Great Depression

From Wikinfo

Search for "Great_Depression" on Wikipedia  • Wikimedia Commons • Wiktionary • Wikiquote • Wikibooks • Mediawiki Wikia • Wikitravel • Google Advanced Search • Yahoo Advanced Search • WorldCat Advanced Search • Amazon • Recent NY Times • Older NY Times.

For criticism see Criticism of Great_Depression

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s.^[1] It was the longest, most widespread, and deepest depression of the 20th century, and is used in the 21st century as an example of how far the world's economy can decline.^[2] The depression originated in the United States, starting with the stock market crash of October 29, 1929 (known as Black Tuesday), but quickly spread to almost every country in the world.^[1]

The Great Depression had devastating effects in virtually every country, rich and poor. Personal income, tax revenue, profits and prices dropped, and international trade plunged by a half to two-thirds. Unemployment in the United States rose to 25%, and in some countries rose as high as 33%.^[3] Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60 percent.^[4][5][6] Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as cash cropping, mining and logging suffered the most.^[7]

Countries started to recover by the mid-1930s, but in many countries the negative effects of the Great Depression lasted until the start of World War II.^[8]

Start of the Great Depression

See also: Timeline of the Great Depression

Historians most often attribute the start of the Great Depression to the sudden and total collapse of US stock market prices on October 29, 1929, known as Black Tuesday.^[1] However, some dispute this conclusion, and see the stock crash as a symptom, rather than a cause of the Great Depression.^[3][9] Even after the Wall Street Crash of 1929, optimism persisted for some time; John D. Rockefeller said that "These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again."^[10] The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30% below the peak of September 1929.^[11] Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.

By mid-1930, interest rates had dropped to low levels, but expected deflation and the reluctance of people to add new debt by borrowing, meant that consumer spending and investment were depressed.^[12] In May 1930, automobile sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930; but then a deflationary spiral started in 1931. Conditions were worse in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the US economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot–Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.

Causes

Main article: Causes of the Great Depression

There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists (such as Barry Eichengreen, Milton Friedman and Peter Temin) point to monetary factors such as actions by the US Federal Reserve that contracted the money supply, and Britain's decision to return to the Gold Standard at pre-World War I parities (US$4.86:£1).

Recessions and business cycles are thought to be a normal part of living in a world of inexact balances between supply and demand. What turns a usually mild and short recession or "ordinary" business cycle into an actual depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part of government efforts to regulate interest rates, curtail widespread bank failures, and control the money supply. Those who believe in a large role for the state in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that compounded the problem.

Current theories may be broadly classified into three main points of view. First, there are structural theories, most importantly Keynesian economics, but also including those who point to the breakdown of international trade, and Institutional economists who point to underconsumption and over-investment (causing an economic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The consensus viewpoint is that there was a large-scale loss of confidence that led to a sudden reduction in consumption and investment spending. Once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand.

Second, there are the monetarists, who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the Federal Reserve), caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression. Related to this explanation are those who point to debt deflation causing those who borrow to owe ever more in real terms.

Lastly, there are various heterodox theories that downplay or reject the explanations of the Keynesian and monetarists. For example, some new classical macroeconomists have argued that various labor market policies imposed at the start caused the length and severity of the Great Depression. The Austrian school of economics focuses on the macroeconomic effects of money supply, and how central banking decisions can lead to over-investment (economic bubble). The Marxist critique of political economy emphasizes the tendency of capitalism to create unbalanced accumulations of wealth, leading to overaccumulations of capital and a repeating cycle of devaluations through economic crises. Marx saw recession and depression as unavoidable under free-market capitalism as there are no restrictions on accumulations of capital other than the market itself.

Structural explanations

Keynesian

British economist John Maynard Keynes argued in General Theory of Employment Interest and Money that lower aggregate expenditures in the economy contributed to a massive decline in income and to employment that was well below the average. In such a situation, the economy reached equilibrium at low levels of economic activity and high unemployment. Keynes basic idea was simple: to keep people fully employed, governments have to run deficits when the economy is slowing, as the private sector would not invest enough to keep production at the normal level and bring the economy out of recession. Keynesian economists called on governments during times of economic crisis to pick up the slack by increasing government spending and/or cutting taxes.

