trucks up and down

city streets begging people to apply for jobs. New workers were needed to replace the 11 million working-age men

serving in the military.


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CONSEQUENCES

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 demagoguesthe most infamous

being Adolf Hitlersetting the stage for World War II in 1939.

AUSTRALIA

Australia's extreme dependence on agricultural and industrial exports meant it was one of the hardest-hit countries in

the Western world, amongst the likes of Canada and Germany. Falling export demand and commodity prices placed

massive downward pressures on wages. Further, unemployment reached a record high of 29% in 1932, with incidents

of unrest becoming common. After 1932, an increase in wool and meat prices led to a gradual recovery.

CANADA

Harshly impacted 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. During the 1930s, Canada employed a highly restrictive immigration policy.

CHILE

Chile initially felt the impact of the Great Depression in 1930, when GDP dropped 14 percent, mining income declined

27 percent, and export earnings fell 28 percent. 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. The League of Nations labeled Chile the country hardest

hit by the Great Depression because 80 percent of government revenue came from exports of copper and nitrates,

which were in low demand.

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 193858 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 earthquake of 1939, the Popular Front government of Pedro Aguirre

Cerda created the Production Development Corporation (Corporacin de Fomento de la Produccin, CORFO) toencourage 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. France's relatively high degree of self-sufficiency meant the

damage was considerably less than in nations like Germany. However, hardship and unemployment were high enough

to lead to rioting and the rise of the socialist Popular Front.


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GERMANY

Germany's Weimar Republic was hit hard by the depression, as American loans to help rebuild the German economy

now stopped. Unemployment soared, especially in larger cities, and the political system veered toward extremism. The

unemployment rate reached nearly 30% in 1932. Repayment of the war reparations due by Germany were suspended

in 1932 following the Lausanne Conference of 1932. By that time Germany had repaid 1/8th of the

reparations. Hitler's Nazi Party came to power in January 1933.

JAPAN

The Great Depression did not strongly affect Japan. The Japanese economy shrank by 8% during 192931. However,

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; 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.

The devaluation of the currency had an immediate effect. Japanese textiles began to displace British textiles in export

markets. The deficit spending however proved to be most profound. The deficit spending went into the purchase ofmunitions 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.

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.

LATIN AMERICA

Because of high levels of United States 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 until 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 United States, 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.


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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 paupers. 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.

SOVIET UNION

Having removed itself from the capitalist world system both by choice and as a result of efforts of the capitalist powers

to isolate it, the Great Depression had little effect on the Soviet Union. A Soviet trade agency in New York advertised

6,000 positions and received more than 100,000 applications. Its apparent immunity to the Great Depression seemed

to validate the theory of Marxism and contributed to Socialist and Communist agitation in affected nations. Many

Western intellectuals, like New York Times reporter Walter Duranty, looked upon Soviet Union with sympathies,

ignoring criticisms about Soviet that killed millions of people. President Roosevelt also looked upon Soviet Union with

sympathies, favoring closer diplomatic and economic ties between two countries.

UNITED KINGDOM

The effects on the industrial areas of Britain were immediate and devastating, as demand for British 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 ship

production fell 90%. The National Hunger March of SeptemberOctober 1932 was the largest of a series of 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.

UNITED STATES

The Great Depression began on "Black Tuesday" with the Wall Street Crash of October, 1929 and rapidly spread

worldwide. The market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation,

plunging farm incomes, and lost opportunities for economic growth and personal advancement. Although its

causes are still uncertain and controversial, the net effect was a sudden and general loss of confidence in the

economic future. The usual explanations include numerous factors, especially high consumer debt, ill-regulated

markets that permitted malfeasance by banks and investors, cutbacks in foreign trade, lack of high-growth new

industries,

and growing wealth inequality, all interacting to create a downward economic spiral of reduced spending,falling confidence, and lowered production.

The initial government response to the crisis exacerbated the situation; protectionist policies like the 1930 Smoot-

Hawley Tariff Act in the U.S. strangled global trade as other nations retaliated against the U.S. Industries that suffered

the most included agriculture, mining, and logging as well as durable goods like construction and automobiles that

people postponed.The economy eventually recovered from the low point of the winter of 1932-33, with sustained

improvement until 1937, when the Recession of 1937 brought back 1934 levels of unemployment.


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Industrial Policy and Competitiveness in Four Countries

Different national governments take different approaches to promoting certain sectors. Some try to back rising sectors

destined to succeed in international competition, with subsidies and with permission to collude domestically. Some

back falling sectors, subsidizing them and shielding them from competitive decline and bankruptcy. Some governments

actually nationalize whole sectors, often re-privatizing them later. In the postwar era, Japan is thought to be an

example of the first kind of industrial policy (backing winners) and Sweden is thought to be an example of the second.

Britain represents the third kind of government, one that supposedly suffers a hangover from nationalization and gains

from re-privatizing. The United States serves as a standard for comparison with the other three countries here.

Which of these beliefs is correct about the country in question? And are all three government-related options inferior to

the Americans' more laissez-faire approach? Your assigned readings introduce you to some policies of Japan and

Britain. Lecture and handouts will add details on Sweden, and evaluate all three countries' policies vis--vis the

American small government alternative. Here is an area rich in public-meets-IO dissertations, allowing one to rethink

theories of government regulation of firms' competition and integration, by drawing on the diverse experiences of

different countries.


