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The '''Great Depression''' was a worldwide [[Recession|economic downturn]] which started in late 1929 and lasted, in some countries, to the end of the 1930s. The depression was felt most markedly in the United States, its main trading partners and countries such as Germany and Austria, who were heavily indebted to United states banks. The depression in other places usually arrived later on and was shorter and less severe and in many places was over by the mid 1930s.
{{subpages}}
{{Main|New Deal}}
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== Causes of Depression ==
| Supplements to this article include an [[/Timelines|'''annotated chronology of the main events in the countries affected''']]  ; a [[/Tutorials|'''discussion of economic theories concerning causes and remedies''']]; and more detailed [[Great Depression in the United States|'''accounts of developments in the United States''']], '''[[Great Depression in Germany|Germany]]''', '''[[Great Depression in the United Kingdom|the United Kingdom]]''' and '''[[Showa Depression (Japan)|Japan]]'''.
|}
The '''Great Depression''' was the longest and deepest downturn in economic activity in modern history. It has had a profound influence upon economic theory, the practice of economic management, and social policy.


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, so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. Current theories may be broadly classified into two main points of view. First, there is orthodox [[classical economics]], [[Monetarism|monetarist]], [[Keynesians|Keynesian]], [[Austrian Economics ]] and [[neoclassical|neoclassical economic theory]], which focuses on the [[macroeconomic]] effects of money supply, including [[Mass production|production]] and [[Consumption (economics)|consumption]]. Second, there are structural theories, including those of [[institutional economics]], that point to [[underconsumption]] and overinvestment ([[economic bubble]]), or to malfeasance by bankers and industrialists.  
Following the [[Crash of 1929]], the United States experienced a deep decline in  prices and production. Businesses and banks closed, people lost their jobs, homes, and savings; and in the absence of welfare programs, many depended on charity to survive. At its worst, in 1933, U.S. unemployment reached a poverty-inducing 25 per cent of the working population, and in the ensuing recovery, it did not fall below 15 per cent until the beginning of the [[Second World War]].  


There are multiple issues—what set off the first downturn in 1929, what were the structural weaknesses and specific events that turned it into a major depression, and how did the downturn spread from country to country.   
At about the same time, the German and Canadian economies suffered downturns of comparable severity.  The British economy experienced a substantial though comparatively short-lived downturn.  The French economy suffered a modest but prolonged decline.  In Japan, the downturn was also modest but shorter.  Most other industrialized countries and their suppliers experienced downturns in economic activity that caused hardship and political unrest.
In terms of the 1929 small downturn, historians emphasize structural factors and the stock market crash, while economists point to Britain's decision to return to the Gold Standard at pre-World War I parities ($4.86 Pound) ([[Keynes]], Peter Temin, Barry Eichengreen).
Although some believe the [[Wall Street Crash of 1929]] was the immediate cause triggering the Great Depression, there are other, deeper causes that explain the crisis. The vast economic cost of [[World War I]] weakened the ability of the world to respond to a major crisis.   
{{main|Causes of the Great Depression}}
===The New York Stock Market crash===
Economists dispute how much weight to give the [[Wall Street Crash of 1929|stock market crash of October 1929]].  According to [[Milton Friedman]], the leader of the [[Monetarist School]],  "the stock market (crash) in 1929 played a role in the initial depression." It clearly changed sentiment about and expectations of the future, shifting the outlook from very positive to negative, with a dampening effect on investment and entrepreneurship. In the long run, the market did not recover; it began almost continuously to head downwards until 1933, producing the greatest long-term market declines by any measure and erasing billions in assets. Other non-monetarist economists question if the crash was really one of the causes of the Depression, or was merely a leading indicator.


===Debt===
Subsequent investigations have attempted to discover the causes for the length and severity of the depression, its global scope, and the effectiveness of various governmental policies.  The answers to those problems remain incomplete but there is a limited consensus among economists concerning its principal features and concerning the appropriate policy response to a threat of a comparable downturn.
[[Macroeconomist]]s, including the current chairman of the U.S. Federal Reserve Bank [[Ben Bernanke]], have revived the debt-deflation view of the Great Depression originated by [[Arthur Cecil Pigou]] and [[Irving Fisher]].  In the 1920s, in the U.S. the widespread use of the home mortgage and credit purchases of automobiles and furniture boosted spending but created consumer debt.  People who were deeply in debt when a price deflation occurred were in serious trouble—even if they kept their jobs—and risked default.  They drastically cut current spending to keep up time payments, thus lowering demand for new products.  Furthermore the debts grew, because prices and incomes fell 20-50%, but the debts remained at the same dollar amount. With future profits looking poor, capital investment slowed or completely ceased. In the face of bad loans and worsening future prospects, banks became more conservative in lending. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.


===Trade Decline and the U.S. Smoot-Hawley Tariff Act===  
==Supplementary material==
Many economists at the time argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries dependent on foreign trade.  Most historians and economists assign the American [[Smoot-Hawley Tariff Act]] of 1930 part of the blame for worsening the depression by reducing international trade and causing retaliation. Foreign trade was a small part of overall economic activity in the United States; it was a much larger factor in most other countries. [http://www.mtholyoke.edu/acad/intrel/depress.htm] 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.  
The following supplementary material is available:
* an annotated [[/Timelines|chronology]] of the main events in the countries affected;
* a discussion of economic theories concerning [[/Tutorials| causes and remedies]]; and
* more detailed accounts of developments  [[Great Depression in the United States|the United States]], [[Great Depression in Germany|Germany]], [[Great Depression in the United Kingdom|the United Kingdom]], and [[Showa Depression (Japan)|Japan]].


In dollar terms, American exports declined from about US$5.2 billion in 1929 to US$1.7 billion in 1933; but prices also fell, so the physical volume of exports only fell in 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
==Overview==
In the United States, the Great Depression <ref>The editors of the British journal ''The Economist'' have suggested that the term depression is conventionally applied to a decline in real GDP that exceeds 10%, or one that lasts more than three years. [http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=12852043].  But ''The Economist'' also notes that prior to the Great Depression any economic [[recession]] was called a "depression."  Economists since 1929 have used the term "recession" "to avoid stirring up nasty memories." </ref> began in 1929, reached its deepest point in 1933 and lasted until 1939.  It was accompanied during that period by a stock change crash, a series of banking crises, a [[credit crunch]], and a severe [[deflation]].  It resulted in a massive loss of output, persistently high [[Employment|unemployment]] and widespread deprivation. A similar sequence of events occurred at about the same time in Germany, downturns of differing severity also occurred in many industrialized and commodity-producing currencies, and there was a general collapse in international trade. Some years after its outset there was a general return to previous levels of economic activity, but the  economies of the United States and of several other countries did not fully recover until the outbreak of the [[Second World War]].
The resulting hardships had significant political repercussions, including the replacement of existing national governments&mdash;notably in Germany&mdash;and a deterioration of international relations, but besides causing widespread human suffering, the great depression stimulated major investigations into  its causes; gave birth to [[macroeconomics]] as a distinct field of study, and the genesis of the rival theories [[Keynesianism]] and [[Monetarism]]; and led to the systematic collection and publication of [[economic statistics]]. It has exerted a major influence upon political beliefs and ideologies and despite continuing  controversy,  it has  generated  major changes in the  consensus views of economists and politicians. It  has also led to international agreements on economic issues, such as that reached at the [[Bretton Woods Conference]], and to  the creation of instruments of international cooperation such as the [[Bank for International Settlements]], the [[International Monetary Fund]], the [[World Bank]] and the [[World Trade Organisation]].


