Introduction to
Economics
Lesson 11 / 07
THE GREAT DEPRESSION
The Great Depression is one of the most significant
events in economic history. What was it, where when, and how did it
occur, and perhaps most importantly, why did it occur are questions for
which we can seek answers.
Answers to the above questions by historians and
economists are many and varied, and in some instances contradictory. To
the basic question of why did it occur, viewpoints are largely divided
between those who say it was the inherent failing of the market, and
those who say it was the fault of government. Those who argue the latter
can, in turn, be divided into those who blame the government for doing
too little or for otherwise doing the wrong thing, and those who blame
it for doing anything at all,
The following outline is presented from the perspective
of a supporter of free market economics albeit taking into account at
least some of the contrary arguments. For a fuller exposure to the
contrary arguments it will, if desired be necessary to consult other
sources
What was it?
A depression is a period of significant decline in
economic activity within a particular economy, resulting in hardship,
discomfiture, deprivation and ruin. The Great Depression was unique in
being the worst economic slump in history, being many times worse on
most criteria than that of the 1890s, which is generally regarded as the
next worst depression in history.
During the Great Depression many banks and other
businesses failed, and unemployment reached previously unheard of
levels. Private investment shrank to a small fraction of previous levels
and private construction virtually halted. Commodity prices collapsed
and international trade was much reduced, Agricultural product prices
fell 40-60%. A fall in property prices coupled with a loss of income
from unemployment led to many foreclosures. Tax and rate revenues were
significantly diminished.
The depression was also the occasion for the countries
of the world to abandon the Gold Standard and to replace it with the
Gold Exchange Standard, whereby the USA continued to allow a limited
redeemability of its dollar into gold, and national currencies generally
were fixed in relation to the US dollar. A spate of competitive
devaluations followed whereby nations sought to generate exports and
discourage imports.
For those who did not experience it, the extent of the
catastrophe, and the depth of human misery experienced as a result of
the Great Depression is difficult to imagine. Literature and films of
the time, such as John Steinbeck’s Pulitzer Prize winning novel Grapes
of Wrath, depicted a graphic but subjective and not necessarily
completely accurate account. Paradoxically, for the roughly two thirds
of the people of the industrialised nations, who were not directly
adversely affected, the Great Depression provided many advantages. Those
with money or reliable employment benefited.
Within the industrialised nations there was significant
political unrest amongst the unemployed and those moved by their plight.
Communism and socialism attracted many. The situation of the Soviet
Union with its absence of unemployment seemed desirable.
Ultra-nationalistic fascist dictatorships emerged, such as in Germany,
Spain and parts of Latin America, the policies of which also appealed to
many.
Where & When?
It is generally accepted that the Great Depression began
in the USA, the world’s leading industrial nation, and thereafter
spread throughout much, if not most, of the world. Particularly hard hit
were the industrialised nations and those countries dependent on
exports.
The date of commencement of the Great Depression is
widely accepted as being 29 October 1929, known as Black Tuesday, when
after a week or so of turmoil, the New York Stock Market finally
crashed, effectively halving the stock exchange index and bringing to an
end the long boom of the 1920s. However the market, in fact, had begun
to decline approximately 3 months earlier.
How?
The popularly accepted version of events is that after a
decade of free-wheeling market economics, administered by a succession
of 3 Presidents largely averse to government intervention or control,
namely Warren Harding [1921-3], Calvin Coolidge [1923-9] and Herbert
Hoover [1929-33], the inherent failings of the market had caused a
collapse, which the laissez faire policies of Hoover were then unable to
rectify. Thereafter a new President, Franklin Roosevelt [1933-45], by
introducing a series of interventionist and controlling government
measures, known as the New Deal, had resolved the inherent problems, and
the Great Depression was largely over by the end of 1933. Any residual
problems were finally laid to rest by the advent of WW2.
In accordance with the popular version, the person
largely to blame for the Great Depression was Herbert Hoover. However as
modern revisionist historians and economists have demonstrated, this
version is basically a myth. Roosevelt’s initial policies were largely
a continuation and expansion of those put in place by Hoover. The
depression did not end in 1933. Conditions continued and were almost as
bad in 1938 as they had been in 1933. Previous depressions had been over
relatively quickly. Apart from its severity, it was its length that made
the Great Depression great
Arguably the Great Depression did not end in the USA
until 1947 when private investment finally returned to pre-crash levels.
By that stage the full force of Roosevelt’s New Deal had largely
passed into history, and the administration of his successor, Harry
Truman [1945-1953], was seen as much more acceptable to private
enterprise. Putting 12 million men into uniform for the duration of the
war had eliminated American unemployment, but was hardly a viable or
acceptable resolution to the problem. It was the post war return to
prosperity that did that. In so far as the Great Depression continued so
badly for so long, the blame can largely be attributed to Franklin
Roosevelt.
Why ?
Whilst thert is general agreement that a number of
factors contributed to causing the Great Depression there has been
considerable disagreement as to what was the decisive or principal
factor. The following are some of the suggestions;
A massive increase in individual debt caused by
purchases on credit, including property, businesses, automobiles,
furnishings and consumer durables coupled with margin trading on the
stock market. This turned a relatively minor stock market collapse into
a massive loss of confidence resulting in people refusing to spend,
which than caused a deflation so that the debt burden became
increasingly unsustainable.
The British decision to return to the Gold Standard at
the pre-WW1 parity of one Pound to US $ 4.86, which meant that the
British currency was effectively overvalued, the British economy
uncompetitive, and the opportunity to repudiate the British war debt
burden was rejected.
The international debt burden of WW1, of which the USA
had been the major beneficiary, and which debt the USA endeavoured to
collect, whilst at the same time refusing, through protectionism, to
allow the entry of foreign imports to pay off the same.
The Monetarist view, particularly that of Milton
Friedman, that the US Federal Reserve had mismanaged the money supply.
The stock market crash caused panic and generated a run on many local
banks, causing a number to fail. This in turn caused a contraction in
the money supply, estimated at one third. The failure of the Federal
Reserve to thereupon reflate meant there was not enough money to sustain
the economy.
The excesses of the market created by big business,
which had too much power and which had enabled big businessmen to create
a bubble economy and garner an excess share of the profits. This was
particularly the view of Roosevelt. The New Deal was intended to counter
the power of big business.
The rise of Government corporatism and intervention,
based particularly on the ideas and policies of Benito Mussolini and the
Italian Fascists, which saw it as the proper role of the state to
control the economy for the benefit of all. In the 1920s this meant
ensuring the continuation of the boom, the maintaining of high wages,
high prices and low interest rates. This view found particular favour in
the USA with Herbert Hoover.
David Sharp
24 July 2007
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