The Great Depression (1929-1940)

Depression is commonly defined as a severe and prolonged downturn in economic activity. It is a sustained recession lasting for two or more years. A depression is usually characterized by high unemployment rates, drop in available credit, bankruptcies, diminishing trade and commerce, volatility in currency values, and sovereign debt defaults.

The Great Depression

The Great Depression is regarded as the greatest and longest economic recession of the 20th century and according to some in the whole modern world history. After years of prosperity, U.S. fell into depression, which soon engulfed nearly the whole world. After a short depression of 1920-21, the US economy experienced a robust growth accompanied by an unprecedented asset price growth and increased money supply due to the relatively new Federal Reserve System.

Black Thursday

The Great Depression owes its beginning to the U.S. stock market crash on October 24, 1929, also known as Black Thursday. The depression reached Europe with the collapse of the Boden-KreditAnstalt, which was the most important bank of Austria in 1931.

Potential causes

The Great Depression was caused by a combination of several factors.

Rampant investor speculation on the stock market

Stock market speculations were rampant in the US throughout the 1920s. Many investors purchased massive shares of stocks financed mainly through the loans. They anticipated a rise in stock prices so that they can pay back their loans while left with a net profit. They shared their methods and encouraged others to follow suit. With the influx of more money, the stock market became too saturated. With market saturation, creditors who supplied loans to the investors started demanding repayment of loan money. This led to a widespread loan defaults and as a result the whole financial structure of the United States crumbled.

Over-availability of consumer credit

The 1920s experienced a boom in the durable consumer goods, such as vacuum cleaners, refrigerators, radios, and automobiles in the U.S. But most of the Americans were not able to afford these goods. As a result, the banks and businesses stepped in to offer credit to the people for buying these goods. Over time, many Americans were unable to pay back their loans and defaulted on them. The matter became worse when the Federal Reserve Board curtailed the credit and raised the interest rates on current consumers. As a result of this misguided decision, Americans struggled a lot to pay for the goods and items.

Treaty of Versailles

Treaty of Versailles which ended the World War I between Germany and the Allied powers, impoverished Germany. The harsh conditions imposed on Germany made it owe extremely high debts. To pay off the debt, the country borrowed from the United Kingdom, which in turn paid Germany by borrowing from the United States of America. This arrangement created an environment wherein all the European nations became dependent on the United States of America.

Many countries financed their investments through the loans provided by the US. In the first half of 1928, the overseas loans of US were roughly $1 billion. Eventually, with the collapse of stock markets, America stopped providing loans to foreign nations and thus leading to a global depression.

Agricultural overproduction

Agricultural overproduction accompanied with falling agricultural prices remained a problem. As the prices fell, the agricultural income also fell. This made farmers to produce even more and bring a larger volume of produce to the market in order to maintain their overall income. This move pushed the prices further down.

Ill-conceived Policies

Economists agree that the ill-conceived policies and events that took shape in 1930s in both the U.S. and the Europe were responsible for prolonging the Great Depression.  The policies followed by the Presidents Harding, Coolidge and Hoover had general disregard for the American economy. For instance, President Hoover’s policies damaged the economy’s ability to adjust and reallocate resources.

First World War

Some people also consider that the first world is also a reason for the depression. According to them, the post war period caused deflation due to the excessive manufacturing activities carried out during the First World War. This resulted in the pile up of huge stocks of unused items. In addition, the wartime expenditure impoverished many European countries.

Impacts of Great Depression

The depth and impacts of the Great Depression are shocking. By the twentieth century, the global economy became integrated so much so that the impact of the crisis in one part of the world was able to quickly spread to the other parts of the world, affecting lives, economies and societies.

Impacts on America

The US was the most severely affected industrial country.

• The employment rate in the US declined from 3.2% in 1929 to 24.9% in 1933. Despite huge government spending under both Hoover and Roosevelt administrations, the unemployment rate continued to remain high.
• Real GDP started to decline and was below 1929 levels.
• US banks curtailed their domestic lending and called back loans. Ultimately, the US banking system itself got collapsed as they were not able to recover the investments and loans. They went bankrupt and many banks were closed down. It is estimated that around 4,000 banks closed down by 1933 and 110,000 companies collapsed between 1929 and 1932.
• The consumerist prosperity of 1920s disappeared, and many people were forced to give up their homes, cars and consumer durables.
• Farmers were unable to sell off their produce and the businesses collapsed.
• The negative effects of the depression also affected the society, politics, and international relations.

Impact on rest of the world

Although the timing and impact varied, the Great depression left most parts of the world with catastrophic declines in production, employment, incomes and trade. In general, the agricultural regions and communities were the most affected due to the prolonged fall in agricultural prices.

The withdrawal of US loans adversely impacted many countries of the world. Those countries which depended on US loans faced a huge crisis. In Europe, it led to bank failures and collapse of currencies such as the British pound sterling. In Latin America, widespread slump was experienced in agriculture and raw material prices. Making the matters even worst, the US imposed hefty import duties to protect its economy. This also dealt a severe blow to the world trade.

Impact on British India

International trade

The colonial government had transformed India into an exporter of agricultural goods and importer of manufactures by the 19^th century. The depression had halved the India’s exports and imports between 1928 and 1934.

Farmers

As international prices slumped, prices in India also slumped. The peasants and farmers faced a huge loss and the worst affected were the jute producers of Bengal. But, the colonial government refused to reduce its revenue demands. As a result, peasant Indebtedness across India increased. To pay back their debts, Indians began exporting precious metals like gold and as per the famous economist John Maynard Keynes, Indiangold exports promoted global economic recovery. This is especially true for the speedy recovery of Britain.

Urban dwellers

The depression became a boon for the Indian urban dwellers with fixed incomes. They found themselves better off as everything cost less. It is estimated that the price decline from late 1929 to October 1931 was 36% in India as compared to 27 % in the UK and 26% in the US.

Industrial investments

The government, under pressure was forced to extend tariff protection to industries. This led to increase in industrial investments.

Economic policies of the colonial government

The colonial government intensified its existing imperialistic economic policies. The policies adopted were aimed at protecting the Britain’s economy. For instance, UK adopted a protective policy prohibiting imports from India. These policies caused widespread poverty among the Indian masses. In these situations, the most recommended approach would be to devalue the currency. Te depression affected countries like Australia, New Zealand, Brazil, and Denmark reduced their exchange value of their currency. But, the colonial government in India refused to do so. Also, instead of increasing the government expenditure, the government was more interested in accumulating wealth.

Establishment of the Central bank

The narrow-minded policies followed by the colonial government were hugely criticized from all the parts of the country. With the intensifying national struggle and protests, the government was made to concede some of the demands of the nationalists. This led to the establishment of a central bank. Subsequently, the Reserve Bank of India Act in 1934 and the central bank came into existence on April 1, 1935.

World War II and the depression

The economy of the US rebounded after it entered into the Second World War. Some economists believe that the active engagement of the US in the World War II increased the industrial and labour production. The war increased the demand for setting up of new industries. The US government also founded the Defense Plant Corporation (DPC) in 1940. According to some estimates, with the setting up of DPC, the government spending accounted for the 67% of the US capital investment. In one stroke, the government made available the necessary manufacturing and infrastructure capacity and lead the country out of the depression. The private capital investments once again found a place to be profitably invested. The Aerospace and other important sectors developed during this period continued to boom even after the World War II.

However, some economists do not approve of this view and they believe that the depression could have very well ended even in the absence increased military production.