===U.S. Federal Reserve and money supply===  
==The development of the depression==
[[Monetarist]]s, including [[Milton Friedman]] and [[Ben Bernanke]], stress the negative role of the American [[Federal Reserve System]] in turning a small depression into a large one by cutting the money supply by one-third from 1930 to 1931. 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, especially the New York branch, which was owned and controlled by Wall Street bankers. The Fed was not controlled by President Hoover or the U.S. Treasury; it was primarily controlled by member banks and businessmen and it was to these groups that the Fed listened most attentively regarding policies to follow. This monetarist approach certainly explains why the depression was agravated, but does not shed any light on why it began, in first place.  
A central cause of the Great Depression were the economic consequences of the [[Treaty of Versailles]]. The post-World-War-One recovery required a long and difficult period of adaptation for its European participants. After a turbulent post-war period during which there were deep but short-lived [[recession]]s on both sides of the Atlantic, there was renewed economic growth in the United States and Europe. The UK and France had incurred huge wartime debts to the United States and Germany was faced with crippling reparations payments. Suspension of war debt repayment was dismissed by the U.S. and the UK and France had few other easy alternatives than squeezing Germany for reparations. When Germany attempted to meet the reparations schedule, beginning in 1922, it's economy collapsed within months and was in technical payment default by January 1923. This collapse precipitated the Ruhr Crisis, a general strike in Germany, and hyperinflation. The U.S. attempted to stabilize the European flow of capital through the [[Dawes Plan]] by which the U.S. essentially bailed out the German economy.  With the U.S. and European economies now closely tied together, however, the Dawes Plan (and its modification, the [[Young Plan]]) guaranteed that any downturn in the U.S. economy would be quickly exported to Europe.<ref>[http://www.history.ucsb.edu/faculty/marcuse/classes/33d/projects/1920s/Econ20s.htm Daniel Costillo: ''German Economy in the 1920s'' 2003]. Editor's note: Costillo may have made the argument that Germany was attempting to reflate its economy in 1922 which precipitated the German hyperinflation.  Someone needs to verify the applicability of Costillo as a source for this paragraph.</ref>


In [[Milton Friedman]]'s work, [[A Monetary History of the United States]], he writes that the downward turn in the economy starting with the stock market crash would have been just another recession.  In general, he states the problem was that some very large, very public bank failures, particularly the [[Bank of the United States]], produced widespread runs on banks, and that the Federal Reserve sat idly by while bank after bank fell.  He claims that if the Federal Reserve had acted by providing 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 that fell after the very large and public ones did would not have, the money supply would not have fallen to the extent it did, and would not have fallen at the speed it did.
The return to the [[gold standard]] in the following decade, after its wartime suspension, had involved further disruption.  The United Kingdom rejoined the [[gold standard]] in 1925 at an [[exchange rate]] that overvalued the pound, and France rejoined it in 1928 at an exchange rate that undervalued the franc.  There followed a series of British trade deficits and gold outflows and a series of French trade surpluses and gold inflows.  By 1927, the [[Bank of England]]'s gold reserves were running so low that its governor persuaded the [[Federal Reserve System|Federal Reserve Bank of New York]] to lower its [[discount rate]].  


===Capitalism to blame===
The downturns in activity that led to the Great Depression began at the end of the 1920s following restrictionary policies in the United States and in Germany prompted by the wish to restrain stock exchange speculation and by concern about gold outflows.  Both downturns were comparatively mild at first, but they became exceptionally severe  in both countries following  the stock exchange [[crash of 1929]] and the [[US banking crises of 1931-33]]. There were depressions of somewhat smaller magnitude in the UK, France and Scandinavia, and the major price reductions that occurred in the international commodity markets led to severe downturns in the commodity-producing economies of Australia and South America.
The revolutionary left saw the Great Depression as the beginning of capitalism's final collapse.  The idea mobilized the far left for action, but they failed to take power in any major country in the 1929-32 period.


===New Deal and "big business"===
In the United States, the recovery began in 1933 after the election of a new administration under the Presidency of [[Franklin D. Roosevelt]] and the launching of the [[New Deal]]. In 1993, the President suspended the gold standard,  imposed  a brief banking "holiday", sponsored the insurance of bank deposits, and  provided the banks with substantial  financial assistance. The [[Federal Reserve system]] began to expand the [[monetary base]], and there followed a limited and delayed increase in the [[money supply]] <ref name=stats>See the statistics on the tutorials page of the article on the Great Depression in the United States [http://en.citizendium.org/wiki/Great_Depression_in_the_United_States/Tutorials]</ref>. Confidence in the banking system returned, but the credit shortage was only very gradually relieved, and small firms continued to experience  credit difficulties for several years after 1933. The New Deal also involved a modest fiscal stimulus <ref> The [[fiscal stimulus]] is described as modest, because it only amounted to about 3 per cent of gdp [http://en.citizendium.org/wiki/Great_Depression_in_the_United_States/Tutorials] in face of a 40 per cent downturn in activity.</ref>  and introduced a  programme of public works known as the  [[New Deal]]. There was a slow recovery in output, interrupted by a brief downturn in the [[Recession of 1937]], but it although GDP had returned to its long-term trend by the end of 1938 unemployment continued for some time at an above-trend level .


Roosevelt primarily blamed the excesses of "big business", specially speculators and financiers, for causing an unstable bubble-like economy. At the end of September 1932, as the economic and financial crisis deepened and even more banks failed, with many citizens losing their savings, F.D.R. said:
In Germany, the Nazi government under the Chancellorship of [[Adolf Hitler]] repudiated all international obligations and adopted a varied programme of reflation and rearmament, which was immediately effective in reducing unemployment and restoring economic growth.


::Every man has a right to his own property, which means a right to be assured, to the fullest extent attainable, in the safety of his savings.... If, in accord with this principle, we must restrict the operations of the speculator, the manipulator, even the financier, I believe we must accept the restriction as needful, not to hamper individualism, but to protect it."
Recovery from the recession began in 1931 in the UK, Scandinavia and Japan <ref> Summaries of the recoveries of countries other than the United States are available on the Addendum subpage</ref>  following currency devaluations made possible by departures from the [[gold standard]].  Recovery did not begin in France until its departure from the gold standard in 1936.


