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The Great Depression: Causes and Effects

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Published: Fri, 26 Jan 2018

It has been observed that the modern world has never experienced an economic crisis as severe as the `Great Depression’. The term was first coined in the United States to describe the economic collapse that, by 1931, had shattered the US economy and Americans’ faith in the future. Europe and the rest of the world were also badly hit, and while they first called the crisis `a slump’, in time the label `Great Depression’ was adopted on both sides of the Atlantic to describe this unprecedented global economic crisis.[1]

The ramifications of the 1890’s depression were circumscribed by comparison with the Great Depression. In the 1930’s, national economies were sorely tested and shaken to their foundations. Economic and social statistics unequivocally attest to the chronic condition of national economies in industrialised nations during the period of 1929-1939.

McGovern presents the figures, which characterise 1933 in the USA.[2] The most serious failure in terms of its human consequences was, of course, unemployment. According to official figures, this peaked in 1933 at 12.8 million or 25% of the workforce, figures that barely changed in 1934 after one year of the Roosevelt administration when 11.3 million were jobless, still nearly 22% of available workers. 11 Expert advisors to the government calculated even higher numbers for 1933, with monthly unemployment averaging 13.1 million. March 1933 was the nadir for the entire 1930s, with 15 million, nearly 30%, out of work. Since unemployed workers usually had families exclusively dependent on them, between 40 and 50 million Americans were without regular job income during the most severe period of the Depression. Another large number of workers with dependents, (larger even than the number unemployed), were forced to work with reduced income as part-time workers.

Furthermore, the period of 1932-1933 is universally described as a dire state for nations and entities such as USA, Europe and Australia, indeed a period popularly referred to as the ‘nadir’ of the depression. Regardless of which barometers of economic strength are consulted, there is a prevailing sense of economic and social malaise, throughout the industrialised world, in these particular years.

Powell notes[3] during the 1930s, the Great Depression was widely blamed on stock market speculation, reckless banking practices, and a concentration of wealth in too few hands. The New Deal laws were drafted accordingly. Subsequent investigations, however, have convinced most economists that the Depression had little to do with any of those things. The most influential single work is A Monetary History of the United States, 1867-1960, published in 1963 by Milton Friedman and Anna Jacobson Schwartz, which documented the catastrophic one-third contraction of the money supply between 1929 and 1933. Princeton University economist Paul Krugman remarks that, “Nowadays, practically the whole spectrum of economists, from Milton Friedman leftward, agrees that the Great Depression was brought on by a collapse of effective demand, and that the Federal Reserve should have fought the slump with large injections of money.”

Smiley contends that adopting the gold standard was a primary cause for the depression, inducing differential inflation rates among the Allies, which in turn doomed those economies to the self-inflicted injuries of deflation. Fear of inflation at the Fed plus the failure to protect the financial sector did considerable damage.

Clavin explains the USA’s role in bringing Europe to the brink, in the early 1930’s.[4] Europe as a whole received some $7.8 billion between 1924 and 1930. But when these American loans dried up, as they did dramatically after 1929, Clavin asserts that problems in European economy resurfaced with a vengeance.

Within the USA, up to 1933, according to Reed, [5] production at the nation’s factories, mines, and utilities fell by more than half. People’s real disposable incomes dropped 28 percent. Stock prices collapsed to one-tenth of their pre-crash height. The number of unemployed Americans rose from 1.6 million in 1929 to 12.8 million in 1933. One of every four workers was out of a job at the Depression’s nadir, and ugly rumours of revolt simmered for the first time since the Civil War.

The critical question involves being definitive about the attributable causes of the severe economic pervasive conditions and their consequent social ramifications globally. It is problematic to determine causality and which antecedents have the dubious credit of creating the severity of 1932-1933. A range of social and economic factors is cited selectively by proponents of polarised political positions. Particular economic paradigms are entertained, so that the mistakes of the Great Depression, as the theorist interprets them; may be used as a precedent to lend intellectual support to a particular approach to economic theory, providing ‘a correct approach’ to present day and future economic challenges.

In simple terms, two broad approaches to economic function, include classical economics, which examines macroeconomic effects of money supply and the supply of gold which backed many currencies before the Great Depression, including production and consumption. Conversely, structural theories, including those of institutional economics, point to under consumption and over investment (economic bubble), malfeasance by bankers and industrialists or incompetence by government officials.[6]

These two broad interpretive frameworks, within which the Great Depression is understood, have stifled insight into the genuine causes of the depression as a whole as well as the reasons underpinning the severity of 1932-1933 in particular. Entrenched and formulaic economic explanations, are often little more than efforts to politicise the depression, in order to reinforce the mantra of left or right wing political philosophies. This practice can be well illustrated, through the writings of economists such as Paul Ormerod, chairman of an organisation known as Post-Orthodox Economics.

