Great Depression

"The Great Depression" redirects here. For other uses, see The Great Depression (disambiguation).

Dorothea Lange's Migrant Mother depicts destitute pea pickers in California, centering on Florence Owens Thompson, age 32, a mother of seven children, in Nipomo, California, March 1936.

The overall course of the Depression in the United States, as reflected in per-capita GDP (average income per person) shown in constant year 2000 dollars, plus some of the key events of the period.

The Depression in international perspective.

The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries. It was the largest and most important economic depression in the 20th century, and is used in the 21st century as an example of how far the world's economy can fall. The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 29, 1929, known as Black Tuesday.

The depression had devastating effects in virtually every country, rich or poor. International trade plunged by half to two-thirds, as did personal income, tax revenue, prices and profits. 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 roughly 60 percent. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as farming, mining and logging suffered the most. However, even shortly after the Wall Street Crash of 1929, optimism persisted; 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 Great Depression ended at different times in different countries; for subsequent history see Home front during World War II. 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 demagogues—the most infamous being Adolf Hitler—setting the stage for World War II in 1939.

The deflation spiral

US Farm Prices, (1928-35).

The Great Depression was triggered by a sudden, total collapse in the stock market. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent 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.

In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worse in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the US economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.

Causes

Main article: Causes of the Great Depression

US industrial production
(1928-39).

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 Standard 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 a great 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.

Current theories may be broadly classified into three main points of view. First, there is orthodox classical economics: monetarist, Austrian Economics and neoclassical economic theory, which focus on the macroeconomic effects of money supply, how central banking decisions lead to overinvestment (economic bubble), or the supply of gold which backed many currencies before the Great Depression, including production and consumption.

USA GDP annual pattern and long-term trend, 1920-40, in billions of dollars at constant prices.

Second, there are structural theories, most importantly Keynesian, but also including those of institutional economics, that point to underconsumption and overinvestment (economic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The only consensus viewpoint is that there was a large-scale lack of confidence. Unfortunately, once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices got lower and lower and a given amount of money bought ever more goods.

Third, there is the Marxist critique of political economy. This emphasizes the tendency of capitalism to create unbalanced accumulations of wealth, leading to overaccumulations 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.

Debt deflation

Crowd at New York's American Union Bank during a bank run early in the Great Depression.

Irving Fisher argued that the predominant factor leading to the Great Depression was overindebtedness 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 chain of 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.

Crowd gathering on Wall Street after the 1929 crash.

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 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.

Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. 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.

Trade decline and the U.S. Smoot-Hawley Tariff Act

Main article: Smoot-Hawley Tariff Act

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. 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. The average ad valorem rate of duties on dutiable imports for 1921–1925 was 25.9% but under the new tariff it jumped to 50% in 1931–1935.

In dollar terms, American exports declined from about $5.2 billion in 1929 to $1.7 billion in 1933; but prices also fell, so the physical volume of exports only fell by half. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this theory, the collapse of farm exports caused many American farmers to default on their loans, leading to the bank runs on small rural banks that characterized the early years of the Great Depression.

U.S. Federal Reserve and money supply

Monetarists, including Milton Friedman and current Federal Reserve System chairman Ben Bernanke, argue that the Great Depression was caused by monetary contraction, the consequence of poor policymaking by the American Federal Reserve System and continuous 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. Friedman argued that the downward turn in the economy, starting with the stock market crash, would have been just another recession. The problem was that some large, public bank failures, particularly that of the New York Bank of the United States, produced panic and widespread runs on local banks, and that the Federal Reserve sat idly by while banks fell. 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.

Austrian School explanations

Another explanation comes from the Austrian School of economics. Theorists of the "Austrian School" who wrote about the Depression include Austrian economist Friedrich Hayek and American economist Murray Rothbard, who wrote America's Great Depression (1963). In their view, the key cause of the Depression was the expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. In their view, the Federal Reserve, which was created in 1913, shoulders much of the blame.

One reason for the monetary inflation was to help Great Britain, which, in the 1920s, was struggling with its plans to return to the gold standard at pre-war (World War I) parity. Returning to the gold standard at this rate meant that the British economy was facing deflationary pressure. According to Rothbard, the lack of price flexibility in Britain meant that unemployment shot up, and the American government was asked to help. The United States was receiving a net inflow of gold, and inflated further in order to help Britain return to the gold standard. Montagu Norman, head of the Bank of England, had an especially good relationship with Benjamin Strong, the de facto head of the Federal Reserve. Norman pressured the heads of the central banks of France and Germany to inflate as well, but unlike Strong, they refused. Rothbard says American inflation was meant to allow Britain to inflate as well, because under the gold standard, Britain could not inflate on its own.