::(...)I believe, that the individual should have full liberty of action to make the most of himself; but I do not believe, that in the name of that sacred word, a few powerful interests should be permitted to make industrial cannon fodder of the lives of half of the population of the United States. <small> Franklin Delano Rooselvelt, presidential campaign, Ohio, August 1932</small>
==Explanations==
===The question of causation===
There have been many attempts to establish the cause of the depression  and to explain its unprecedented depth and duration - but no definitive explanation has emerged. Because of the complexity of the interactions among the factors that were involved it now seems that any  search for a single cause is likely to be confusing and inconclusive. For example, although the popular view  that it was initiated by the stock market crash can be shown to be mistaken <ref> Because the economic downturn started before the crash - see the paragraph on the crash on the [[/Tutorials|tutorials subpage]]</ref>, the crash must be presumed to have contributed to its subsequent severity. Similarly, it can reasonably  be presumed that although the 1931 banking panic could not have started the great depression, there is no doubt that it intensified its subsequent severity. In what follows, designation "contributory factor" rather than a "cause" is not intended to suggest that the factor in question  is of lesser importance.


When Franklin D. Roosevelt was finally inaugurated on Saturday, March 4, 1933, the country was ruined. Almost all banking activities had ceased; the financial system was disintegrating; industrial production had collapsed; agriculture barely existed any more; many of the 12.8 million unemployed (this figure was not only in absolute numbers, but also relative—officially it stood at 25%—much higher than in Germany then) were wandering around homeless, hungry, even starving. A mood of utter despair had gripped the country.
===Rival Hypotheses===
Among rival explanations is the belief that the Great Depression was started by the bursting of a speculative [[Asset price bubble|bubble]] on the New York stock exchange and that it spread abroad from the United States, causing the collapse  of a hitherto well-functioning system of international finance. Those beliefs have been challenged by the eminent economists who have studied the evidence. According to Ben Bernanke there is a consensus that the picture of a stock exchange [[bubble (economics)|bubble]] that had been verbally painted by John Kenneth Galbraith and others is mistaken, and that the stock prices did not at that time overstate the value of the issuing companies <ref> For the evidence supporting the contention that stocks were not overvalued, see the article on the [[Crash of 1929]]</ref>. Moreover, neither [[/Tutorials#Keynes and the Keynesians|John Maynard Keynes]]  nor [[/Tutorials#Milton Friedman and the Chicago School|Milton Friedman]] considered the stock exchange crash to have started the downturn, although they both  recognised that it must have contributed to its severity. The belief that the depression originated uniquely in the United States has been challenged by [[/Tutorials#Peter Temin|Peter Temin]], who has identified evidence that it had an independent origin in Germany, and has suggested that it developed jointly from both origins. The belief that the depression put an end to what had been a stable international financial system has been challenged by [[/Tutorials#Charles Kindleberger|Charles Kindleberger]], who argues that, although the [[gold standard]] system had worked well before the first world war, its post-war version had a bias toward deflation that made it inherently unstable. Peter Temin has argued that the belief that the depression had been intensified by economic nationalism should be qualified by the consideration that the "trade war" could not have had much effect upon the United States because international trade had occupied too small a part in its economy; and the belief that trading had been hampered by the competitive devaluation of national currencies has been challenged by [[/Tutorials#Barry Eichengreen|Barry Eichengreen]] on the basis of evidence that it had contributed to world output.


Coming to the heart of the New Deal, F.D.R. announced "strict supervision of all banking and credits and investments” and “an end to speculation with other people’s money." On March 6, 1933 he shut down all of the banks in the nation and forced Congress to pass the Emergency Banking Act which gave the government the opportunity to inspect the health of all banks. The Federal Deposit Insurance Corporation (FDIC) was formed by Congress to insure deposits up to $5000. These measures reestablished American faith in banks. Americans were no longer scared that they would lose all of their savings in a bank failure. Roosevelt expanded this emergency legislation: Commercial banks were strictly separated from investment houses, so by law they could not “speculate with other people’s money.” This effort culminated in the famous Glass-Steagall Act of June 1933, which not only established sound banking practices, but also greatly weakened Wall Street’s grip over U.S. financial policy.  
The belief that policy mistakes had contributed to the disaster is generally accepted by economists, but there is disagreement among them concerning the nature of those mistakes, and concerning the economists' beliefs upon which they had been founded. The belief that had been current at the time that  economic  instability results from government attempts at regulation and that  action to counter recessions makes them worse, is not widely accepted nowadays, except by some economists of the [[Austrian School]], and there are few who now believe that maintenance of  a balanced budget and adherence to the gold standard are essential for the maintenance  of price stability. The principle remaining controversy concerns the roles of fiscal and monetary policy. In their time, [[/Tutorials#Friedrich Hayek|Friedrich Hayek]] had laid the entire blame for the depression upon the Federal Reserve's 1924 monetary expansion, whereas  John Maynard Keynes and Milton Friedman had held its 1928 monetary contraction to have been largely responsible. Milton Friedman blamed the Federal Reserve for continuing to restrict the money supply after the depression had started, whereas John Maynard Keynes had warned President Roosevelt against reliance upon expanding the money supply and voiced concern about what he considered to be the President's reluctance to introduce an adequate  fiscal expansion.


Concretely, Roosevelt attacked the depression problem on two levels: First, emergency measures, such as social relief programs and make-work programs of all kinds, urgently needed to prevent millions of Americans from literally starving, and give them work—any work. Secondly, on a strategic level, were those measures to reconstruct and develop the country’s totally ruined infrastructure. F.D.R. reduced unemployment by over 5 million in his first term—and reconstruct the country by physically changing its economy. <ref name=>[http://www.schillerinstitute.org/fid_97-01/002-3_fdr_new_deal.html CRAMER, Hartmut. ''F.D.R.’s 'New Deal': An Example of American System Economics''.<small>This speech opened the third panel of the conference, “On the Subject of Startegic Method, in Bad Schwalbach, Germany on May 28, 2000. Footnotes have been added.</small>]</ref>
==Consequences==
Among the observable consequences of the Great Depression were personal losses of jobs, savings and homes, and there were reports that in Germany and the United States, in particular, that was accompanied by hunger, ill-health, and even starvation. It must also have had  effects upon social attitudes that were not observable, except indirectly in the form of occasional riots and hunger marches. It would be rash to attribute the political upheavals of the 1930s exclusively to the widespread personal hardships that were being suffered at the time, but an association between those developments was certainly evident. Political organisations that offered relief by means of increased social intervention in the conduct of industry and commerce gained power at the expense of the mainly laissez-faire governments of the 1920s. In Germany, Italy and Japan the gains went to totalitarians, in France to social democrats, and in the United States to Roosevelt's [[New Deal]] Democrats. The chief exception was the UK, where the social democrat Labour Party was displaced by a conventionally conservative coalition.