As the Depression wore on, Roosevelt tried public works, farm subsidies, and other devices to restart the economy, but never completely gave up trying to balance the budget. According to the Keynesians, this improved the economy, but Roosevelt never spent enough to bring the economy out of recession until the start of World War II.^[13]

Breakdown of international trade

Many economists have argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign trade. Most historians and economists partly blame the American Smoot-Hawley Tariff Act (enacted June 17, 1930) for worsening the depression by seriously reducing international trade and causing retaliatory tariffs in other countries. While foreign trade was a small part of overall economic activity in the United States and was concentrated in a few businesses like farming, it was a much larger factor in many other countries.^[14] The average ad valorem rate of duties on dutiable imports for 1921–1925 was 25.9% but under the new tariff it jumped to 50% in 1931–1935.

In dollar terms, American exports declined from about $5.2 billion in 1929 to $1.7 billion in 1933; but prices also fell, so the physical volume of exports only fell by half. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this theory, the collapse of farm exports caused many American farmers to default on their loans, leading to the bank runs on small rural banks that characterized the early years of the Great Depression.

Debt deflation

Irving Fisher argued that the predominant factor leading to the Great Depression was over-indebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles.^[15] He then outlined 9 factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows:

1. Debt liquidation and distress selling
2. Contraction of the money supply as bank loans are paid off
3. A fall in the level of asset prices
4. A still greater fall in the net worths of business, precipitating bankruptcies
5. A fall in profits
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence
8. Hoarding of money
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.^[15]

During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%.^[16] Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.^[17] Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.^[18]

Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.^[17] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.

The liquidation of debt could not keep up with the fall of prices which it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed.^[15] This self-aggravating process turned a 1930 recession into a 1933 great depression.

Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Fisher.^[19][20]

Monetarist explanations

Monetarists, including Milton Friedman and current Federal Reserve System chairman Ben Bernanke, argue that the Great Depression was mainly caused by monetary contraction, the consequence of poor policymaking by the American Federal Reserve System and continued crisis in the banking system.^[21][22] In this view, the Federal Reserve, by not acting, allowed the money supply as measured by the M2 to shrink by one-third from 1929 to 1933, thereby transforming a normal recession into the Great Depression. Friedman argued that the downward turn in the economy, starting with the stock market crash, would have been just another recession.^[23] However, the Federal Reserve allowed some large public bank failures – particularly that of the New York Bank of the United States – which produced panic and widespread runs on local banks, and the Federal Reserve sat idly by while banks collapsed. He claimed that, if the Fed had provided emergency lending to these key banks, or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, and the money supply would not have fallen as far and as fast as it did.^[24] With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch.^[25]

One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit the Federal Reserve could issue was limited by laws which required partial gold backing of that credit. By the late 1920s the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes. Since a "promise of gold" is not as good as "gold in the hand", during the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. On April 5, 1933 President Roosevelt signed Executive Order 6102 making the private ownership of gold certificates, coins and bullion illegal, reducing the pressure on Federal Reserve gold.^[26]

Continued at Great Depression, part 2

Other "great depressions"

There have been other downturns called a "Great Depression," but none has been as worldwide for so long. British economic historians used the term "Great depression" to describe British conditions in the late 19th century, especially in agriculture, 1873–1896, a period also referred to as the Long Depression.^[27] Several Latin American countries had severe downturns in the 1980s. Finnish economists refer to the Finnish economic decline around the breakup of the Soviet Union (1989–1994) as a great depression. Kehoe and Prescott define a great depression to be a period of diminished economic output with at least one year where output is 20% below the trend. By this definition Argentina, Brazil, Chile, and Mexico experienced great depressions in the 1980s, and Argentina experienced another in 1998–2002. This definition also includes the economic performance of New Zealand from 1974–1992 and Switzerland from 1973 to the present, although this designation for Switzerland has been controversial.^[28][29]

