GREAT DEPRESSION OF 1929

INTRODUCTION: The Great Depression was a severe

worldwide economic depression that took place mostly during the 1930s,
beginning in the United States. The timing of the Great Depression varied across
the world; in most countries, it started in 1929 and lasted until the late 1930s. It
was the longest, deepest, and most widespread depression of the 20th century. The
Great Depression is commonly used as an example of how intensely the global
economy can The two classic competing economic theories of the Great Depression are
the Keynesian (demand-driven) and the monetarist explanation. There are also various heterodox
theories that downplay or reject the explanations of the Keynesians and monetarists. The
consensus among demand-driven theories is that a large-scale loss of confidence led to a sudden
reduction in consumption and investment spending. Once panic and deflation set in, many people
believed they could avoid further losses by keeping clear of the markets. Holding money became
profitable as prices dropped lower and a given amount of money bought ever more goods,
exacerbating the drop in demand. Monetarists believe that the Great Depression started as an
ordinary recession, but the shrinking of the money supply greatly exacerbated the economic
situation, causing a recession to descend into the Great Depression Decline.

CAUSES:
The Great Depression of the late 1920s and ’30s remains the longest and most
severe economic downturn in modern history. Lasting almost 10 years (from late
1929 until about 1939) and affecting nearly every country in the world, it was
marked by steep declines in industrial production and in prices (deflation),
mass unemployment, banking panics, and sharp increases in rates of poverty and
homelessness. In the United States, where the effects of the depression were
generally worst, between 1929 and 1933 industrial production fell nearly 47
percent, gross domestic product (GDP) declined by 30 percent, and unemployment
reached more than 20 percent. By comparison, during the Great Recession of
2007–09, the second largest economic downturn in U.S. history, GDP declined by
4.3 percent, and unemployment reached slightly less than 10 percent.

There is no consensus among economists and historians regarding the exact causes
of the Great Depression. However, many scholars agree that at least the following
four factors played a role.

The stock market crash of 1929. During the 1920s the U.S. stock

market underwent a historic expansion. As stock prices rose to unprecedented
levels, investing in the stock market came to be seen as an easy way to make
money, and even people of ordinary means used much of their disposable income
or even mortgaged their homes to buy stock. By the end of the decade hundreds of
millions of shares were being carried on margin, meaning that their purchase price
was financed with loans to be repaid with profits generated from ever-increasing
share prices. Once prices began their inevitable decline in October 1929, millions
of overextended shareholders fell into a panic and rushed to liquidate their
holdings, exacerbating the decline and engendering further panic. Between
September and November, stock prices fell 33 percent. The result was a profound
psychological shock and a loss of confidence in the economy among both
consumers and businesses. Accordingly, consumer spending, especially on durable
goods, and business investment were drastically curtailed, leading to reduced
industrial output and job losses, which further reduced spending and investment.

Banking panics and monetary contraction. Between 1930 and 1932 the United
States experienced four extended banking panics, during which large numbers of
bank customers, fearful of their bank’s solvency, simultaneously attempted to
withdraw their deposits in cash. Ironically, the frequent effect of a banking panic is
to bring about the very crisis that panicked customers aim to protect themselves
against: even financially healthy banks can be ruined by a large panic. By 1933
one-fifth of the banks in existence in 1930 had failed, leading the new Franklin D.
Roosevelt administration to declare a four-day “bank holiday” (later extended by
three days), during which all of the country’s banks remained closed until they
could prove their solvency to government inspectors. The natural consequence of
widespread bank failures was to decrease consumer spending and business
investment, because there were fewer banks to lend money. There was also less
money to lend, partly because people were hoarding it in the form of cash.
According to some scholars, that problem was exacerbated by the Federal Reserve,
which raised interest rates (further depressing lending) and deliberately reduced
the money supply in the belief that doing so was necessary to maintain the gold
standard (see below), by which the U.S. and many other countries had tied the
value of their currencies to a fixed amount of gold. The reduced money supply in
turn reduced prices, which further discouraged lending and investment (because
people feared that future wages and profits would not be sufficient to cover loan
payments).

The gold standard. Whatever its effects on the money supply in the United States,
the gold standard unquestionably played a role in the spread of the Great Depression
from the United States to other countries. As the United States experienced declining
output and deflation, it tended to run a trade surplus with other countries because
Americans were buying fewer imported goods, while American exports were
relatively cheap. Such imbalances gave rise to significant foreign gold outflows to the
United States, which in turn threatened to devalue the currencies of the countries
whose gold reserves had been depleted. Accordingly, foreign central banks attempted
to counteract the trade imbalance by raising their interest rates, which had the effect of
reducing output and prices and increasing unemployment in their countries. The
resulting international economic decline, especially in Europe, was nearly as bad as
that in the United States. 

