Economic Impact of the Great Depression, Research Paper Example

The Great Depression lasted 10 years between 1929 and 1939.  Unemployment was already low when the stock market crashed in October 1929. This catastrophic event triggered a series of events throughout the world culminating what became known as “the dirty thirties”.   At the height of this depression in 1933 virtually 1 in 4 Americans were out of work.  Many people were impoverished sort of both food and clothing, a supreme irony being that large stockpiles of this produce sat idle in warehouses.    Economists at the time made the distinction betweeen that of recession and depression.  They considered this to be a recession because economic activity was falling or declining as opposed to depression where the economy is depressed below some level. The determining factor here being “the level” which was not accurately defined or clear. (Geoffrey H. Moore)

So from the Economists point of view the Great Depression actually comprised two significant periods of recession. The first of these beginning in 1929 and the second in 1937.  In the first period of recession from 1929-1933 the value of goods and services was estimated to fall by some 42% , whereas between 1937-38 they only fell by some 9%.  The commencement of the Second World War in 1939 shown a marked improvement in employment as munitions, ships and armament sales increased in order to assist the western allies in Europe.

During the period of the great depression business failures were place at being at around 127 per 10,000 businesses in North America.  It is interesting to view the number of Bank suspensions during this period. The chart illustrates the number of Banks each year and the sharp  rate in decline. Hence it can be observed that the number of banks reduced by approximately one this during the first recession. This with the number of suspensions hitting a peak of 4,000 in the fifth year.  Much of the banking crisis was not transparent to the general public  During the 1930’s the USA  noticed a sharp increase in the number of displaced people and the emergence of shanty towns or skid row.  As the great depression caused so much human suffering in the USA it had major political ramifications. In 1936 the Democrats regained a massive majority in the house and only once in the next 50 years did the Republicans change this situation.

The Great Depression had a number of international economic ramifications. One key aspect being the elimination of the international gold standard.  There was an overall increase of Government Controls and particularly in Financial Markets.  We have witnessed resent similar examples in the current recession, for example the UK taking public ownership of the majority of the commercial Banks in the United Kingdom.  In 1934 the USA established the Securities and Exchange Commission with the express purpose of regulating stock market trading practices.  The era also played a key part in establishing macroeconomic policies. In 1936 the famous UK economist John Milton Keanes developed what became known as  the General Theory of Employment Interest and Money.  ” Keynes’s theory suggested that increases in government spending, tax cuts, and monetary expansion could be used to counteract depressions. This insight, combined with a growing consensus that government should try to stabilize employment, has led to much more activist policy since the 1930s”  (Romer)

The economic impact of the Great Recession reached out to truly global perspectives. South East Asia was hit on both economic and political scene. The collapse of Western Industry having a profound impact on international trading. In addition to the destruction of markets and capital it ushered in a profound wave of immigration creating inprecedented policy and political changes in South East Asian countries.  The impact on industry both in the USA and United Kingdom was very different.  The UK saw a sharp decline in Shipbuilding in the 1930’s whereas in the US certain industies like petrochemical and tobacco seemed relatively recession proof.  There were no real natural alignments between industries on an international scale ” shipbuilding in the United Kingdom fell by 90 percent during the 1929-1932 period. However, during the same period, output in the United Kingdom actually rose in industries such as paper and printing, leather, and food (Aldcroft 1970). Heim states that in the United States, “Throughout the 1930s, the food, leather, petroleum, and tobacco products sectors were relatively ‘depression-proof.’ ”(Wheeler).