The economic crisis in the 1990s that struck former members of the Soviet Union was almost twice as intense as the Great Depression in the countries of Western Europe and the United States in the 1930s.^[30][31] Average standards of living registered a catastrophic fall in the early 1990s in many parts of the former Eastern Bloc - most notably, in post-Soviet states.^[32] Even before Russia's financial crisis of 1998, Russia's GDP was half of what it had been in the early 1990s.^[31] Some populations are still poorer today than they were in 1989 (e.g. Ukraine, Moldova, Serbia, Central Asia, Caucasus). The collapse of the Soviet planned economy and the transition to market economy resulted in catastrophic declines in GDP of about 45% during the 1990–1996 period^[33] and poverty in the region had increased more than tenfold.^[34]

People have been taking to calling the current economic recession the "Great Recession".^{[35][36][37][38]}

See also

References

Further reading

For US specific references, please see complete listing in the Great Depression in the United States article.

External links

• Theories of the Great Depression, R. L. Norman, Jr.
• America in the 1930s Extensive library of projects on America in the Great Depression from American Studies at the University of Virginia
• The 1930s Timeline year by year timeline of events in science and technology, politics and society, culture and international events with embedded audio and video. AS@UVA
• Recession? Depression? What's the difference? (About.com)
• An Overview of the Great Depression from EH.NET by Randall Parker.
• Great Myths of the Great Depression by Lawrence Reed
• Franklin D. Roosevelt Library & Museum for copyright-free photos of the period
• Economic Depressions: Their Cause and Cure by Murray Rothbard (1969)
• An Age of Lost Innocence: Childhood Realities and Adult Fears in the Depression American Studies at the University of Virginia
• City Life During the Great Depression
• Great Depression in the Deep South
• The Great Depression study guide and teaching guide - dates, people, timelines, analysis
• Soul of a People documentary on Smithsonian Networks
• Great Apprehensions, Prolonged Depression: Gauti Eggertsson on the 1930s

Template:GreatDepr nav Template:New Deal

v • d • e Major topics in the United States
History	Timeline ( Colonial Era • Declaration of Independence and American Revolution • Westward Expansion • Civil War • World War I • Great Depression • World War II • Cold War • Vietnam War • Civil Rights) • Foreign relations • Military • Demographic • Industrial • Postal
Government	Law ( Constitution • Bill of Rights • Separation of powers) • Legislative branch ( House • Senate) • Executive Branch ( Cabinet • Federal agencies) • Judicial Branch (Supreme Court) • Appeals)
Politics	Political parties ( Democrats • Republicans) • Elections (Electoral College) • Political scandals • Red state vs. blue state divide • Uncle Sam
Geography	Political divisions • Territory • States • Cities • Counties • Regions (New England • Mid-Atlantic • The South • Midwest • Great Plains • Northwest • Southwest) • Mountains ( Appalachian • Rocky) • Rivers (Mississippi • Colorado) • Valleys • Islands • Extreme points • National Park System
Economy	U.S. Dollar • Companies • Wall Street • Federal Reserve • Banking • Standard of living (Personal and Household income • Homeownership) • Communications • Transportation (Cars and Highways • Airports • Railroads) • Tourism
Society	Demographics • Languages (American English • Spanish) • Religion • Social structure (American Dream • Affluence • Middle class • Poverty • Educational attainment • Professional and working class conflict) • Media • Education • Holidays • Crime • Prisons
Arts	Music ( Classical • Folk • Popular) • Film and TV (Hollywood) • Literature (American Folklore • Poetry • Transcendentalism • Harlem Renaissance • Beat Generation) • Visual arts ( Abstract expressionism) • Cuisine • Dance • Architecture
Controversies	Immigration • Affirmative action • Racial profiling • Human rights • War on Drugs • Pornography • Same-sex marriage • Capital punishment • Anti-Americanism • American exceptionalism • United States Mexico barrier

Template:US recessions

This page uses content from Wikipedia. The original article was at Great Depression. The list of authors can be seen in the page history. The text of this Wikinfo article is available under the GNU Free Documentation License and the Creative Commons Attribution-Share Alike 3.0 license. English | Română | edit