In the Austrian view it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods. By the time the Fed belatedly tightened in 1928, it was far too late and, in the Austrian view, a depression was inevitable.

The artificial interference in the economy was a disaster prior to the Depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. According to Rothbard, government intervention delayed the market's adjustment and made the road to complete recovery more difficult.

Furthermore, Rothbard criticizes Milton Friedman's assertion that the central bank failed to inflate the supply of money. Rothbard asserts that the Federal Reserve bought $1.1 billion of government securities from February to July 1932, raising its total holding to $1.8 billion. Total bank reserves rose by only $212 million, but Rothbard argues that this was because the American populace lost faith in the banking system and began hoarding more cash, a factor quite beyond the control of the Central Bank. The potential for a run on the banks caused local bankers to be more conservative in lending out their reserves, and this, Rothbard argues, was the cause of the Federal Reserve's inability to inflate.

Power farming displaces tenants from the land in the western dry cotton area. Childress County, Texas, 1938.

Business

Franklin D. Roosevelt, elected in 1932 and inaugurated March 4, 1933, primarily 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. Regulation of the economy was a favorite remedy. Some New Deal regulation (the NRA and AAA) was declared unconstitutional by the U.S. Supreme Court. Most New Deal regulations were abolished or scaled back in the 1970s and 1980s in a bipartisan wave of deregulation. However the Securities and Exchange Commission and Social Security won widespread support.

Keynesian models

British economist John Maynard Keynes argued in General Theory of Employment Interest and Money that lower aggregate expenditures in the economy contributed to a massive decline in income and to employment that was well below the average. In this situation, the economy might have reached a perfect balance, at a cost of high unemployment. Although Keynes never mentions fiscal policy in The General Theory, and instead advocates the need to socialize investments, Keynes ushered in more of a theoretical revolution than a policy one. His basic idea was simple: to keep people fully employed, governments have to run deficits when the economy is slowing because the private sector will not invest enough to increase production and reverse the recession. Keynesian economists called on governments during times of economic crisis to pick up the slack by increasing government spending and/or cutting taxes.

As the Depression wore on, Roosevelt tried public works, farm subsidies, and other devices to restart the economy, but never completely gave up trying to balance the budget. According to the Keynesians, he needed to spend much more money; they were unable to say how much more. With fiscal policy, however, government could provide the needed Keynesian spending by decreasing taxes, increasing government spending, and increasing individuals' incomes. As incomes increased, they would spend more. As they spent more, the multiplier effect would take over and expand the effect on the initial spending. The Keynesians did not estimate what the size of the multiplier was. Keynesian economists assumed poor people would spend new incomes; however, they saved much of the new money; that is, they paid back debts owed to landlords, grocers and family. Keynesian ideas of the consumption function were upset in the 1950s by Milton Friedman and Franco Modigliani.

Neoclassical approach

Recent work from a neoclassical perspective focuses on the decline in productivity that caused the initial decline in output and a prolonged recovery due to policies that affected the labor market. This work, collected by Kehoe and Prescott, decomposes the economic decline into a decline in the labor force, capital stock, and the productivity with which these inputs are used. This study suggests that theories of the Great Depression have to explain an initial severe decline but rapid recovery in productivity, relatively little change in the capital stock, and a prolonged depression in the labor force. This analysis rejects theories that focus on the role of savings and posit a decline in the capital stock.

Inequality of wealth and income

Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948, detailed what he believed caused the Depression in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951):

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.]

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

Turning point and recovery

In most countries of the world recovery from the Great Depression began between late 1931 and early 1933. 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 gold and what results they got varied widely.