===Great Infrastructure Projects===
In contrast to the reported tendency toward increased social cohesion of the 1930s <ref>[http://www.enotes.com/1930-lifestyles-social-trends-american-decades/red-decade-solidarity-individualism Matthew Bruccoli and Richard Layman (eds): ''1930's Lifestyles and Social Trends: The Red Decade: Solidarity and Individualism in the 1930s.'',  eNotes.com. 2006] </ref>  
 
within countries, it was a period of strained relations and intensified rivalry between countries.
The best of big "hard" infrastructure projects being carried out under the New Deal examples are the results of the [[PWA|Public Works Administration (PWA)]] <ref name=PWA>[http://www.bartleby.com/65/pu/PublicWo.html PWA - Public Works Administration,The Columbia Encyclopedia, Sixth Edition, 2001-05]]</ref>, a former U.S. government agency established by Congress as the Federal Administration of Public Works, pursuant to the [[National Industrial Recovery Act]], and the almost legendary [[Tennessee Valley Authority]] (TVA) <ref name=TVA>[http://www.tva.gov/abouttva/history.htm TVA - Tennessee Valley Authority: From the New Deal to a New Century]]</ref>, both of which, President Roosevelt ran, more or less directly. The [[PWA]] became, with its ''"[[multiplier-effect]]"'' and first two-year budget of $3.3 billion (then an enormous sum), the driving force of America’s biggest construction effort up to that date. By June 1934 the agency had distributed its entire fund to 13,266 federal projects and 2,407 non-federal projects.  For every worker on a [[PWA]] project, almost two additional workers were employed indirectly. The [[PWA]] accomplished the electrification of rural America, the building of canals, tunnels, bridges, highways, streets, sewage systems, and housing areas, as well as hospitals, schools, and universities; every year it used up roughly half of the concrete and one-third of the steel of the entire nation. <ref name=ROOSELVELT1>[http://www.kansaspress.ku.edu/mcjfdr.html McJIMSEY, George. ''The Presidency of Franklin Delano Rooselvelt'', American Presidency Series. University Press of Kanasas, April 2000. ISBN 978-0-7006-1012-9]</ref> The development of the huge Tennessee River basin in the South by the [[TVA]] was a model for what a modern nation could accomplish.  By stopping the yearly floods of the Tennessee River and making it navigable, an entire area of almost the size of England could be opened up for development. [[Franklin Delano Roosevelt]] was the first President who attacked this problem from a higher level.
 
The projects to develop the "hard" infrastructure of the country were flanked by measures to improve its "soft" counterpart: important social measures, which for the first time in U.S. history, established the concept of a [[minimum wage]], created insurance for the unemployed, sick and old, established decent health care, and abolished child labor. The [[Works Progress Administration]] (later Work Projects Administration, abbreviated [[WPA]]), was created on May 6, 1935 by Presidential order (Congress funded it annually but did not set it up). It was the largest and most comprehensive [[New Deal|New Deal agency]], employing millions of people and affecting every locality. The crowning achievement of these measures was the [[Social Security Act of 1935]].  This law was overturned by the Supreme Court, so that Roosevelt had to pass it in another form the [[Wagner Act of 1935]], the "Bill of Rights" of American labor.
Many of the New Deal <ref name=NEWDEAL'>[http://eh.net/bookreviews/library/0219 ROSENOF, Theodore. ''Economics in the Long Run: New Deal Theorists and Their Legacies, 1933-1993''. Chapel Hill: University of North Carolina Press, 1997. ISBN 0-8078-2315-5.]</ref> regulations were abolished or scaled back in 1975-1985 in a bipartisan [[neoliberal]] wave of [[deregulation]]. However various of them, such as the [[Federal Housing Administration]] (FHA) <ref name=FHA>[http://www.fha.com/fha_loans.cfm Federal Housing Administration]</ref>, the [[Social Security Administration]] (SSA) <ref name=SSA>[http://www.ssa.gov/SSA_Home.html SSA - U. S. Social Security Administration]</ref> , the [[Tennessee Valley Authority]] (TVA) <ref name=TVA>[http://www.tva.gov/abouttva/history.htm TVA - Tennessee Valley Authority: From the New Deal to a New Century]]</ref>, the [[Federal Deposit Insurance Corporation]] (FDIC) <Ref name=FDIC>[http://www.fdic.gov/ FDIC - Federal Deposit Insurance Corporation]</ref>, the [[Securities and Exchange Commission]] (SEC) <ref name=SEC>[http://www.sec.gov/about/whatwedo.shtml SEC - U.S. Securities and Exchange Commission]</ref> and the so called [[Glass-Steagall Act]] sections of the original [[Banking Act]] of June 1933, (sections 16, 20, 21 and 32), which regulates Wall Street, won widespread support and continue to this day.
{{Main|New Deal}}
 
===Deficit Spending needed ===
The British economist [[John Maynard Keynes]] argued that the low [[aggregate demand]] in the economy caused a multiple decline in income, keeping the economy in an equilibrium  well below full employment. In this situation, the economy may reach perfect balance, but at a cost of a high unemployment. [[Keynesianism|Keynesian economists]] were increasingly calling for government to take up the slack by increasing government spending. Although Keynes's specific policy prescriptions at the time were vague (Perelman 1989) <ref name=PERELMAN>PERELMAN,  Michael. ''Keynes, Investment Theory and the Economic Slowdown: The Role of Replacement Investment and q-Ratios''. NY and London: St. Martin's and Macmillan, 1989. ISBN 0333464966</ref>, his basic approach was to let business be free to do as it would choose, while creating a [[macreconomics|macroeconomic]] climate in which investment would be brisk or, using Keyne's own words - which became famous - creating a [[macroeconomics|macroeconomic]] environment capable of awakening the ''"[[animal spirits]]"'' of entrepreneurs. ''[[Animal spitirts]]'' are a particular sort of confidence, ''"naive optimism"''; "the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death".<small>John Maynard Keynes</small>
{{Main|Keynesians}}
{{Main|John Maynard Keynes}}
 
==Effects==
===Canada===
{{main|Great Depression in Canada}}
Canada is sometimes considered to be the country hardest hit by the Great Depression. The economy fell further than that of any nation other than the United States, and it took far longer to recover. However, unlike in the U.S., there were no bank failures in Canada.
 
===Britain ===
{{main|Great Depression in the United Kingdom}}
 
The World Depression broke at a time when Britain was still far from having recovered from the effects of the [[World War I|First World War]] more than a decade earlier.
 
A major cause of the international financial instability, which preceded and accompanied the Great Depression, was the [[debt]] which many European countries had accumulated to pay for their involvement in the war. This debt destabilised many European economies as they tried to rebuild during the 1920s.
 
Great Britain was driven off the [[gold standard]] in 1931.
 
===France ===
{{main|Great Depression in France}}
 
The crisis affected France a bit later than other countries, around 1931. As in Britain, France was recovering from World War I, trying without much success to recover the [[World War I reparations|reparations]] from Germany. This led to the [[occupation of the Ruhr]] at the beginning of the 1920s, which failure in turn led to the implementation of the [[Dawes Plan]] of August 1924 and the [[Young Plan]] of 1929. However, the depression had drastic effects on the local economy, and partly explains the [[February 6, 1934 riots]] and even more the formation of the [[Popular Front (France)|Popular Front]], led by [[Section française de l'Internationale ouvrière|SFIO socialist leader]] [[Léon Blum]], which won the elections in 1936.
 