Ormerod contends, that, “ the left tends to see the current crisis as a failure of markets. Whether the call is for more or, in Third Way style, better regulation, the argument is the same: the unrestricted workings of markets are causing problems, so governments must step in to show that they can run them better. But all this misses the most important point. The Great Depression of the 1930s was not primarily a failure of markets but a failure of government. The Federal Reserve slashed the money supply at a time when it should have expanded it. This is the lesson to be learnt. Forget fears of inflation. Expand the money supply to cut off the risk of a second great recession. [7]

Ormerod’s position finds support from the Mackinac Centre for Public Policy: Myths of the Great Depression, by free market economist and historian Lawrence W. Reed. Reed states in a nonchalant manner that the mythical explanation of the depression is, “An important pillar of capitalism, the stock market, crashed and dragged America into depression. President Herbert Hoover, an advocate of “hands-off,” or laissez-faire, economic policy, refused to use the power of government to intervene in the economy and conditions worsened as a result. It was up to Hoover’s successor, Franklin Delano Roosevelt, to ride in on the white horse of government intervention and steer the nation toward recovery.[8]

Unabashed, Reed continues to emphatically advocate governmental responsibility for the onset or deterioration of the Great Depression within USA, and one could safely assume, Reed would apply his free marketeering philosophy, to equally account for the severity of the depression in other democratic nations in the 1930’s. Reed asserts [9] in “1929, the wild manipulation of the currency by the Federal Reserve shows that government, far from a disinterested bystander, was the principal culprit of the stock market crash.” Furthermore, he attributes blame to politically strategic blunders throughout the 1920’s within the USA. “The genesis of the Great Depression lay in the inflationary monetary policies of the U. S. government in the 1920s. It was prolonged and exacerbated by a litany of political missteps: trade-crushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops and cattle, and coercive labour laws, to recount just a few. It was not the free market which produced 12 years of agony; rather, it was political bungling on a scale as grand as there ever was.[10]

Within the United Kingdom, renowned writer George Orwell provides a poignant anecdote in his 1936 book ‘Road to Wigan Pier’, indicating the severity of the Great Depression for unemployed men and women in northern England. : “Several hundred men risk their lives and several hundred women scrabble in the mud for hours… searching eagerly for tiny chips of coal in slagheaps so they could heat their homes. For them, this arduously-gained ‘free’ coal was more important almost than food.”[11]

Indeed, according to Rothermund, in Britain, there existed a “conflict of interests among three major groups: the City of London as the centre of world finance, British industry, and labour. The City had reached its aim of returning to the gold standard which enabled it to transact international business along the lines of prewar times. The return to the gold standard at the prewar parity in 1925 had been a mistake, as it forced the City to adopt a deflationary course so as to support the overvalued pound. This affected British industry both with regard to its export position and its access to credit.[12] Rothermund again contends, “While the deflationary policy of the Bank of England had already made matters worse, when the bank had to raise its discount rate at a time of intense American speculation, the tension increased.”

According to Clavin,[13] between 1924 and 1929 over 40 countries returned to gold or joined the system for the first time. This was done in the belief it would stabilise product price and promote international trade. Nonetheless, by the early 1930’s many countries began to abandon the gold standard Rothermund notes, “Keynes had written to Macdonald in August 1931, advising him that the game was up and that Great Britain should abandon the gold standard and head a new sterling bloc.”[14]

The severity of the Great Depression, can also have regard to the societal regression it promoted.[15] Export and credit failure, meant nations adopted protectionist mindsets, helping to spawn totalitarian regimes in Europe from the mid 1930’s. Claven contends that loss of US credit, determined that countries had to raise interest rates, thus making it more difficult for businesses and farms to borrow money at precisely the time they needed to do so to combat depression. Governments, too, began to feel the squeeze as their levels of revenue from taxes fell dramatically just when they needed to spend more money on unemployment benefit and public work schemes to mop up unemployment and to kick-start recovery. Across Europe, parliaments like Britain and Germany in the summer of 1931 became deadlocked over the issue of government spending.