In the United States recovery began in the spring of 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 gold inflows was a crucial source of the recovery of the United States economy, and that fiscal policy and World War II were of little help. The gold inflows were partly due to devaluation of the U.S. dollar and partly due to deterioration of political situation in Europe. In their book, A Monetary History of the United States, Milton Friedman and Anna J. Schwartz also laid the recovery to monetary factors, and contended that it was much slowed by poor management of money by the Federal Reserve System. Current Chairman of the Federal Reserve Ben Bernanke agrees that monetary factors played important role 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. Many economists, exemplified by Harold L. Cole and Lee E. Ohanian, believe that the economy should very quickly have returned to normal except for continued depressing influences, and point the finger to the lack of downward flexibility in prices and wages, encouraged by Roosevelt Administration polices such as the National Industrial Recovery Act. Some economists have called attention to the expectations of reflation and rising nominal interest rates that Roosevelt's words and actions portended.

Literature

The U.S. Depression has been the subject of much writing, as the country has sought to re-evaluate an era that caused emotional as well as financial trauma to its people. Perhaps the most noteworthy and famous novel written on the subject is The Grapes of Wrath, published in 1939 and written by John Steinbeck, who was awarded both the Nobel Prize for literature and the Pulitzer Prize for the work. The novel focuses on a poor family of sharecroppers who are forced from their home as drought, economic hardship, and changes in the agricultural industry occur during the Great Depression. Steinbeck's Of Mice and Men is another important novel about a journey during the Great Depression. The Great Depression is a novella written by Alon Bersharder about a sad, disgruntled temporary worker, making the title both a homage to the historical event and a pun. Additionally, Harper Lee's To Kill a Mockingbird is set during the Great Depression. Margaret Atwood's Booker prize-winning The Blind Assassin is likewise set in the Great Depression, centering on a privileged socialite's love affair with a Marxist revolutionary.

Effects

Australia

Main article: Great Depression in 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 civil unrest becoming common. After 1932, an increase in wool and meat prices led to a gradual recovery.

Canada

Unemployed men march in Toronto, Ontario, Canada.

Main article: Great Depression in 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.

France

Main article: Great Depression in 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.

Germany

"Diligent young man seeks work"

Main article: Great Depression in Central Europe

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.

Bonnie and Clyde were notorious bank robbers during what is sometimes referred to as the "public enemy era" between 1931 and 1935. During the Depression bankers became so unpopular that bank robbers, such as John Dillinger, became folk heroes.

Japan

The Great Depression did not strongly affect Japan. The Japanese economy shrank by 8% during 1929–31. 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 spending; and second, by devaluing the currency. Takahashi used the Bank of Japan to sterilize the deficit spending and minimize resulting inflationary pressures. Econometric studies have identified the fiscal stimulus as especially effective.

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 of munitions for the armed forces. By 1933, Japan was already out of the depression. By 1934 Takahashi realized that the economy was in danger of overheating, and to avoid inflation, moved to reduce the deficit spending that went towards armaments and munitions. This resulted in a strong and swift negative reaction from nationalists, especially those in the Army, culminating in his assassination in the course of the February 26 Incident. This had a chilling effect on all civilian bureaucrats in the Japanese government. From 1934, the military's dominance of the government continued to grow. Instead of reducing deficit spending, the government introduced price controls and rationing schemes that reduced, but did not eliminate inflation, which would remain a problem until the end of World War II.

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

Main article: Great Depression in 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

Main article: Great Depression in the 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.

Buried machinery in a barn lot; South Dakota, May 1936. The Dust Bowl on the Great Plains coincided with the Great Depression.

File:Kersnovskaya Entering Camp5 54.jpg

Entering Gulag (a leaf from Eufrosinia Kersnovskaya's notebook). During the Depression thousands of Americans emigrated to the Soviet Union. Many were arrested as potential “spies” during the Great Terror of 1937-38.

South Africa

Main article: Great Depression in 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

Main article: Economy of the Soviet Union § Economic development

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. This was a period of industrial expansion for the USSR as it recovered from revolution and civil war, and its apparent immunity to the Great Depression seemed to validate the theory of Marxism and contributed to Socialist and Communist agitation in affected nations. This in turn increased fears of Communist revolution in the West, strengthening support for anti-Communists, both moderate and extreme. Unlike the previous similar famine in Russia, information about the Soviet famine of 1932–1933 was suppressed by the Soviet authorities until perestroika. In 1933 workers' real earnings sank to about one-tenth of the 1926 level. Common and political prisoners in labor camps were forced to do unpaid labor, and communists and Komsomol members were frequently "mobilized" for various construction projects.