===Germany ===
The Great Depression hit [[Germany]] hard. The impact of the [[Wall Street Crash]] forced American banks to end the new loans that had been funding the repayments under the [[Dawes Plan]] and the [[Young Plan]]. In 1932, 90% of German reparation payments were cancelled. Widespread unemployment reached 25% in Germany, as every sector was hurt. The [[Weimar]] government, under Kurt von Schleicher <ref name=SCHLEICHER>[http://en.allexperts.com/e/h/hj/hjalmar_schacht.htm Hjalmar Horace Greeley Schacht]</ref>, by the end of 1932, had already  enacted legislation which was in line with [[keynesians|keynesian]] suggestions (and which even came to influence some of Rooselvelt's [[New Deal]] ideas), but failed to implement it for fears that such a high-spending policy could lead to a return of the [[hyperinflation]] that had affected Germany in the years immediately after World War I. This failure to deal with the depression crisis caused both the general public and the German elites to completely lose  confidence in the Weimar government and  played a significant role in the election of [[Adolf Hitler]] and in the ascention of his [[Nazi Party]]. Once in power, Hitler's appointed as his economy minister [[Hjalmar Schacht|Horace Greely Hjalmar Schacht]] <ref name=SCHACHT>[http://pdftohtml.markoer.org/pdf2html.php?url=http://www.people.fas.harvard.edu/~jfrieden/Selected%20Articles/Books/GlobalCapitalism/EconomicPrincipals.pdf  WARSH, David; Editor. ''Hjalmar Horace Greeley Schacht and Other Citizens of the Twentieth Century''.<small> in: www.people.fas.harvard.edu; April 9, 2006</small>]</ref> (1934–37), the same banker who had been responsible for ending Germany's hyperinflation some years earlier. Schacht <ref name=SCHACHT>[http://pdftohtml.markoer.org/pdf2html.php?url=http://www.people.fas.harvard.edu/~jfrieden/Selected%20Articles/Books/GlobalCapitalism/EconomicPrincipals.pdf  WARSH, David; Editor. ''Hjalmar Horace Greeley Schacht and Other Citizens of the Twentieth Century''.<small> in: www.people.fas.harvard.edu; April 9, 2006</small>]</ref> applied vigorously the new ideas Keynes had been defending, almost simulteanously with Roosevelt's [[New Deal]]. Under the command of Schacht, who run deficit spendings of up to 5% of  Nazi Germany's GNP, unemployment was completely ended in Germany by 1937, without any significant increase in inflation. Three years after Schacht took office, [[Keynes]] would publish ''The General Theory of Employment, Interest and Money'' <ref name=GENERAL>[http://cepa.newschool.edu/het/texts/keynes/gtcont.htm KEYNES, John Maynard. ''General Theory of Employment, Interest and Money, The''. London: Macmillan Press; New York: St. Martin's Press; 1936]</ref>, the book which would elaborate the theoretical framework which explained those [[Keynesians|kenesian]] measures that were already being implemented, by politicians of various ideologies around the world, just a couple of years before Keyne's book publication,  . 
 
Hitler followed an [[autarky]] economic policy, creating a network of client states and economic allies in central Europe and Latin America. Schachtian economics kept as much German money as possible in Germany, and otherwise built a system of satellites with differential exchange rates: Hungary, Romania, Bulgaria, Yugoslavia, Greece and Turkey. "Inflation is a lack of discipline," explained Hitler; "I'll see to it that prices remain stable." <ref name=PRINCIPALS>[http://www.economicprincipals.com/issues/06.04.09.html ''Hjalmar Horace Greeley Schacht and Other Citizens of the Twentieth Century''. Economicpricipals.com, April 9, 2006]</ref>. Large scale military spending did not begin until 1936--it was financed by the recovery but did not cause it.
 
===Italy===
The Great Depression hit [[The Italian economy under Fascism, 1922-1943#The Great Depression|Italy]] very hard. As industries came close to failure they were bought out by the banks in a largely illusionary bail-out - the assets used to fund the purchases were largely worthless. This lead to a financial crisis peaking in 1932 and major government intervention. The [[Industrial Reconstruction Institute]] (IRI) was formed in January 1933 and took control of the bank-owned companies, suddenly giving Italy the largest state-owned industrial sector in Europe (excluding the USSR). IRI did rather well with its new responsibilities - restructuring, modernising and rationalising as much as it could. It was a significant factor in post-1945 development. But it took the Italian economy until 1935 to recover the manufacturing levels of 1930 - a position that was only 60% better than that of 1913.
 
===Spain ===
 
[[Spain]] had a relatively isolated economy, with high protective tariffs and was experiencing other economic problems with the need for land reform, overall development, and better education levels. It was not one of the main countries affected by the Depression. However, because the country was destroyed by [[Spanish Civil War|civil war]] and suffered from isolation because of [[Francisco Franco]]'s fascist regime, GDP levels of 1939 were not recovered until 1953.
 
===Australia ===
{{main|Great Depression in Australia}}
 
[[Australia]], with its extreme dependence on [[export]]s, particularly primary products such as [[wool]] and [[wheat]], is thought to have been one of the hardest-hit countries in the [[Western world]] along with [[Canada]] and [[Germany]]. [[Unemployment]] reached a record high of 29% in 1932, one of the highest rates in the world. There were also incidents of [[civil unrest]], particularly in Australia's largest city, [[Sydney]].
 
===East Asia ===
 
Japan, with a growing industrial base, was hurt slightly, with GDP falling 8% 1929-30. The economy recovered by 1932.
 
===Latin America ===
{{main|Great Depression in Latin America}}
 
Before the 1929 crisis, links between the world economy and [[Latin America]]n economies had been established through American and British investment in Latin American exports to the world. As a result, Latin Americans export industries felt the depression quickly. World prices for commodities such as wheat, coffee and copper plunged. Exports from all of Latin America to the US fell in value from $1.2 billion in 1929 to $335 million in 1933, rising to $660 million in 1940.
 
But on the other hand, the depression led the area governments to develop new local industries and expand consumption and production. Following the example of the New Deal, governments in the area approved regulations and created or improved welfare institutions that helped millions of new industrial workers to achieve a better standard of living.
 
===South Africa ===
{{main|Great Depression in South Africa}}
 
The Great Depression had a pronounced economic and political effect on [[South Africa]], as it did to most nations at the time.  As world trade slumped, demand for South African agricultural and mineral exports fell drastically.  Many historians think that the social discomfort caused by the depression was a contributing factor in the defeat of [[Barry Hertzog]] and his [[National Party (South Africa)|National Party]] in the 1933 general election.
 
===United States ===
{{main|Great Depression in the United States}}
 
The Great Depression had a significant impact on the economy and people of the [[United States]] and began to fully affect the country late in 1930 and early in 1931. The official beginning and ending dates for the economic decline according to the National Beureau of Economic Research were from September of 1929 to March of 1933. At the depth of the downturn, the unemployment rate exceeded 20% and the index of industrial production dropped about 50%. Real or inflation/deflation adjusted gross domestic product ("GDP") grew rapidly after 1933 and surpassed the 1929 high by 1936. There was also a decline or recession from June of 1937 through June of 1938, but real GDP remained above the 1929 high. Employment was much slower to recover. The number of non farm jobs did not surpass the 1929 high until 1939 and the number of total jobs did not surpass the 1929 high until 1941. President [[Herbert Hoover]] was widely blamed, and he was defeated in 1932 by [[Franklin D. Roosevelt]]. Roosevelt launched a [[New Deal]] designed to provide emergency relief to upwards of a third of the population, to recover the economy to normal levels, and to reform failed parts of the economic system.  Although F.D.R. reduced unemployment by over 5 million in his first term <ref name=>[http://www.schillerinstitute.org/fid_97-01/002-3_fdr_new_deal.html CRAMER, Hartmut. ''F.D.R.’s 'New Deal': An Example of American System Economics''.<small>This speech opened the third panel of the conference, “On the Subject of Startegic Method, in Bad Schwalbach, Germany on May 28, 2000. Footnotes have been added.</small>]</ref> relatively high unemployment lingered until the early 1940s.
 
