Great Depression
The Great Depression is the period of history that followed "Black Thursday", the stock market crash of Thursday, October 24, 1929. 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 USA 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.
Dorothea Lange's Migrant Mother, depicts destitute pea pickers in California, centering on a mother of seven children, age thirty-two, in Nipomo, California, March 1936.
Causes of the Great Depression
Introduction
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 Britain. 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 misdistribution of purchasing power
A fundamental misdistribution 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 continue 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.
The credit structure
Another factor was the credit structure of the economy. As farm prices plummeted, farmers were deeply in debt—their land mortgaged, and crop prices 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. The banking system as a whole, moreover, was only very loosely regulated by the Federal Reserve System. 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 breakdown of international trade
Another factor was America's position in international trade. Protectionist impulses led nations to manufacture goods or harvest raw materials at home, although this policy was sometimes more expensive than importing what they needed. Then, to protect home products against competition from foreign imports, high tariff walls, such as the Hawley-Smoot Tariff Act, which raised tariffs on imports in order to protect local producers who were being hurt by foreign competition. The United States led the movement toward higher tariffs. Other nations quickly retaliated with discriminatory tariffs against the United States and each other, resulting in a chain reaction, American foreign trade seriously declined, and the volume of world trade steadily decreased.
The United States was far less dependent on overseas trade than it would later become, but exports formed a significant part of the economy in the 1920s.
Beginning late in the decade, 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. But it was because the European economy was being destabilized by the international debt structure that had emerged in the aftermath of World War I.
Thus, the international debt structure was a major contributing factor to the Depression. 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 economies. That was 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.
Responses
In the United States, Herbert Hoover was the president, and he tried to control the situation, however, he helped little. One of the major problems was that with deflation, the currency that you kept in your pocket could buy more goods as the prices went down. The other was that there had been no oversight in the stock market or other investments, and with the collapse, many of the 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.
In Germany unemployment increased drastically, fuelling widespread disillusionment and anger. The institutions of the Weimar Republic, which had been standing on shaky grounds already before, 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.)
Likewise, 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.
Roosevelt's "New Deal" in the United States
For details, see the main New Deal article.
In 1932 the United States elected Franklin Delano Roosevelt to replace Hoover as president. With unemployment near twenty five percent of the workforce, he initiated a number of government programs to increase liquidity and provide jobs, which jointly are called the New Deal. Some believe that these actions helped bring the country out of the depression--though there is controversy over the extent to which this is true--and provided some of the infrastructure, including roads that are still in use today. Roosevelt's first major action happened on his first full day in office on March 5, 1933 when he declared that a "bank holiday" would go into effect the next day that would close all United States banks and freeze all financial transactions in order to stop the run on bank deposits. When banks were finally allowed to open on March 13, depositors found that they would never again be allowed to withdraw the gold that they had deposited. This confiscation of wealth substantially reduced the rate of bank closures, and allowed the government to finance further "New Deal" programs. The United States Congress went to work on its first 100 days of enacting New Deal legislation on March 9, 1933.
Because the US was still in a state of depression when it entered World War II, the New Deal's success is still debated. Much of the debate is centered around when to measure the success from or what constitutes success. Those who measure success as return to the economic levels of 1928 argue that the new deal was a failure. In 1928, the level of Gross National Product (GNP) was at 100 billion, and Consumer Goods purchased was at 80 billion. By 1933, when Roosevelt took office, the economy had shrunk to a GNP of 55 billion and CGP of 45 billion. Some argue, that the American economy had probably hit an economic peak around 1928, and that it would be unreasonable to return to those levels. By 1939 the US GNP had risen to 85 billion with a CGP of 65 billion.
It is known that Roosevelt's New Deal programs were initially struck down by the Supreme Court, so that his initial interventions in the economy were all halted.
World War II and the end of the Great Depression in the United States
But it was not until the US entered World War II, however, did Roosevelt try idea of massive public expenditures and deficit spending on a scale necessary to pull the nation out of the Great Depression; Roosevelt, of course, had little choice now. Even granted the special circumstances of war mobilization, it seemed to work exactly as Keynes predicted, winning over many Republicans even. When the Great Depression was brought to an end by the Second World War, business had been reinforced by government expenditures.
New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending, baked up later by the British economist John Maynard Keynes. In 1929 federal expenditures were only 3 percent of GDP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was 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 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 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; and it had only a small impact on the distribution of wealth among the population.