Cause and Effect of the Great Depression

The1920’s was an era of great prosperity in the USA often dubbed ” the roaring twenties”.  Whilst this was happening the class system became wider between the rich and poorer strata’s of American society.  Average output per individual worker rose by 32% whilst wages only rose by 8% , hence the adage the rich got richer and the poor got poorer.  Between 1923-29 investors got extremely well rewarded with profits increasing on average by 62% and dividends to shareholders rising by 65%.  Hence ” The large and growing disparity of wealth between the well-to-do and the middle-income citizens made the U.S. economy unstable. For an economy to function properly, total demand must equal total supply. In an economy with such disparate distribution of income it is not assured that demand will always equal supply.”  (3rd)

The Author Martin Kelly, noted for his works on American History, cited that there were 5 main causes resulting in the Great depression:

1. The Stock Market Crash of 1929
2. Bank Failures
3. Reduction in across the board purchasing
4. American economic policy with Europe
5. Drought Conditions

The Stock Market Crash of 1929

Black Tuesday October 22nd 1929 ultimately saw a stock loss of some $44billion wiped out.  Although it began to rally by the end of 1930, nevertheless it was just not enough and heralded in the decade of depression.  Many felt the situation did not radically improve until the outbreak of the second world war in 1939.  This kick starting manufacturing industry in support of the western alliance war in Europe.

The Bank Failure

During the 1930’s 9000 banks were deemed to have failed.  The Banks became very nervous about the state and future of the economy.  This resulted in people losing their savings and the banks not granting loans.  This just compounded the situation making the banking system go from bad to worse.

Reduction in Across the Board Purchasing

The economic crash created a nervous situation amongst people and they stopped purchasing general consumer goods.  This had the ripple effect of less goods produced and a reduction in the workforce that produced them ” As people lost their jobs, they were unable to keep up with paying for items they had bought through instalment plans and their items were repossessed. More and more inventory began to accumulate. The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation. ”  (Kelly)

American Economic Policy With Europe

As American business went into decline the Government introduced a tariff in order to protect them.  It became known as the Scott Hawly Tarrif whereby a high tax was levied on imported goods resulting in a trade war and economic retaliation by Europe. ” The Depression hit hardest those nations that were most deeply indebted to the United States, i.e., Germany and Great Britain. In Germany, unemployment rose sharply beginning in late 1929, and by early 1932 it had reached 6 million workers, or 25 percent of the work force. Britain was less severely affected, but its industrial and export sectors remained seriously depressed until World War II. Many other countries had been affected by the slump by 1931 ”  (Anon, The Great Depression)

Drought Conditions

The terrible drought condition in the Mississippi Valley during the 1930’s precipitated many farms having to close down . The story featuring in John Steinbeck’s The Grapes of Wrath.

Hence it can be seen that the Great depression was not just about the US economy but had international dimensions that consisted of a diverse number of issues that when all brought together brought about the great depression.

As the immediate neighbour of the USA few countries were so adversely impacted by the Great Depression as much as Canada.  Between 1929-1933 the Gross National Expenditure  declined by 42%  and by 1933 30% of the nation became unemployed and as such 1 in 5 Canadians became dependent on government support for their very survival.  The impact on world trade was devastating and Canada relies on this to support economic growth and stability.  33% of the National income was dependant upon exports.  The four Western Canadian provinces relied heavily upon agriculture and export of grain products.  The provincial income dropped by 90% and forced 60% of the working population into relief or reliance on Government subsidy.  From 1932 onwards essentially  all of the Western provinces were in a state of bankruptcy.  Only in Ontario and Quebec was the impact less severe owing to the nature of their diversification of economy.

Demographics were also a factor and during the 1930’s the population in Canada dropped below that of the 1880’s and immigration had been severely cut back “The number of immigrants accepted into Canada dropped from 169 000 in 1929 to fewer than 12 000 by 1935 and never rose above 17 000 for the remainder of the decade. During that time European Jews fleeing Nazi Germany were denied a sanctuary in Canada” (Anon).

The impact of the recession was truly global and the hardest hit centred on manufacturing, farming and heavy industry.  International trade plunged by 2/3rd, crop prices plunged 60% and on average unemployment was up by 30% over all major population centres. Although generally recovery was attributed as starting in the mid 1930’s in reality it was not until the early start of the Second World War.  An ironic situation that it took one of the darkest periods of the worlds history in terms of death and destruction in order to kick start a world economy from the depths of poverty and depravation. ” The reaction of many countries that had close trading links with Britain was to abandon gold and devalue their currencies, too. However, once devalued, sterling was considered safe. Speculators turned away from London and made an assessment of the next most vulnerable currency. They quickly concluded that it was the U.S. dollar.” (Fearon)

The Impact on the Nation and Europe

France

France was less impacted than most of the other European countries. The main impact started in 1933.  Oddly enough a time when climatic change was impacting agriculture. France was mainly self sufficient but had a heavy reliance upon agricultural projects. The recession did, however, create social upheaval and rioting and was attributed to the creation of the Socialist Popular  Front.