As confidence dropped, governments, companies and individuals cut back on spending. Demand for industrial and agricultural products dried up, and this caused prices to fall still further. By the end of 1930 the price of wheat sold on the Liverpool exchange had fallen by 50 per cent and the price of meat by 40 per cent. Desperate to protect their own markets from the threat of cheap foreign imports being dumped on them, levels of trade protection began to rise dramatically. By 1932 France had introduced strict quotas on over 3,000 different products entering France, and German tariffs rose by 50 per cent after 1929. Most startling was Britain’s retreat into protection in the autumn of 1931, ending a commitment to the ethos of Free Trade that had lasted 85 years. The world was now divided into competing economic blocs.

Countries which depended heavily on the export of agricultural produce were especially hard hit because agricultural prices fell more dramatically than those of industrial goods. A Polish farmer who paid 100 kg of rye to buy a new plough in 1928, now found that the same plough cost 270 kg.

By the summer of 1931, the European economy began to crack under the strain of the continued fall in prices, the lack of demand and spiralling levels of unemployment. Economic, political and financial pressures combined to produce a financial crisis that swept across Europe like a flash flood. In countries, like Austria and Germany, where the banks had a particularly close relationship with industry, the collapse of private companies forced banks, too, to shut up shop. With some of Europe’s most prestigious banking houses facing ruin, the German and Austrian governments were forced to become directly involved in managing the financial system. They also introduced exchange controls to stop the further export of gold or foreign currency from German or Austrian banks to banks in Switzerland or Britain.

McGovern contends that the great fear among consumers, induced by the failure of the stock market and over 5,000 commercial banks between 1929 and 1932, prompted cutbacks in their spending. This, in turn, led to contractions in capital goods industries (especially steel and their suppliers), in construction, mining, and transportation—hence, to broad layouts of workers. The downward curve then accelerated, with unemployment leading to further cutbacks in consumption and consequently also production. [16]

Finally, it is worth pointing out that since the effects of the depression were challenging within some parts of Britain and devastating in others, it is clear that its impact was not uniform, but reactive to particular social, political and economic circumstances. Areas heavily dependent upon the shipping industry, such as Newcastle –Upon- Tyne, were decimated by the events. The later Jarrow Street March in 1936, saw the frustration spill over into public, unified action, on behalf of ship workers and miners, who marched from the North- East of England to Parliament to lobby for change.

 
Bibliography

Books

  • Rothermund, D. The Global Impact of the Great Depression, 1929-1939, London, Routledge, 1996.
  • Claven, P. The Great Depression in Europe, 1929-1939 in History Review, History Today Ltd 2000
  • McGovern, J. And a Time for Hope: Americans in the Great Depression, Praeger, 2000
  • Orwell, G. Road to Wigan Pier, Left Book Club, London, 1937,
  • Smiley, G. Rethinking the Great Depression: A New View of its Causes and Consequences, Chicago: Ivan R. Dee, 2002

Articles

  • Ormerod, P New Statesman, Vol. 127, October 9, 1998
  • J. Powell, Did the New Deal Actually Prolong the Great Depression? The American Enterprise, Vol. 13, March 2002

Websites

Mackinac Center for Public Policy: Myths of the Great Depression. 2000 accessed

23 March 2007

http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom accessed 23 March 2007

1


Footnotes

[1] P. Claven, The Great Depression in Europe, 1929-1939 in History Review, History Today Ltd 2000, p. 30

[2] Ibid p.4

[3] J. Powell, Did the New Deal Actually Prolong the Great Depression? The American Enterprise, Vol. 13, March 2002

[4] P Claven The Great Depression in Europe, 1929-1939 in History Review, History Today Ltd 2000, p. 31

[5] L.W. Reed. Myths of the Great Depression, at http://eldoradogold.net/pdf/October%202005/GreatDepression.pdf,

Mackinac Centre for Public Policy, 2000

[6] http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom

[7] P. Ormerod; New Statesman, Vol. 127, October 9, 1998, p.1

[8] L.W. Reed. Myths of the Great Depression, at http://eldoradogold.net/pdf/October%202005/GreatDepression.pdf,

Mackinac Centre for Public Policy, 2000

[9] Ibid p.6

[10] Ibid p 16

[11] G. Orwell, Road to Wigan Pier, 1937, Left Book Club

[13] P. Claven, The Great Depression in Europe, 1929-1939 in History Review, History Today Ltd 2000, p. 30

[15] P Claven The Great Depression in Europe, 1929-1939 in History Review, History Today Ltd 2000, p. 30

[16] J. McGovern, And a Time for Hope: Americans in the Great Depression , Praeger, 2000


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