== Responses in the United States  ==
=== Initial reaction in the United States ===
 
Treasury Secretary [[Andrew Mellon]] advised President Hoover that a shock treatment would be the best response: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . [That] will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people" (Hoover ''Memoirs'' 3:9). Hoover rejected the advice, and made Mellon an ambassador.
 
Hoover did not believe that the government should directly aid the people, but insisted instead on "voluntary cooperation" between business and government. Hoover believed that the stock market crash was a regular hiccup in the capitalistic cycle, and that it need not affect the greater economy. Hoover asked large business leaders to voluntarily "take a hit" for the greater good of the nation. Business leaders agreed initially, but in practice no business wanted to put their neck out and risk complete failure for the good of the economy. Hoover also promoted a centralized bank - led by business, not the government like the eventual [[FDIC]] - that would hold money in reserve to secure against bank runs. Once again, business agreed that it was a good idea, but they were incapable of coordinating such an organization on their own. Hoover's "voluntary cooperation" failed, but his policies during his tenure proved that the government needed to take an active role in the economy if it was to recover from this depression.
 
=== New Deal in the United States ===
{{Main|New Deal}}
 
From 1932 onward Roosevelt argued that a restructuring of the economy—a "reform" would be needed to prevent another depression. New Deal programs sought to stimulate [[demand]] and provide work and relief for the impoverished through increased government spending, by:
* reforming the financial system, especially the banks and Wall Street. The [[Securities Act of 1933]] comprehensively regulated the securities industry. This was followed by the [[Securities Exchange Act of 1934]] which created the [[Securities and Exchange Commission]]. (Though amended, the key provisions of both Acts are still in force as of 2006). Federal insurance of bank deposits was provided by the [[Federal Deposit Insurance Corporation|FDIC]] (still operating as of 2006), and the [[Glass-Steagal Act]] (which remained in effect for 50 years).
* instituting regulations which ended what was called "cut-throat competition" which kept forcing down prices and profits for everyone. (The NRA—which ended in 1935).
* setting minimum prices and wages and competitive conditions in all industries (NRA)
* encouraging unions that would raise wages, to increase the purchasing power of the working class (NRA)
* cutting farm production so as to raise prices and make it possible to earn a living in farming (done by the [[Agricultural Adjustment Act|AAA]] and successor farm programs)
 
The most controversial of the New Deal agencies was the [[National Recovery Administration]] (NRA) which ordered:
* businesses to work with government to set price codes;
* the NRA board to set labor codes and standards.
 
These reforms (together with relief and recover measures) are called by historians the [[First New Deal]]. It was centered around the use of an [[alphabet soup]] of agencies set up in 1933 and 1934, along with the use of previous agencies such as the [[Reconstruction Finance Corporation]], to regulate and stimulate the economy. By 1935, the "Second New Deal" added [[Social Security]], a national relief agency the [[Works Progress Administration]] (WPA), and, through the [[National Labor Relations Board]] a strong stimulus to the growth of labor unions. Unemployment fell by two-thirds in Roosevelt's first term (from 25% to 9%), but then remained stubbornly high until 1942.
 
In 1929, federal expenditures constituted only 3% of the [[Gross domestic product|GDP]]. Between 1933 and 1939, federal expenditure tripled, funded primarily by a growth in the national debt. The debt as proportion of GNP rose under Hoover from 20% to 40%.  FDR kept it at 40% until the war began, when it soared to 128%. After the [[Recession of 1937]], conservatives were able to form a bipartisan [[Conservative coalition]] that stopped further expansion of the New Deal, and, by 1943, had abolished all of the relief programs.
 
=== Recession of 1937 in the United States  ===
{{Main|Recession of 1937}}
 
In [[1937]], the American economy took an unexpected nosedive that continued through most of 1938. Production declined sharply, as did profits and employment. [[Unemployment]] jumped from 14.3% in 1937 to 19.0% in 1938. The administration reacted by launching a rhetorical campaign against [[monopoly]] power, which was cast as the cause of the new dip. The president appointed an aggressive new direction of the antitrust division of the Justice Department, but this effort lost its effectiveness once World War II, a far more pressing concern, began.
 
But the administration's other response to the 1937 deepening of the Great Depression had more tangible results. Ignoring the pleas of the Treasury Department, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power.  Business-oriented observers explained the recession and recovery in very different terms from the Keynesians. They argued that the New Deal had been very hostile to business expansion in 1935-37, had encouraged massive strikes which had a negative impact on major industries such as automobiles, and had threatened massive anti-trust legal attacks on big corporations. All those threats diminished sharply after 1938. For example, the antitrust efforts fizzled out without major cases. The CIO and AFL unions started battling each other more than corporations, and tax policy became more favorable to long-term growth.
 
On the other hand, according to economist [[Robert Higgs]], when looking only at the supply of consumer goods, significant GDP growth only resumed in 1946 (Higgs does not estimate the value to consumers of collective goods like victory in war) (Higgs 1992). To Keynesians, the [[war economy]] showed just how large the fiscal stimulus required to end the downturn of the Depression was, and it led, at the time, to fears that as soon as America demobilized, it would return to Depression conditions and industrial output would fall to its pre-war levels. That is, [[Keynesians]] predicted that a new depression would start after the war, unless some government measures were enacted to prevent it, such as the [[Marshall Plan]] in destroyed Europe.
 
==Keynesian models==
In the early 1930s, before [[John Maynard Keynes]] wrote ''[[General Theory of Employment Interest and Money|The General Theory]]'', he was advocating public works programs and deficits as a way to get the British economy out of the Depression. Although Keynes never mentions fiscal policy in ''The General Theory'', and instead advocates the need to socialise investments, Keynes ushered in more of a theoretical revolution than a policy one. Keynes's basic idea was simple: in order to keep people fully employed, governments have to run deficits when the economy is slowing because, under unemployment, the private sector won't invest to increase production and reverse the recession.
 
As the Depression wore on, Franklin D. Roosevelt tried public works, farm subsidies and other devices to restart the economy, but he never completely gave up trying to balance the budget. According to the Keynesians he had to spend much more money; they were unable to say how much more.  With [[fiscal policy]], however, government could provide the needed Keynesian spending by decreasing taxes, increasing government spending, increasing individuals' incomes.  As incomes increased, they would spend more. As they spent more, the [[multiplier effect]] would take over and expand the effect on the initial spending.  The Keynesians did not estimate what the size of the multiplier was. [[Keynesians|Keynesian economists]] assumed that poor people would spend new incomes; in reality they saved much of the new money, that is they paid back debts owed to landlords, grocers and family.  Keynesian initial ideas of the consumption function were harshly questioned in the 1950s by the monetarist [[Milton Friedman]] and have since been considerably refined by [[Franco Modigliani]] who, with help from the Hicks-Hansen IS-LM model, <ref name=ISLM>[http://cepa.newschool.edu/het/essays/keynes/hickshansen.htm ''The Hicks-Hansen IS-LM Model'']</ref> created the nucleus of the ''Neoclassical Synthesis of Keynesianism'' which was embraced and further developed  by [[Paul Samuelson]], [[James Tobin]], [[Wassily Leontief]] an his pupil [[Robert Solow]] to became the mainstream economic thought until the early seventies.
 
