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Baliddawa Marianna

Dr. Lee Salter

American Economics

27 November 2022

The Great Depression

The Great Crash of 1929 devastated the US stock market, but its effects were felt

globally as the Great Depression progressively expanded from the United States to the rest of

the world, creating widespread unemployment, suffering, and starvation. Although not as a

result of the stock market fall, the Great Depression came after it. The collapse of the stock

market significantly decreased American aggregate demand. Following the crisis, both

company investment and consumer purchases of durable goods declined precipitously. The

financial crisis certainly caused a great deal of apprehension regarding future income, which

in turn caused individuals and businesses to postpone buying durable items. Real production

in the United States, had been dropping gradually up until this moment, plummeted sharply in

late 1929 and into 1930 as a result of the massive decline in consumer and business

expenditure. The drop in stock prices was one of the factors contributing to the decline in

output and employment in the United States, even though the Great Crash of the stock market

and the Great Depression are two fundamentally different occurrences.

Prior to the stock market, the US's fundamental economic situation was not

particularly favourable. Domestic purchase of comparatively new consumer goods peaked in

the 1920s. But a large portion of this shopping was done on credit and with monthly

instalments, which was completely unsustainable. Additional economic difficulties included a

slowdown in house development and vehicle manufacturing expansion by 1925. But the

greatest was that “by 1929, commercial bankers were in the unusual position of loaning more
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money for stock market and real estate investments than for commercial ventures” (David

Kennedy). One of the main reasons of the Great Depression of 1929 was the unstable banking

system in America. In 1930, Louisville saw the start of a wave of bank failures that later

expanded throughout the USA. Because there were not enough funds on reserve when the

panic hit and customers raced to withdraw cash from the bank, the institution would go down.

The economic collapse that ultimately occurred was caused by credit freezing up. Deflation

resulted from a credit system that was frozen due to the lack of circulating money. 2294

American banks had collapsed by the end of 1931, which was twice as many as in 1930.

Massive unemployment and the misery it brought, which started in 1930–1931, are what

really made the Great Depression so severe.

The wisest course of action, in President Herbert Hoover's opinion, was to “use the

power of government to cushion the situation”. Numerous industrialists were influenced by

him to continue keeping pay rates the same. Additionally, Herbert Hoover convinced

Congress to approve spending $140 million on new public works projects and convinced the

federal Farm Board to encourage agricultural productivity. Congress approved the Revenue

act of 1932, but it did little to halt the Great Depression. President Herbert Hoover and

Congress established the Reconstruction Finance Corporation in January 1932. It took out

loans to assist banks, building and lending associations, railways, and agricultural enterprises

emergency loans. However, none of these was sufficient to stop the Great Depression. Real

production and prices both dropped sharply. In the United States, industrial production

plummeted by 47% and real GDP by 30% between the downturn's high and its trough. 20%

of the labour force, or well over 10 million individuals, were unemployed by early 1932.

While this Depression began in the United States, it had a significant impact on virtually

every nation on this planet, causing sharp drops in output, high unemployment rates, and

acute deflation. The global economic crisis known as the Great Depression lasted from 1929
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to 1939. It was the global economy's lengthiest and most severe economic slump ever, and it

had a long-lasting damage.

From the most underdeveloped parts of Africa and Asia to the wealthiest parts of

Europe and the Americas, Great Depression had an impact. China experienced the Great

Depression in a different manner than most other countries did. China adhered to the silver

standard rather than the gold standard. China benefited greatly from this as their currency had

a fixed value in silver. When the price of silver declines, the value of the currency likewise

declines. As a result of the cost of silver falling, the Chinese money became less expensive,

which in turn made Chinese goods more affordable. This made it easier for China to sell

goods, which at the time made it fairly better compared to many other places around the

world. It attracted a lot of foreign investment in business and infrastructure. While yearly

GDP growth reached slightly more than 2% between the 1910s to 1930s, the entire supply of

money nearly tripled during that time, showing a greater degree of monetization and financial

depth (Ma and Zhao 2019). China's economy began expanding quickly during the Great

Depression, but this came to a stop when silver prices increased and Japan invaded China in

1931, which caused China to experience its own depression. In 1932, the urban Chinese

economy, which was very successful in the early years of the Kuomintang administration,

entered a period of decline. The effects of Great Depression in commerce and financial

activities could not be avoided by China.

The United States government's 1933 Silver Purchase Initiative drove up the price of

silver globally and depleted China's silver reserves. Chinese bank financing was greatly

shocked by the 1933 U.S. Silver Purchase Program. China's financial system and economy

were damaged by fluctuations in global silver prices. The Silver Purchase crisis causes a

sharp downturn in credit, and corporations that borrowed from banks with greater exposure to

it face more labour unrest and worker infiltration by the Communist Party. Urban China
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experienced a depression in the middle of the 1930s as a result of this decline, which was

accompanied by decreasing wholesale prices, rising interest rates, declining output, and

sharply reducing commodities export totals. The Chinese capitalist' economic foundation was

damaged by the worsening downturn in 1932 and 1935.