United Kingdom

Main article: Great Depression in the 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 September–October 1932 was the largest of a series of hunger marches in Britain in the 1920s and 1930s. About 200,000 unemployed men were sent to the work camps, which continued in operation until 1939.

Shacks, put up by the Bonus Army (WWI veterans) on the Anacostia flats, Washington, DC, burning after the battle with the 1,000 soldiers accompanied by tanks and machine guns, 1932.

United States

Main article: Great Depression in the United States

Hoover administration

President Herbert Hoover started numerous programs, all of which failed to reverse the downturn. In June 1930 Congress approved the Smoot-Hawley Tariff Act which raised tariffs on thousands of imported items. The intent of the Act was to encourage the purchase of American-made products by increasing the cost of imported goods, while raising revenue for the federal government and protecting farmers. However, other nations increased tariffs on American-made goods in retaliation, reducing international trade, and worsening the Depression. In 1931 Hoover urged the major banks in the country to form a consortium known as the National Credit Corporation (NCC). By 1932 unemployment had reached 24.9%, a drought persisted in the agricultural heartland, businesses and families defaulted on record numbers of loans, and more than 5,000 banks had failed. Tens-of-thousands of Americans found themselves homeless and they began congregating in the numerous Hoovervilles that had begun to appear across the country. In response, President Hoover and Congress approved the Federal Home Loan Bank Act, to spur new home construction, and reduce foreclosures. The final attempt of the Hoover Administration to stimulate the economy was the passage of the Emergency Relief and Construction Act (ERA) which included funds for public works programs such as dams and the creation of the Reconstruction Finance Corporation (RFC) in 1932. The RFC's initial goal was to provide government-secured loans to financial institutions, railroads and farmers. Quarter by quarter the economy went downhill, as prices, profits and employment fell, leading to the political realignment in 1932 that brought to power Franklin Delano Roosevelt.

Great Depression: man lying down on pier, New York City docks, 1935.

Bennett buggies, or "Hoover wagons", cars pulled by horses, were used by farmers too impoverished to purchase gasoline.

Roosevelt administration

Main article: New Deal

Shortly after President Roosevelt was inaugurated in 1933, drought and erosion combined to cause the Dust Bowl, shifting hundreds of thousands of displaced persons off their farms in the midwest. From his inauguration onward, Roosevelt argued that restructuring of the economy would be needed to prevent another depression or avoid prolonging the current one. New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending and institute financial reforms. The Securities Act of 1933 comprehensively regulated the securities industry. This was followed by the Securities Exchange Act of 1934 which created the Securities and Exchange Commission. Though amended, key provisions of both Acts are still in force. Federal insurance of bank deposits was provided by the FDIC, and the Glass-Steagall Act. The institution of the National Recovery Administration (NRA) remains a controversial act to this day. The NRA made a number of sweeping changes to the American economy until it was deemed unconstitutional by the Supreme Court of the United States in 1935.

Early changes by the Roosevelt administration included:

• Instituting regulations to fight deflationary "cut-throat competition" through the NRA.
• Setting minimum prices and wages, labor standards, and competitive conditions in all industries through the NRA.
• Encouraging unions that would raise wages, to increase the purchasing power of the working class.
• Cutting farm production to raise prices through the Agricultural Adjustment Act and its successors.
• Forcing businesses to work with government to set price codes through the NRA.

CCC workers constructing road, 1933. Over 3 million unemployed young men were taken out of the cities and placed into 2600+ work camps managed by the CCC.

WPA employed 2 to 3 million unemployed at unskilled labor.

These reforms, together with several other relief and recovery measures are called the First New Deal. Economic stimulus was attempted through a new alphabet soup of agencies set up in 1933 and 1934 and previously extant agencies such as the Reconstruction Finance Corporation. By 1935, the "Second New Deal" added Social Security (which did not start making large payouts until much later), a jobs program for the unemployed (the Works Progress Administration, WPA) and, through the National Labor Relations Board, a strong stimulus to the growth of labor unions. In 1929, federal expenditures constituted only 3% of the GDP. The national debt as a proportion of GNP rose under Hoover from 20% to 40%. Roosevelt kept it at 40% until the war began, when it soared to 128%. After the Recession of 1937, conservatives were able to form a bipartisan conservative coalition to stop further expansion of the New Deal and, when unemployment dropped to 2% they abolished WPA, CCC and the PWA relief programs; Social Security, however, remained in place.

