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.
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.
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.
24 July 2007