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Effect on employment

The Great Depression began in 1929 when the entire world suffered an enormous drop in output and an

unprecedented rise in unemployment. World economic output continued to decline until 1932 when it clinked bottom at

50% of its 1929 level. Unemployment soared, in the United States it peaked at 24.9% in 1933. It remained above 20%

for two more years, reluctantly declining to 14.3% by 1937. It then leapt back to 19% before its long-term decline. Since

most households had only one income earner the equivalent modern unemployment rates would likely be much higher.Real economic output (real GDP) fell by 29% from 1929 to 1933 and the US stock market lost 89.5% of its value.

Another unusual aspect of the Great Depression was deflation. Prices fell 25%, 30%, 30%, and 40% in the UK,

Germany, the US, and France respectively from 1929 to 1933. These were the four largest economies in the world at

that time.

To put the severity of the depression in modern perspective, consider the following. Real US GDP went down 4.4% in

the five years that it declined since 1959, all added together! Unemployment has never exceeded 9.7% and we have

not had one year of deflation. Maybe you're thinking, "Whats wrong with a little price deflation?" Depending on how

much and how unexpected, deflation can be a devastating economic event. Imagine wages falling by 30% and the

value of debts simultaneously increasing by that much. In the great depression it would have been nice if the suffering

had been so evenly distributed. Instead the deflation caused bankruptcies, which in turn led to, more Bankruptcies!

Millions of people and companies were wiped out completely. The lack of adequate social programs left people of all

social strata depending on relatives and friends for charity. Spending became paralyzed with fear as the downturn was

so unexpected, so severe, and the bad news just kept coming for years.

Many did not realize how severe the downturn was until 1932 or 1933 when the economy had technically hit bottom

and even begun to chug forward. People's resources were depleted by then and so were many of their friends'. So the

human misery caused by the Depression really started in the mid-1930s. The political backlash to the miserable

economic situation is often blamed for toppling democracies, bringing fascist governments to power in Germany, Italy,

and Japan, and ultimately provoking the Second World War. "Hitler's rise to power can be directly linked to the

profound economic crisis in Germany at that time". The German economic crisis was compounded by the huge war

reparations imposed upon the Germans following World War I (an interesting comment on the efficacy of economic

sanctions!).


18/19

Lessons from the Great Depression

With its plunging stock prices, failing banks, currency crises and rising unemployment, he warned, "the issues raised

by the Depression, and its lessons, are still relevant today. Ben Bernanke.

Writing as a Princeton economics professor eight years ago, he was fascinated by the human drama behind the bread

lines and bank runs that ushered in the worst period of economic collapse in U.S. history. Averting a 21st century

Depression is no longer an academic concern.

"Financial meltdown,""The worst financial crisis in almost a century."

Since then, stock prices have plunged 26 percent on the Dow Jones Industrial Average, which fell 18 percent in a

week. The dive prompting Treasury Secretary Henry Paulson to announce Friday that the government would buy bank

stocks to try to halt the slide, a measure last taken during the Great Depression "I think everybody knows now," he said

last week, "we're in the worst financial crisis since the Great Depression."

Panic on Wall Street, urgent pleadings from the White House and political admonitions from the campaign trail aside,

the present crisis is at once similar to and very different from those that presaged the Great Depression. Americans

can take heart in a few statistics that make clear the country is nowhere near the dire straits it faced from 1929 until

1934, when the economy began to claw its way out of the depths of despair. In the Great Depression, unemployment

rose to 25 percent nationally; in some cities it was twice that. Since relatively few women worked at the time, that

meant that one out of every four American families was without a breadwinner.

September 2008 unemployment rate was 6.1 percent, historically high, to be sure, but a far cry from catastrophic -

except, of course, for the 9.5 million Americans who are out of work.

Between 1929 and 1933, the U.S. economy actually contracted four years in a row. Output fell from $104.4 billion in

1929 to $56.7 billion in 1933 - a 46 percent decrease. It was 1940 before economic output topped $100 billion again,

and then only barely. This year, the economy grew at an annual rate of 2.8 percent during the three months that ended

June 30, after growing 2 percent, adjusted for inflation, in 2007. In 1929, there were nearly 26,000 state and national

banks in the country. By 1934, a third had failed. Depositors lost a staggering $1.3 billion - equal to about $21 billion

today. In 2008, 13 banks have failed, according to the Federal Deposit Insurance Corporation, the watchdog and

oversight agency, which lists 117 others at risk of failing.

Roosevelt said after enduring cushions against hard times: Social Security, for instance, and unemployment benefits -

as well as regulatory agencies, like the Securities and Exchange Commission, meant to protect the economy against

reckless or corrupt practices. And policy makers like Bernanke, mindful of the lessons of history, are working in concert

with their global counterparts to cut interest rates and flood global financial institutions with hundreds of billions of

dollars in cash, to try to avoid the worldwide credit crisis that contributed to the Depression. And yet, if there are

important differences between 1929 and 2008, there are also troubling parallels. The Depression, after all, followed a

decade of rampant speculative investment on Wall Street that led to a debilitating crash. At the end of 1928, the Dow

Jones Industrial Average closed at 300, up a dizzying 48 percent for the year. By the next September, it peaked at 381,

a 27 percent gain in ten months.


19/19

Documents

Great Depression of 1929