There has always been debate among politicians and scholars as to whether New Deal policies lengthened and deepened the Depression. One small voluntary response survey from 85 PhD holding members of the Economic History Society, which the author stated may not be not representative of all economic historians, showed that there were statistically different opinions between economic historians who taught or studied economic history and those that taught or studied economic theory. The former were in consensus that the New Deal did not lengthen and deepen the depression, while the latter were more evenly divided.

Recession of 1937

Main article: Recession of 1937

By 1936, the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high, although it was considerably lower than the 25% unemployment rate seen in 1933. In the spring of 1937, American industrial production exceeded that of 1929 and remained level until June 1937 when the Roosevelt administration cut spending, cut WPA rolls drastically, and put PWA projects on hold. This was with the expectation that private business would resume investment and expansion. However, immediately after these federal spending cuts, the American economy took a sharp downturn, lasting for 13 months through most of 1938. Industrial production fell almost 30 per cent within a few months and production of durable goods fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. As unemployment rose, consumers' expenditures declined, leading to further cutbacks in production.

The Roosevelt Administration reacted by launching a $5 billion spending program in April 1938 to provide a new stimulus to the U.S. economy through PWA, WPA, various relief agencies, and farm subsidies, in an effort to increase aggregate demand and mass purchasing power. By May 1938 retail sales began to increase, employment improved, and industrial production turned up after June 1938 and was further stimulated by a wave of war-anticipation orders. However, employment did not regain the 1937 level until late 1940.

Gold standard

Every major currency left the gold standard during the Great Depression. Great Britain was the first to do so. Facing speculative attacks on the pound and depleting gold reserves, in September 1931 the Bank of England ceased exchanging pound notes for gold and the pound was floated on foreign exchange markets.

Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931. Other countries, such as Italy and the 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 1935-1936.

According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country's severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies.

Political consequences

The crisis had many political consequences, among which was the abandonment of classic economic liberal approaches, which Roosevelt replaced in the United States with Keynesian policies. These policies magnified the role of the federal government in the national economy. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state. The Great Depression was a main factor in the implementation of social democracy and planned economies in European countries after World War II. (see Marshall Plan). Although Austrian economists had challenged Keynesianism since the 1920s, it was not until the 1970s, with the influence of Milton Friedman that the Keynesian approach was politically questioned.

Other great depressions

There have been other downturns called a "Great Depression," but none has been as worldwide for so long. British economic historians use the term "Great depression" to describe British conditions in the late 19th century, especially in agriculture, 1873-1896, a period also referred to as the Long Depression. Several Latin American countries had severe downturns in the 1980s. Finnish economists refer to the Finnish economic decline around the breakup of the Soviet Union (1989-1994) as a great depression. Kehoe and Prescott define a great depression to be a period of diminished economic output with at least one year where output is 20% below the trend. By this definition Argentina, Brazil, Chile, and Mexico experienced great depressions in the 1980s, and Argentina experienced another in 1998-2002. This definition also includes the economic performance of New Zealand from 1974-1992 and Switzerland from 1973 to the present, although this designation for Switzerland has been controversial.

The economic crisis in the 1990s that struck former members of the Soviet Union was almost twice as intense as the Great Depression in the countries of Western Europe and the United States in the 1930s. Average standards of living registered a catastrophic fall in the early 1990s in many parts of the former Eastern Bloc - most notably, in post-Soviet states. Even before Russia's financial crisis of 1998, Russia's GDP was half of what it had been in the early 1990s. Some populations are still poorer today than they were in 1989 (e.g. Ukraine, Moldova, Serbia, Central Asia, Caucasus). The collapse of the Soviet planned economy and the transition to market economy resulted in catastrophic declines in GDP of about 45% during the 1990–1996 period and poverty in the region had increased more than tenfold.