Germany

Was hit hard by the recession. In the first instance loans for the rebuilding of Germany after the First World War were terminated by the USA.  The rate of unemployment in all the major cities soared and gave rise to fascist extremist groups.  In 1933 the Nazi party under Adolf Hitler came into power. ” In the worst affected countries – Poland, Germany and Austria – one in five of the population was unemployed, and industrial output fell by over 40 per cent. Levels of trade between countries also collapsed. By 1932 the value of European trade had fallen to one-third of its value in 1929″.  (Clavin)

Netherlands

The Netherlands suffered a deep and prolonged recession from 1929 through to 1937 with the main impact resulting from the New York (US) Stock Exchange crash.  The Netherlands being heavily vested in Gold and Diamonds. The drop of the Gold Standard had a devastating impact on the Dutch economy.  This resulted in widespread instability and riots leading to the formation of the Dutch Socialist Party.  A common denominator with Germany moving into extreme socialist powers.  Although the impact in Germany was to become more extreme with the outbreak of War in 1939.

United Kingdom

The impact of the crash to Britain was particularly horrific and very immediate.  The demand for British products collapsed and in the following years unemployment more than doubled from 1 million to 2.5 million people.  Exports dropped by 50% and the decline of heavy industry and manufacturing did not recover until 1939.  Unemployment peaked in 1933 with unemployment reaching 70% and production dropping by 90%.  As in other European Cities it led to wide civil unrest with riots, protest marches and resulted in some 200,000 people being sent to work camps which did not close until the outbreak of the second World War in 1939. There is a similar comparison to the current UK recession where protectionism is resulting in British people voicing opinion against migrant European workers taking British jobs ” A chain reaction of protectionism spread throughout the world, global industrial production fell 36% in three years and world trade dropped by 62%. People who know this, such as Britain’s Euro-politician, Peter Mandelson, are panicking. A series of wildcat strikes in the UK against workers from another EU country is feeding populist anger that British jobs should be for British people”  (Galbraith)

Reaction to World War 11

The onset of World War 11 in 1939 many perceived as the catalyst for breaking the world recession.  A closer reality is that it really broke the chain of unemployment as labour was diverted to the war machine making munitions, ships, tanks, and equipment in support of the war efforts.  In Britain at the onset of the war unemployment was 1.5 million and this chain was abruptly broken as the Government invested heavily intro the war efforts.   The entry of America into the war in 1941 brought this to an end as trade intensified between the USA and her western allies.  The war in the Pacific with Japan kick started the US economy with employment in heavy manufacturing, ship building and armaments to support the war effort.  Essentially bringing the recession to an end in 1942.   With the end of  World War 2 in Europe in 1945 and in the Pacific 1 year later a new world order was established with the USA rising to a world economic power.  This along with the USSR in the East gave birth to the two super powers and ultimately the start of the cold war.

In the USA the Roosevelt Administration that assumed office in 1933 worked extremely hard to limit the effects of the recession to the people of the USA.  Despite their efforts it was not until 1936 that the pendulum swung from negative to positive. In 1936 the main economic indicators shown that it had reached the 1929 levels although unemployment was at 11%; still considered an improvement to the height of the impact in 1933 where it was 25%.  By the summer of 1937 the industrial output exceeded that of 1929 but then took a downturn because of government intervention trying to address spending and taxation cuts in order to balance the Federal budget.  This hit the confidence levels plunging output for the next 13 months into 1938 with production falling by almost 30%.  This equally hit unemployment that suddenly jumped during this period from 5 million to 12 million people.  As unemployment rose, equally consumer spending declined and so the vicious circle started all over again.  Hence cutbacks in production and manufacturing, fuelling less consumer spending and more unemployment.