A turning point in the development of Chinese labour occurred during the 1930s. The

First Battle of Shanghai in 1932 caused a downturn in production and commerce. The GDP

of China fell to 28.8 billion in 1932. Following a time of instability and deterioration, GDP

decreased to 21.3 billion by 1934. Then, fortune began to resurface, and GDP increased to

23.7 billion in 1935 as Chinese industrial output started to quickly rebound, reaching 1931

levels by 1936.

Approximately 20 to 25 million Chinese people died during the war. It significantly

slowed down the advancement of the previous ten years. Detrimental violence significantly

crippled commerce following the war. Chinese industry only generated 25% of pre-war

production while operating at 20% power. Both employees and employers were dealing with

financial instability as a result of the war and the crisis. The state's stance toward the

economy changed from laissez-faire to determined involvement in reaction to a catastrophic

deflation. The economy began to grow in the middle of the decade. Prices increased as

political unrest subsided and budgetary stability strengthened.

China was severely affected by the Great Depression and is still feeling the effects of

it now. The Great Depression initially had a favourable effect on China but afterwards had a

detrimental impact that resulted in economic turmoil, civil upheaval, and a drop in

international commerce. The cycle of economic rehabilitation and fiscal transition eventually

polarized the whole Chinese economy since it took purposeful government control to create a

new monetary system with a different foreign currency standard. Rigorous restrictions on the
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economy, a departure from the laissez-faire philosophy that had defined its earlier years, and

a move toward a more centrally planned state economy all to improve commercial

relationships between the Chinese and the global market.

The Great Britain had yet to make a full recovery from the impacts of the First World

War when the Great Depression of 1929–1932 occurred. Prior to the Great Depression, the

United Kingdom was a sole superpower. The Great Britain advocated for a global financial

strategy centred on free trade, in which nations may trade freely with one another. This

established a world-wide commercial network connecting practically every nation of the

globe. Large amounts of unpaid debt were a recurring issue across the majority of Europe

following World War 1. Britain, a key war financier, had lost many industrial assets to the

US, which caused its GDP to decline from 32% to 9%.  Between 1918 and 1921, economic

production decreased by 25%, and it did hardly start to increase again until the conclusion of

the Great Depression. The United Kingdom had a twenty-year depression that started in

1918.

Between 1929 and 1934, the Britain's economic production slightly decreased in

comparison to the rest of the globe.  The bulk of the second portion of the 1920s saw limited

growth and recession in Great Britain, primarily as a result of its choice in 1925 to go back to

the gold standard with an inflated pound. However, Britain did not experience a serious

depression until the beginning of 1930, and the apex decrease in factory output which was

only about one-third that in America. It is believed that a quarter of all families survived at or

below the subsistence level, proving that poverty was not just a problem for the jobless. A

poor diet was present in the nutrition of 4.5 million persons in 1936.

Throughout the Great Depression, Britain's export of raw resources to the US

suddenly ceased. Due to the Smooth-Hawley Tariff Act, which saw a rise in import tariff
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rates in United states. Furthermore, the worth of American money had been too inadequate.

Lastly, USA industries were already in financial trouble. Along with the downturn unfolding

across the Atlantic Ocean, the collapse of the Austria Creditanstalt Bank marked the start of

the Great Depression in Britain. In response to foreign nations' failure to repay the bank for

their obligations, accounts were frozen. Restrictions on currency exchange were put in place

to avoid war.

During the 1930–1933 recession, the public sector deficit was on average 1.1% of

GDP. To stabilize United Kingdom’s rehabilitation from the Great Depression, Britain

introduced the floating exchange rate in 1931. By 1935, Britain would have fully recovered

from the crisis. The reason the pound was able to be devalued to increase exports and reduce

unemployment after Britain started a program of huge rearmament was primarily because it

left the gold standard. The British economy became increasingly reliant on its exports and

more susceptible to any global market collapse as a result of the Great Depression's loss of

foreign exchange profits. In particular, conventional exports like textiles, steel, and coal had

lost their outside consumers.

The Great Depression was a widespread phenomenon: every economic system

connected to global financial and commodity markets suffered. Due to the decline in income

and productivity in the 1930s, over half of all American financial institutions vanished as

well as went bankrupt. The supply of money and lending both collapsed as a result, which in

turn had two terrible effects. The Great Depression in the United States started in the summer

of 1929. Late 1929 saw a noticeably worsening of the depression, which persisted until early

1933. The unemployment rate reached a peak of over 20% while the wholesale price index

fell by 33%. When contrasted to America's second-worst recession of the 20th century, which
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occurred in 1981–1982, when real GDP fell by just 2% and the unemployment rate peaked at

around 10%, the severity of these falls becomes more apparent. The primary driver of the

Great Depression in the United States was a drop in consumer expenditure, which in turn

caused a decrease in manufacturing as producers and retailers saw an unforeseen increase in

inventory. Over the course of the Depression, the causes of the reduction in American

spending varied, but they all added up to a massive drop-in economic activity.