See also

• Aftermath of World War I
• America's Great Depression written by Murray Rothbard.
• Arthurdale
• Bennett buggy
• Cities in the Great Depression
• Debt bondage
• Economic collapse
• Great Contraction
• Hoovervilles
• Hunger marches
• Ivar Kreuger
• Late 2000s recession
• Panic of 1837
• Timeline of the Great Depression

Further reading

• Ambrosius, G. and W. Hibbard, A Social and Economic History of Twentieth-Century Europe (1989)
• Bernanke, Ben S. "The Macroeconomics of the Great Depression: A Comparative Approach" Journal of Money, Credit & Banking, Vol. 27, 1995 online at JSTOR
• Brown, Ian. The Economies of Africa and Asia in the inter-war depression (1989)
• Davis, Joseph S., The World Between the Wars, 1919-39: An Economist's View (1974)
• Eichengreen, Barry. Golden fetters: The gold standard and the Great Depression, 1919-1939. 1992.
• Eichengreen, Barry, and Marc Flandreau; The Gold Standard in Theory and History 1997 online version
• Feinstein. Charles H. The European economy between the wars (1997)
• Friedman, Milton and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960 (1963), monetarist interpretation (heavily statistical)
• Galbraith, John Kenneth, The Great Crash, 1929 (1954)
• Garraty, John A., The Great Depression: An Inquiry into the causes, course, and Consequences of the Worldwide Depression of the Nineteen-Thirties, as Seen by Contemporaries and in Light of History (1986)
• Garraty John A. Unemployment in History (1978)
• Garside, William R. Capitalism in crisis: international responses to the Great Depression (1993)
• Goldston, Robert, The Great Depression: The United States in the Thirties (1968)
• Haberler, Gottfried. The world economy, money, and the great depression 1919-1939 (1976)
• Hall Thomas E. and J. David Ferguson. The Great Depression: An International Disaster of Perverse Economic Policies (1998)
• Kaiser, David E. Economic diplomacy and the origins of the Second World War: Germany, Britain, France and Eastern Europe, 1930-1939 (1980)
• Keynes, John Maynard. "The World's Economic Outlook," Atlantic (May 1932), online edition
• Kindleberger, Charles P. The World in Depression, 1929-1939 (1983)
• Gernot Kohler and Emilio José Chaves (Editors) “Globalization: Critical Perspectives” Haupauge, New York: Nova Science Publishers (http://www.novapublishers.com/) ISBN 1-59033-346-2. With contributions by Samir Amin, Christopher Chase Dunn, Andre Gunder Frank, Immanuel Wallerstein
• League of Nations, World Economic Survey 1932-33 (1934)
• Madsen, Jakob B. "Trade Barriers and the Collapse of World Trade during the Great Depression", Southern Economic Journal, Southern Economic Journal 2001, 67(4), 848-868 online at JSTOR
• Donald Markwell, John Maynard Keynes and International Relations: Economic Paths to War and Peace, Oxford University Press (2006).
• Mitchell, Broadus. Depression Decade: From New Era through New Deal, 1929-1941 (1947), 462pp; thorough coverage of the U.S.. economy
• Mundell, R. A. "A Reconsideration of the Twentieth Century," The American Economic Review Vol. 90, No. 3 (Jun., 2000), pp. 327–340 online version
• Rothermund, Dietmar. The Global Impact of the Great Depression (1996)
• Tausch, Arno, with Christian Ghymers. "From the “Washington” towards a “Vienna Consensus”? A quantitative analysis on globalization, development and global governance". Hauppauge, N.Y.: Nova Science Publishers, 2007 (for info: https://www.novapublishers.com/catalog/).
• Tausch, Arno and Almas Heshmati (Eds.) "Roadmap to Bangalore? Globalization, the EU’s Lisbon Process and the Structures of Global Inequality" Hauppauge, N.Y.: Nova Science Publishers, 2008, with contributions by Franco Modigliani et al. (for info: https://www.novapublishers.com/catalog/).
• Tipton, F. and R. Aldrich, An Economic and Social History of Europe, 1890–1939 (1987)

For US specific references, please see complete listing in the Great Depression in the United States article.

External links

• Comparison of 1929 to 2007 - Dow Jones Industrial Average
• Great Depressions of the Twentieth Century, edited by T. J. Kehoe and E. C. Prescott
• Theories of the Great Depression, R. L. Norman, Jr.
• America in the 1930s. Very large multi-mediated project on America in the Great Depression
• Recession? Depression? What's the difference? (About.com)
• An Overview of the Great Depression from EH.NET by Randall Parker.
• Great Myths of the Great Depression by Lawrence Reed
• Franklin D. Roosevelt Library & Museum for copyright-free photos of the period
• Economic Depressions: Their Cause and Cure by Murray Rothbard (1969)
• Great Depression in the Deep South
• The Great Depression study guide and teaching guide - dates, people, timelines, analysis