In 1938 President Roosevelt became more receptive to advice from Keynesian economists and their plans for reversing the spiral created by the Federal Treasury.  Nevertheless such advice was not well heeded and the political debates continued during the Second World War years.  The President at the time being more focused on the outcome of the war on Europe and the position of the US Military.  ” It was the Keynesians, of course, who caught the president’s ear in 1938, to the distress of budget balancers in the Treasury Department. But, as Brinkley notes, Roosevelt embraced Keynes’s countercyclical measures only as an expedient, not out of informed commitment. So, too, the ventures in anti-monopoly studies of the Temporary National Economic Council and the anti-trust actions of Thurman Arnold in the Justice Department, Consequently, the battles over policy had to be fought again in the war years.”  (Alan Brinkley, Alan Brinkley is the Allan Nevins Professor of History at Columbia University).

Conclusions

Even though the Great Depression primarily originated from the USA it was a global phenomenon.  The impact was transmitted throughout the world by trade flows, capital flows and commodity prices.  Each country was impacted differently by these chain of events and did not necessarily experience the same type of misfortunes as the USA.  The current recession has many similarities to the Great Depression.  Again the impact is global and we have not been able to uncouple the Asian and European economies from that of North America. Evidence has suggested that Europe and Asia to some extent have experienced a worse time with larger drops in manufacturing, production, exports and equity prices.  In fact the decline in industrial production was worse than the 9 months that followed the 1929 peak.

From the global perspective we are  doing even worse than the Great Depression.  This regardless of the metrics in force.  The “Great Recession” label may turn out to be too optimistic for our current international economic situation. This is considered to be a Depression-sized event. Nevertheless, we are only one year into the current crisis, as opposed to the 1929 crash where the economy continued to dive for the next three years.

The world economy is now facing an  economic shock every bit as big as the Great Depression of 1929-30. Examining the  US leads one to overlook how alarming the current situation is on a truly global scale, even considering the similarities of  1929-30. The good news, is that the economic policy responses  are very different to the historical perspectives.

Works Cited

3rd, Paul Alexander Gusmorino. Main Causes of the Great Depression. 3 5 1996. 17 11 2009 <http://www.gusmorino.com/pag3/greatdepression/index.html>.

Alan BrinkleyAlan Brinkley is the Allan Nevins Professor of History at Columbia University, where he is also provost. He is a progressive historian of the New Deal. Brinkley writes rBrinkley, Alen. The End of Reform: New Deal Liberalism in Recession and War. 2009. 17 11 2009 <http://www.thefreelibrary.com/The+End+of+Reform:+New+Deal+Liberalism+in+Recession+and+War.-a016615991>.

Anon. The Canadian Encyclopedia. 2009. 14 11 2008 <http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=a1ARTA0003425>.

—. The Great Depression. 2009. 25 11 2009 <http://www.english.illinois.edu/maps/depression/about.htm>.

Clavin, Patricia. History Today. 9 2000. 25 11 2009 <http://www.historytoday.com/MainArticle.aspx?m=14072&amid=14072>.

Fearon, Peter. International Impact of the Great Depression. 2004. 25 11 2009 <http://www.novelguide.com/a/discover/egd_01/egd_01_00289.html>.

Galbraith, David. What will cause a Great Depression. 3 2 2009. 25 11 2009 <http://davidgalbraith.org/uncategorized/what-will-cause-a-great-depression/1658/>.

Geoffrey H. Moore. A Case of Unemployment . 1980. 17 11 2009 <http://ingrimayne.com/econ/EconomicCatastrophe/GreatDepression.html>.

Kelly, Martin. Top 5 Causes of the Great Depression. 2009. 17 11 2009 <http://americanhistory.about.com/od/greatdepression/tp/greatdepression.htm>.

Romer, Christina D. Brittanica.com . 17 11 2009. 17 11 2009 <http://www.britannica.com/EBchecked/topic/243118/Great-Depression/234447/Economic-impact>.

Wheeler, Mark. Economics of the Great Depressioon. 1998. 14 11 2009 <http://www.upjohninst.org/publications/ch1/wheelerch1.pdf>.