== Gold Standard ==
[[Britain]] departed from the [[gold standard]] in September 1931, allowing the [[pound sterling]] to float.  As a result, the value of the pound dropped significantly and British exports became cheaper.  In 1933, the United States followed suit and dropped the gold standard.
 
==Rearmament and recovery==
The massive rearmament policies to counter the threat from [[Nazi Germany]] helped stimulate the economies of many countries around the world. By 1937 unemployment in Britain had fallen to 1.5 million.  The mobilization of manpower following the outbreak of war in 1939 finally ended unemployment.
 
In the United States, the massive war spending doubled the GNP, helping end the depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output as an expression of [[patriotism]]. Patriotism drove most people to voluntarily work overtime and give up leisure activities to make money after so many hard years. People accepted rationing and price controls for the first time as a way of expressing their support for the war effort. Cost-plus pricing in munitions contracts guaranteed that businesses would make a profit no matter how many mediocre workers they employed, no matter how inefficient the techniques they used. The demand was for a vast quantity of war supplies as soon as possible, regardless of cost. Businesses hired every person in sight, even driving sound trucks up and down city streets begging people to apply for jobs. New workers were needed to replace the 12 million working-age men serving in the military. These events magnified the role of the federal government in the national economy. In 1929, federal expenditures accounted for only 3% of GNP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state. However, spending on the New Deal was far smaller than on the war effort.
 
== Political consequences ==
The crisis had many political consequences, among which the abandonment of classic [[economic liberalism|economic liberal]] approaches, which [[Franklin Delano Roosevelt|Roosevelt]] replaced in the US with [[keynesian]] policies. It was a main factor in the implementation of [[social-democracy]] and [[planned economy | planned economies]] in European countries after the war. It would not be until the 1970s and the beginning of [[monetarism]] that this keynesian approach was challenged, leading the way to [[neoliberalism]].
 
== See also ==
*[[Aftermath of World War I]]
*[[Business cycle]]
*[[Cities in the great depression]]
*[[Economic collapse]]
*[[Gold as an investment]]
*[[New Deal]]
*[[Keynesians]]
*[[John Maynard Keynes]]
*[[Smoot-Hawley Tariff Act]]
 
==Notes==
<div class="references-small">
<references/>
</div>


==References==
==References==
* Ambrosius, G. and W. Hibbard, ''A Social and Economic History of Twentieth-Century Europe'' (1989)
{{reflist}}
* Bernanke, Ben S. "The Macroeconomics of the Great Depression: A Comparative Approach" ''Journal of Money, Credit & Banking'', Vol. 27, 1995
* Brown, Ian. ''The Economies of Africa and Asia in the inter-war depression'' (1989)
* Davis, Joseph S., ''The World Between the Wars, 1919-39: An Economist's View'' (1974)
* Feinstein. Charles H. ''The European economy between the wars'' (1997)
* Friedman, Milton and Anna Jacobson Schwartz.  ''A Monetary History of the United States, 1867-1960'' (1963), monetarist interpretation (heavily statistical)
* Garraty, John A., ''The Great Depression: An Inquiry into the causes, course, and Consequences of the Worldwide Depression of the Nineteen-Thirties, as Seen by Contemporaries and in Light of History'' (1986)
* Garraty John A. ''Unemployment in History.'' (1978)
* Garside, William R. ''Capitalism in crisis: international responses to the Great Depression'' (1993)
* Haberler, Gottfried. ''The world economy, money, and the great depression 1919-1939'' (1976)
* Hall Thomas E. and J. David Ferguson. ''The Great Depression: An International Disaster of Perverse Economic Policies'' (1998)
* Kaiser, David E. ''Economic diplomacy and the origins of the Second World War: Germany, Britain, France and Eastern Europe, 1930-1939'' (1980)
* Kindleberger, Charles P. ''The World in Depression, 1929-1939'' (1983)
* League of Nations, ''World Economic Survey 1932-33'' (1934)
* Madsen, Jakob B. "Trade Barriers and the Collapse of World Trade during the Great Depression"' ''Southern Economic Journal'', Vol. 67, 200
* [http://www.kansaspress.ku.edu/mcjfdr.html McJIMSEY, George. ''The Presidency of Franklin Delano Rooselvelt'', American Presidency Series. University Press of Kanasas, April 2000. ISBN 978-0-7006-1012-9]
* Mundell, R. A. "A Reconsideration of the Twentieth Century' "The American Economic Review" Vol. 90, No. 3 (Jun., 2000), pp. 327-340 in JSTOR
* Powell, Jim.  ''FDR's Folly: How Roosevelt And His New Deal Prolonged The Great Depression'' (2003), libertarian
* Rothbard, Murray. ''America's Great Depression'' (2000), libertarian
* Rothermund, Dietmar. ''The Global Impact of the Great Depression'' (1996)
* Tipton, F. and R. Aldrich, ''An Economic and Social History of Europe, 1890–1939'' (1987)
* Stein, Samantha.  "Great Depression Women" (2006)
* For '''US specific references''', please see complete listing in the [[Great Depression in the United States]] article.
 
==External links==
*[http://eh.net/encyclopedia/article/parker.depression An Overview of the Great Depression] from EH.NET by Randall Parker.
* [http://www.mackinac.org/archives/1998/sp1998-01.pdf Great Myths of the Great Depression] by [[Lawrence Reed]]
*[http://www.fdrlibrary.marist.edu/gdphotos.html Franklin D. Roosevelt Library & Museum] for copyright-free photos of the period
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Supplements to this article include an annotated chronology of the main events in the countries affected  ; a discussion of economic theories concerning causes and remedies; and more detailed accounts of developments in the United States, Germany, the United Kingdom and Japan.

The Great Depression was the longest and deepest downturn in economic activity in modern history. It has had a profound influence upon economic theory, the practice of economic management, and social policy.

Following the Crash of 1929, the United States experienced a deep decline in prices and production. Businesses and banks closed, people lost their jobs, homes, and savings; and in the absence of welfare programs, many depended on charity to survive. At its worst, in 1933, U.S. unemployment reached a poverty-inducing 25 per cent of the working population, and in the ensuing recovery, it did not fall below 15 per cent until the beginning of the Second World War.

At about the same time, the German and Canadian economies suffered downturns of comparable severity. The British economy experienced a substantial though comparatively short-lived downturn. The French economy suffered a modest but prolonged decline. In Japan, the downturn was also modest but shorter. Most other industrialized countries and their suppliers experienced downturns in economic activity that caused hardship and political unrest.