The Great Depression's cultural and economic ramifications are astounding,

particularly in the United States, where it is considered the second-worst disaster in American

history (after the Civil War). The American people yearned for stability in their nation more

than anything. By shattering the economy, Hoover's policies transformed a crisis into the

Great Depression. Hoover spent more money on it during his four years in office than his

predecessors did over the course of thirty years. As a result, the populace looked to the

federal government and particularly Franklin D. Roosevelt, who campaigned for the

presidency in 1932 on a platform of a new deal, for a solution. Franklin D. Roosevelt's New

Deal was his strategy for rescuing the country from the 1930s Great Depression. When he

took office as president in March 1933, Franklin D. Roosevelt attempted an elaborate project

to restore the American economy by combining new federal job programs like the Civilian

Conservation Corps (CCC) and the Works Progress Administration (WPA) with new

regulatory requirements of both the financial sector and private businesses. During the 1930s,

the welfare state and labour unions both saw significant growth. Between 1930 and 1940,

union membership in America more than doubled. The Congress of Industrial Organizations,

which sought to unionize large sectors of the workforce in industries like steel production and

the auto industry, was the most significant union during the 1930s. The 1930s' high

unemployment rate and the 1935 enactment of the National Labour Relations (Wagner) Act,

which promoted collective bargaining, both served as catalysts for this tendency. In the
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spring of 1933, the United States started to recover. Midway through the 1930s, output

surged quickly: from 1933 and 1937, real GDP increased at an average rate of 9% annually.

But because of the severity of the early 1930s recession, output remained significantly below

its long-term trend level during this time.

Programs under the New Deal mostly fell into 3 categories. The assistance programs

that helped the impoverished and others in need. The recovery initiatives had the goal of

temporarily fixing the economy and giving people jobs. Lastly, reform measures that were

created to control the economy in the future to stop recurrent depressions. Laws including the

National Industrial Recovery Act, which created the NRA (national recovery administration),

the Glass-Stegall Act, which prohibited commercial banks from purchasing and selling

stocks, and the Agricultural Adjustment Act were approved by Congress. The Social Security

Act of 1935 is the New Deal's most significant accomplishment. The Social Security Act of

1935, which was enacted in reaction to the struggles of the 1930s, provided unemployment

insurance as well as old age and survivors' insurance in the United States.

Did the New Deal end the Great Depression? No. By 1940 over 15% of the United

States workforce continues to remain unemployed. Nevertheless, because the unemployment

rate was 25% in 1933, it was successful in reducing it. In March 1933, the rate of

unemployment reached an all-time high of 28.3%. Roosevelt allowed the dollar to

significantly decline in value by temporarily suspending the convertibility to gold in April

1933. Large amounts of gold were poured into the U.S. Treasury when reintroduced gold at

the new, higher price. As political unrest in Europe increased and investors desired the

security of American assets, these gold inflows miraculously persisted across the middle of

the 1930s. In the middle of the 1930s, development was quite quick. In 1934, real GDP grew

by 11%; in 1935, 9%; and in 1936, 13%. Even at this GDP growth, the economy could not be

fully restored to normality since it was starting off at such a low level. The American
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economy saw another severe setback in 1937–1938, but from mid–1938, it expanded even

more quickly than it had in the mid–1930s. The GDP increased, but according to economists

Lee E. Ohanian and Harold L. Cole, it was 27 percent behind its long-term average in 1939,

indicating that the economy was growing more slowly than it ought to do. In 1942, American

production at last reached its long-term trend level.

One of the main characteristics of the Great Depression was the significant output

contraction and alarming increase in unemployment that almost every industrialized nation

went through. There were decreases in many other regions, including Europe, Asia, among

others, that were comparable to or even greater than those in the United States. The American

collapse extended to the rest of the world in large part due to the gold standard. However,

several other factors also contributed to the recession in other countries. The remainder of the

world saw an uneven recovery. Following the country's removal from the gold standard in

September 1931, the British economy began to stabilize quickly, though a true restoration did

not start until the end of 1932. It is not unexpected that currency devaluations and monetary

stimulus were the main drivers of stabilisation around the globe given the crucial roles that

monetary contraction and the gold standard played in producing the Great Depression. A

noticeable association exists between the moment nations gave off the gold standard and a

subsequent uptick in their productivity. It is crucial to recall and comprehend the history of

the Great Depression since we are presently experiencing another recession.

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Works Cited