The Great Depression

The Great Depression was a period of economic depression that began after a major fall in stock prices in the United States and impacted most countries across the world. Worldwide GDP fell by an estimated 15% between 1929 and 1932, and the negative effects of the Great Depression lasted until the beginning of World War II. International trade fell by more than 50%, unemployment in the U.S. rose to 23% and in some countries rose as high as 33%. Cities around the world were hit hard, especially those dependent on heavy industry, and farming communities and rural areas suffered as crop prices fell by about 60%. The catalyst of the Great Depression was the sudden devastating collapse of U.S. stock market prices, but some dispute this conclusion, seeing the stock crash less as a cause of the Depression and more as a symptom of the rising nervousness of investors. The Smoot–Hawley Tariff Act, passed in the U.S. on June 17, 1930, exacerbated the Great Depression by reducing international trade and causing retaliatory tariffs in other countries. The gold standard was the primary transmission mechanism of the Great Depression, and every major currency left the gold standard during the Great Depression. The financial crisis escalated out of control in mid-1931, starting with the collapse of the Credit Anstalt in Vienna in May. Recovery from the Great Depression began in most countries of the world in 1933, but the U.S. did not return to 1929 GNP for over a decade and still had an unemployment rate of about 15% in 1940. 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 1937 recession that interrupted it).The Great Depression: Role of Women, World War II, and Mainstream Explanations

• Women's primary role during the Great Depression was as housewives, and their work became much harder in dealing with food and clothing and medical care due to the lack of steady family income.

• Birthrates fell everywhere, and in Canada, half of Roman Catholic women defied Church teachings and used contraception to postpone births.

• In rural and small-town areas, women expanded their operation of vegetable gardens to include as much food production as possible.

• The common view among economic historians is that the Great Depression ended with the advent of World War II. When the United States entered the war in 1941, it finally eliminated the last effects from the Great Depression and brought the U.S. unemployment rate down below 10%.

• The two classic competing economic theories of the Great Depression are the Keynesian (demand-driven) and the Monetarist explanation.

• The monetarist explanation argues that the Great Depression was caused by the banking crisis that caused one-third of all banks to vanish, a reduction of bank shareholder wealth, and monetary contraction of 35%.

• Keynes argued that lower aggregate expenditures in the economy contributed to a massive decline in income and to employment that was well below the average.

• Irving Fisher argued that the predominant factor leading to the Great Depression was a vicious circle of deflation and growing over-indebtedness.

• The consensus among demand-driven theories is that a large-scale loss of confidence led to a sudden reduction in consumption and investment spending.

• There is a consensus that the Federal Reserve System should have cut short the process of monetary deflation and banking collapse, by expanding the money supply and acting as a lender of last resort.

• The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings.

• Ben Bernanke developed an alternative way in which the financial crisis affected output, building on both the monetary hypothesis of Milton Friedman and Anna Schwartz and the debt deflation hypothesis of Irving Fisher.

• According to Peter Temin, Barry Wigmore, Gauti B. Eggertsson, and Christina Romer, the key to recovery and to ending the Great Depression was brought about by successful management of public expectations.The Great Depression: Causes, Theories, Socio-Economic Effects

• Roosevelt's fiscal and monetary policy regime change helped make his policy objectives credible, and the expectation of higher future income and higher future inflation stimulated demand and investment.

• The recession of 1937-1938, which slowed down economic recovery from the Great Depression, is explained by fears of the population that the moderate tightening of the monetary and fiscal policy in 1937 were first steps to a restoration of the pre-1933 policy regime.

• At the beginning of the Great Depression, most economists believed in Say's law and the equilibrating powers of the market, and failed to understand the severity of the Depression.

• The liquidationist position held that a depression worked to liquidate failed businesses and investments that had been made obsolete by technological development, and was universally held by Austrian School economists.

• President Herbert Hoover tried to keep the federal budget balanced until 1932, which led to disastrous consequences.

• The Austrian School believes that the key cause of the Depression was the expansion of the money supply in the 1920s which led to an unsustainable credit-driven boom.

• Marxists generally argue that the Great Depression was the result of the inherent instability of the capitalist mode of production.

• Waddill Catchings and William Trufant Foster popularized a theory that influenced many policy makers, including Herbert Hoover, Henry A. Wallace, Paul Douglas, and Marriner Eccles. It held the economy produced more than it consumed, because the consumers did not have enough income.

• The first three decades of the 20th century saw economic output surge with electrification, mass production, and motorized farm machinery, and because of the rapid growth in productivity there was a lot of excess production capacity and the work week was being reduced.

• The majority of countries set up relief programs and most underwent some sort of political upheaval, pushing them to the right.

• Australia's dependence on agricultural and industrial exports meant it was one of the hardest-hit developed countries. Falling export demand and commodity prices placed massive downward pressures on wages.

• The Great Depression hit Germany hard and put heavy pressure on the country, which was already in political turmoil with the rise in violence of national socialist and communist movements.Global Impact of the Great Depression

• Germany was hit hard by the Great Depression, leading to widespread unemployment and the rise of Nazi and Communist parties.

• Greece adopted protectionist policies and expanded its industry during the Great Depression, leading to comparative economic stability.

• Iceland's post-World War I prosperity ended with the outbreak of the Great Depression, causing a drop in export value and an increase in government interference in the economy.

• India's jute industry was negatively impacted by the Great Depression, but local markets in agriculture and small-scale industry showed modest gains.

• Italy was hit hard by the Great Depression, leading to a financial crisis and major government intervention, resulting in the largest state-owned industrial sector in Europe.

• Japan implemented Keynesian economic policies, leading to a transformative effect on the country's industrial production and a quick exit from the depression.

• Latin American economies suffered severely due to high levels of U.S. investment, with Chile, Bolivia, and Peru being particularly affected.

• The Middle East and North Africa experienced economic decline and social unrest due to the Great Depression.

• The Netherlands suffered a deep and exceptionally long depression due to the after-effects of the American stock-market crash and government policy, leading to political instability and riots.

• New Zealand was vulnerable to the worldwide depression due to its reliance on agricultural exports, leading to job loss and riots among the unemployed.

• Poland was affected longer and stronger than other countries due to inadequate economic response from the government and pre-existing economic circumstances.

• Portugal suffered no turbulent political effects of the Depression due to the already authoritarian regime, leading to budget balance and autarky.

• Puerto Rico's per capita income dropped 30%, leading to the creation of the Puerto Rico Emergency Relief Administration and the Puerto Rico Reconstruction Administration.

• Romania was also affected by the Great Depression, leading to business failures and a spread to other countries.

• South Africa's demand for agricultural and mineral exports fell drastically, leading to economic decline.