The Online Encyclopedia and Dictionary






Great Depression

The Great Depression was a global economic slump that began in 1929 and bottomed in 1933. However, most of the remainder of the 1930s was spent recovering from the contraction, and it would be well after World War II when such indicators as industrial production, share prices and global GDP surpassed their 1929 peaks. The Great Depression can refer to the economic event, but it can also refer to the cultural period, often called simply "The Depression", and to the political response to the economic events.

What gave this downturn the name the "Great Depression" was that it is by far the largest sustained decline in industrial production and productivity from the century and a half where economic records have been kept with any regularity, and it reached virtually the entire industrialized world and their trading partners in peripheral nations. It led to massive bank failures, high unemployment, as well as dramatic drops in GDP, industrial production, share prices and virtually every other measure of economic growth.


Causes of the Great Depression

(See Main Article Causes of the Great Depression)

Economists, historians, and political scientists have posed several theories for the cause, or causes, of the Great Depression with surprisingly little consensus. It remains one of the most studied events of history to economic historians. Major theories that have been proposed include the stock market crash of 1929, collapse of the gold standard, collapse of international trade, Federal Reserve policy, and many other influences. The question in economic theory is which effects drove the Great Depression, and therefore which policy actions could have been taken to prevent, ameliorate, or end, the Great Depression.

Theories from mainstream capitalist economics focus on the relationship between production, consumption and credit, as embodied in macro-economics and on personal incentives and purchasing decisions as embodied in micro-economics. In these theories attempts are made to order the sequence of events which imploded the industrialized world's monetary system and its trade relationships. Theories from Marxian or Marxist economics focus on the relationships of the control of production and the concentration of wealth. For Marxists, the Great Depression is the kind of crisis which capitalism is prone to, and its occurrence is not surprising. These theories were more influential at the time, because of the existence of a communist government in the USSR, an area which covered present day Russia, Ukraine and the Central Asian republics.

Other heterodox theories of the Great Depression have been advanced, and from time to time gain favor. These include long cycle theories of economics, which argue that there are statistical periods to economic activity, and that the Great Depression was simply at the intersection of several concurrent long cycle troughs.


This family, the Wares, squatted on , , in 1930 because of the Great Depression.
This family, the Wares, squatted on Terminal Island, California, United States 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% to over 25%, 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.

The economic crises due to the depression were a terrible epidemic throughout the United States and many parts of the world. Consumers reduced their purchases of luxury cars, clothes, and many businesses cut production. Big businesses, such as General Motors, saw their sales drop by 50% in the late 1920s and the early 1930s. This caused businesses to lay off thousands of workers.

When farm prices fell, small farmers went bankrupt and lost their land. By June of 1932, the American economy had fallen by about 55% of the work force. The Government tried to restore prosperity by spending on welfare and public works.

After the stock market collapse, the New York banks became frightened and called in their loans to Germany and Austria. However, without the American money, Germany had to stop paying reparations to France and Britain. Of course, this was a chain reaction and they could not repay their war loans to America. Therefore, the depression had spread to Europe. All governments were forced to cancel both reparations payments and war loans.

The United States government tried to protect domestic industries from foreign competition by imposing the highest import duty in American history. In retaliation, other countries raised their tariffs on imports of American goods. As a result, global industrial production declined by 36% between 1929 and 1932, while world trade dropped by a breathtaking 62%.

In 1932, the United States had elected President Franklin D. Roosevelt. He proposed the "New Deal", a platform of government programs to stimulate and revitalize the economy. The British and French governments also intervened in their economies and escaped the worst of the depression. Moreover, the Soviet Union put in the Five-Year Plans.

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, fueling 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 the United Kingdom, 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 efforts to control the situation. However, hindsight shows that at first, he gravely underestimated the severity of the crisis (even announcing to U.S. Congress on December 3, 1929, that the worst effects of the recent stock market crash were behind them, and that the U.S. public had regained faith in the economy). Having realized his mistake, Hoover went before Congress again on December 2, 1930, to ask for a $150 million public works program to help generate jobs. However, one of the major problems was that with deflation, the currency that you kept in your pocket could buy more goods as prices went down. 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 may have precipitated a collapse of the banking system in 1932; Milton Friedman's monetary theories suggest that the inexperience of the newly-created Federal Reserve in managing the money supply exacerbated the problem. With the banking system in shambles, and people holding on to whatever currency that they had, there was minimal cash available for any activities that would cause positive change.

The response of the Hoover administration helped little; instead of increasing the money supply, the Hoover administration did the exact opposite and raised interest rates, falsely believing that inflation was the real danger. Many in the Hoover administration believed that as wages fell, the cost of production would drop and, as a result, production would pick up again, and the depression would be self-correcting. Nobody at that time understood the effects of a calamitous drop in the money supply. For this reason, they saw no need for the government to intervene in the economy, a policy which proved disastrous.

Like their counterparts abroad, many Americans were disillusioned with their system of government, believing that Hoover's policies had driven the country to ruin. (Shanty towns populated by unemployed people at the time were often dubbed Hoovervilles 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, although 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 the 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.

Effects of Great Depression on Asia

Asia was also hit by the Great Depression due to its dependence on trade of rubber and tin with the West. Being the biggest buyers of rubber and tin (for the automobile industry), Asian trade fell sharply as America and Europe became gripped in the depression. Companies in Asia had much less profit than before and had to dismiss some workers.