Decreased international lending and tariffs. In the late 1920s, while the U.S.
economy was still expanding, lending by U.S. banks to foreign countries fell, partly
because of relatively high U.S. interest rates. The drop-off contributed to
contractionary effects in some borrower countries, particularly Germany, Argentina,
and Brazil, whose economies entered a downturn even before the beginning of the
Great Depression in the United States. Meanwhile, American agricultural interests,
suffering because of overproduction and increased competition from European and
other agricultural producers, lobbied Congress for passage of new tariffs on
agricultural imports. Congress eventually adopted broad legislation, the Smoot-
Hawley Tariff Act (1930), that imposed steep tariffs (averaging 20 percent) on a wide
range of agricultural and industrial products. The legislation naturally provoked
retaliatory measures by several other countries, the cumulative effect of which was
declining output in several countries and a reduction in global trade.

Just as there is no general agreement about the causes of the Great Depression, there is
no consensus about the sources of recovery, though, again, a few factors played an
obvious role. In general, countries that abandoned the gold standard or devalued their
currencies or otherwise increased their money supply recovered first (Britain
abandoned the gold standard in 1931, and the United States effectively devalued its
currency in 1933). Fiscal expansion, in the form of New Deal jobs and social welfare
programs and increased defense spending during the onset of World War II,
presumably also played a role by increasing consumers’ income and aggregate
demand, but the importance of this factor is a matter of debate among scholars.

NEW DEAL : Historians debating the New Deal have generally been
divided between liberals who support it, conservatives who oppose it, and
some New Left historians who complain it was too favourable to capitalism and
did too little for minorities. There is consensus on only a few points, with most
commentators favourable toward the CCC and hostile toward the NRA.
Consensus historians of the 1950s, such as Richard Hofstadter, according to May:
Believed that the prosperity and apparent class harmony of the post-World War II
era reflected a return to the true Americanism rooted in liberal capitalism and the
pursuit of individual opportunity that had made fundamental conflicts over
resources a thing of the past. They argued that the New Deal was a conservative
movement that built a welfare state, guided by experts, that saved rather than
transformed liberal capitalism

WHAT CAUSED DEPRESSION : According to Ben Bernanke, a past

chairman of the Federal Reserve, the central bank helped create the Depression. It used tight
monetary policies when it should have done the opposite. According to Bernanke, these were the
Fed's five critical mista

1. According to Ben Bernanke, a past chairman of the Federal Reserve, the central

bank helped create the Depression. It used tight monetary policies when it should have
done The Fed began raising the fed funds rate in the spring of 1928. It kept increasing it
through a recession that started in August 1929. 
2. When the stock market crashed, investors turned to the currency markets. At that time,
the gold standard supported the value of the dollars held by the U.S. government.
Speculators began trading in their dollars for gold in September 1931. That created a run
on the dollar. 
3. The Fed raised interest rates again to preserve the dollar's value. That further restricted
the availability of money for businesses. More bankruptcies followed.
4. The Fed did not increase the supply of money to combat deflation.
5. Investors withdrew all their deposits from banks. The failure of the banks created more
panic. The Fed ignored the banks' plight. This situation destroyed any of consumers’
remaining confidence in financial institutions. Most people withdrew their cash and put it
under their mattresses. That further decreased the money supply.

WHAT ENDED THE GREAT DEPRESSION:

In 1932, the country elected Franklin D. Roosevelt as president. He promised to

create federal government programs to end the Great Depression.1 2  Within 100
days, he signed the New Deal into law, creating 42 new agencies throughout its
lifetime.1 3  They were designed to create jobs, allow unionization, and provide
unemployment insurance. Many of these programs still exist. They help safeguard
the economy and prevent another depression Many argue that World War II, not
the New Deal, ended the Depression.1 4  Still, others contend that if FDR had spent
as much on the New Deal as he did during the War, it would have ended the
Depression. In the nine years between the launch of the New Deal and the attack
on Pearl Harbor, FDR increased the debt by $3 billion. In 1942, defense spending
added $23 billion to the debt. In 1943, it added another $64 billion.1 5

Reasons a Great Depression Could Not Happen Again

While anything is possible, it's unlikely to happen again. Central banks around the
world, including the Federal Reserve, have learned from the past. There are better
safeguards in place to protect against catastrophe, and developments in monetary
policy help manage the economy. The Great Recession, for instance, had a
significantly smaller impact.1 6

But monetary policy can't offset fiscal policy. Some argue that the sizes of the U.S.
national debt and the current account deficit could trigger an economic crisis.
Experts also predict that climate change could cause profound losses.1 7