Many workers were dismissed so as to keep the company going, and the rest had their pay reduced. Many people had to depend on the aid of their friends or relatives to find a job.

Life during the Depression

In the so-called Dust Bowl, a massive area of the Great Plains consisting mainly of Kansas, Oklahoma, and parts of Texas, people found themselves unable to make a living. On top of the economic crisis, the earth withered and blew away in a series of massive dust storms. For a farming people this was disastrous, and these migrants were led westward by advertisements for work put out by agribusiness in western states such as California. The migrants came to be called Okies, Arkies, and other derogatory names as they flooded the labor supply of the agricultural fields, driving down wages and increasing competition for jobs in a place that couldn't afford it. This story was dramatized in the famous novels The Grapes of Wrath and Of Mice and Men by John Steinbeck. The former is a Biblical reference, intimating that God himself was punishing America and indicating the dramatic scope of the suffering so caused. The latter harkens back to the famous phrase of Robert Burns, "The best laid schemes of mice and men often go awry", implying that the economic crisis was threatening to unravel America and her (then) 150 years of history.


Many other nations, although not all, experienced a similar decline, though the severity and timing differed from country to country. For example, Britain hit its trough in the third quarter of 1932, while France did not reach its low point until April of 1937. Charles P. Kindleberger has provided the best international account of the Depression so far in his book The World in Depression.

End of the Great Depression

For details, see the main New Deal article.

It was not until the U.S. entered World War II that Roosevelt's ideas for massive public expenditures and deficit spending truly began to bear fruit. Roosevelt's administration, of course, had little choice but to increase expenditures, given the war effort. Even given the special circumstances of war mobilization, New Deal policies seemed to work exactly as predicted, winning over many Republicans, who had been the New Deal's greatest opponents. When the Great Depression was brought to an end by the Second World War, it was obvious that the turnaround had been caused primarily by the reinforcement of business through government expenditure.

In truth Roosevelt had foreseen from early in his Presidency that only a solution to the international trade problem would finally end the depression, and that the New Deal was, to no small extent, a "holding action". He contemplated precipitating a war with Japan early on, in hopes of dealing with the problem early. However, the intensity of the economic crisis convinced him that before the world situation could be dealt with, the United States would have to put its own fiscal house back in order. His original conception was that the New Deal would restore circumstances which would allow for a return to balanced budgets and an international gold standard. It was only gradually that he came to the conclusion that it was essential to remake the US economy in a more extensive fashion, particularly because of the "Roosevelt Recession" of 1937, when he had balanced the budget by restricting fiscal support to the economy.

Thus the statement "it was World War II that ended the Depression", while often asserted by partisans as proof that the New Deal "failed" is, in fact, the view that the architects of the New Deal themselves had seen as the reality: that as long as Europe was marching towards war, Japan was engaged in imperial conquest, and the international debt and trading system were still organized in an attempt by creditors to be paid back for World War I at pre-war values for gold, that a full solution to the economic crisis was impossible.

New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending, by instituting regulations which ended what was called "cut throat competition", were large players used predatory pricing to drive out small players, and by creating regulations which would raise the wages of ordinary workers and spread demand so that more people could purchase products. The original implementation, in the form of the National Recovery Act, was to allow business to set price codes, the NRA board to set labor codes and standards, and for the Federal government to insure the banking system and provide price supports for agriculture and mining, as well as direct unemployment relief, this is called the First New Deal . It was centered around the use of the alphabet soup of agencies set up in 1933 and 1934, along with the use of previous agencies, to regulate and stimulate the economy.

The theories behind the New Deal were backed up later by the writings of British economist John Maynard Keynes. In 1929 federal expenditures constituted only 3% of the GDP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics accused him of turning America into a socialist state, or even Stalinist state. The primary purpose of the New Deal was to prevent the economy and banking system from going into free fall, to provide effective relief until larger economic forces would end the slump, and to prevent those factors which had exacerbated the slump. The New Deal was both a program of national recovery and of reform. An interesting insight into what motivated Roosevelt came from the transition from the Hoover administration — both men agreed that it was a global maladjustment of prices, debts and production that was causing the slump. The disagreement came over whether the US government should act first to try and negotiate an end to the root causes internationally, which was Hoover's view, or act for domestic recovery and reform until the international situation could be resolved, which was FDR's view.

The New Deal was rooted in new ideas, but also in economic orthodoxy of balanced budgets, and restraint of federal power; it was bigger and broader government than ever before, but it was not as big as government would later become: spending on the New Deal was far smaller than on the war effort. In short, federal expenditures went from 3% of the GDP in 1929 to about 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 more than doubled. Consequently, unemployment plummeted—from 19.0% at the bottom 1938 to 1.2% in 1944—as the labor force grew by ten million. The war economy showed just how large the fiscal stimulus required to end the downturn of the Depression was, and it led, at the time, to fears that as soon as America demobilized, that it would return to Depression conditions and industrial output would fall to its pre-war levels. There is general agreement that it was World War II which finally provided the United States Federal Government with the ability to inject enough demand stimulus to end the Depression, and resolve the global monetary crisis by the imposition of the Bretton Woods system.

The Great Depression was not the longest depression on record, that title being held by the Long Depression of the late nineteenth century, nor was it the sharpest contraction, the one after the First World War being a deeper drop. It has commonly been described as the "deepest" depression in history because it represented the greatest fall from the general trendline of growth for the longest time.


See also

External links

The contents of this article are licensed from under the GNU Free Documentation License. How to see transparent copy