Subsequent investigations have attempted to discover the causes for the length and severity of the depression, its global scope, and the effectiveness of various governmental policies. The answers to those problems remain incomplete but there is a limited consensus among economists concerning its principal features and concerning the appropriate policy response to a threat of a comparable downturn.

Supplementary material

The following supplementary material is available:

Overview

In the United States, the Great Depression [1] began in 1929, reached its deepest point in 1933 and lasted until 1939. It was accompanied during that period by a stock change crash, a series of banking crises, a credit crunch, and a severe deflation. It resulted in a massive loss of output, persistently high unemployment and widespread deprivation. A similar sequence of events occurred at about the same time in Germany, downturns of differing severity also occurred in many industrialized and commodity-producing currencies, and there was a general collapse in international trade. Some years after its outset there was a general return to previous levels of economic activity, but the economies of the United States and of several other countries did not fully recover until the outbreak of the Second World War.

The resulting hardships had significant political repercussions, including the replacement of existing national governments—notably in Germany—and a deterioration of international relations, but besides causing widespread human suffering, the great depression stimulated major investigations into its causes; gave birth to macroeconomics as a distinct field of study, and the genesis of the rival theories Keynesianism and Monetarism; and led to the systematic collection and publication of economic statistics. It has exerted a major influence upon political beliefs and ideologies and despite continuing controversy, it has generated major changes in the consensus views of economists and politicians. It has also led to international agreements on economic issues, such as that reached at the Bretton Woods Conference, and to the creation of instruments of international cooperation such as the Bank for International Settlements, the International Monetary Fund, the World Bank and the World Trade Organisation.

The development of the depression

A central cause of the Great Depression were the economic consequences of the Treaty of Versailles. The post-World-War-One recovery required a long and difficult period of adaptation for its European participants. After a turbulent post-war period during which there were deep but short-lived recessions on both sides of the Atlantic, there was renewed economic growth in the United States and Europe. The UK and France had incurred huge wartime debts to the United States and Germany was faced with crippling reparations payments. Suspension of war debt repayment was dismissed by the U.S. and the UK and France had few other easy alternatives than squeezing Germany for reparations. When Germany attempted to meet the reparations schedule, beginning in 1922, it's economy collapsed within months and was in technical payment default by January 1923. This collapse precipitated the Ruhr Crisis, a general strike in Germany, and hyperinflation. The U.S. attempted to stabilize the European flow of capital through the Dawes Plan by which the U.S. essentially bailed out the German economy. With the U.S. and European economies now closely tied together, however, the Dawes Plan (and its modification, the Young Plan) guaranteed that any downturn in the U.S. economy would be quickly exported to Europe.[2]

The return to the gold standard in the following decade, after its wartime suspension, had involved further disruption. The United Kingdom rejoined the gold standard in 1925 at an exchange rate that overvalued the pound, and France rejoined it in 1928 at an exchange rate that undervalued the franc. There followed a series of British trade deficits and gold outflows and a series of French trade surpluses and gold inflows. By 1927, the Bank of England's gold reserves were running so low that its governor persuaded the Federal Reserve Bank of New York to lower its discount rate.

The downturns in activity that led to the Great Depression began at the end of the 1920s following restrictionary policies in the United States and in Germany prompted by the wish to restrain stock exchange speculation and by concern about gold outflows. Both downturns were comparatively mild at first, but they became exceptionally severe in both countries following the stock exchange crash of 1929 and the US banking crises of 1931-33. There were depressions of somewhat smaller magnitude in the UK, France and Scandinavia, and the major price reductions that occurred in the international commodity markets led to severe downturns in the commodity-producing economies of Australia and South America.

In the United States, the recovery began in 1933 after the election of a new administration under the Presidency of Franklin D. Roosevelt and the launching of the New Deal. In 1993, the President suspended the gold standard, imposed a brief banking "holiday", sponsored the insurance of bank deposits, and provided the banks with substantial financial assistance. The Federal Reserve system began to expand the monetary base, and there followed a limited and delayed increase in the money supply [3]. Confidence in the banking system returned, but the credit shortage was only very gradually relieved, and small firms continued to experience credit difficulties for several years after 1933. The New Deal also involved a modest fiscal stimulus [4] and introduced a programme of public works known as the New Deal. There was a slow recovery in output, interrupted by a brief downturn in the Recession of 1937, but it although GDP had returned to its long-term trend by the end of 1938 unemployment continued for some time at an above-trend level .

In Germany, the Nazi government under the Chancellorship of Adolf Hitler repudiated all international obligations and adopted a varied programme of reflation and rearmament, which was immediately effective in reducing unemployment and restoring economic growth.

Recovery from the recession began in 1931 in the UK, Scandinavia and Japan [5] following currency devaluations made possible by departures from the gold standard. Recovery did not begin in France until its departure from the gold standard in 1936.

Explanations

The question of causation

There have been many attempts to establish the cause of the depression and to explain its unprecedented depth and duration - but no definitive explanation has emerged. Because of the complexity of the interactions among the factors that were involved it now seems that any search for a single cause is likely to be confusing and inconclusive. For example, although the popular view that it was initiated by the stock market crash can be shown to be mistaken [6], the crash must be presumed to have contributed to its subsequent severity. Similarly, it can reasonably be presumed that although the 1931 banking panic could not have started the great depression, there is no doubt that it intensified its subsequent severity. In what follows, designation "contributory factor" rather than a "cause" is not intended to suggest that the factor in question is of lesser importance.

Rival Hypotheses

Among rival explanations is the belief that the Great Depression was started by the bursting of a speculative bubble on the New York stock exchange and that it spread abroad from the United States, causing the collapse of a hitherto well-functioning system of international finance. Those beliefs have been challenged by the eminent economists who have studied the evidence. According to Ben Bernanke there is a consensus that the picture of a stock exchange bubble that had been verbally painted by John Kenneth Galbraith and others is mistaken, and that the stock prices did not at that time overstate the value of the issuing companies [7]. Moreover, neither John Maynard Keynes nor Milton Friedman considered the stock exchange crash to have started the downturn, although they both recognised that it must have contributed to its severity. The belief that the depression originated uniquely in the United States has been challenged by Peter Temin, who has identified evidence that it had an independent origin in Germany, and has suggested that it developed jointly from both origins. The belief that the depression put an end to what had been a stable international financial system has been challenged by Charles Kindleberger, who argues that, although the gold standard system had worked well before the first world war, its post-war version had a bias toward deflation that made it inherently unstable. Peter Temin has argued that the belief that the depression had been intensified by economic nationalism should be qualified by the consideration that the "trade war" could not have had much effect upon the United States because international trade had occupied too small a part in its economy; and the belief that trading had been hampered by the competitive devaluation of national currencies has been challenged by Barry Eichengreen on the basis of evidence that it had contributed to world output.

The belief that policy mistakes had contributed to the disaster is generally accepted by economists, but there is disagreement among them concerning the nature of those mistakes, and concerning the economists' beliefs upon which they had been founded. The belief that had been current at the time that economic instability results from government attempts at regulation and that action to counter recessions makes them worse, is not widely accepted nowadays, except by some economists of the Austrian School, and there are few who now believe that maintenance of a balanced budget and adherence to the gold standard are essential for the maintenance of price stability. The principle remaining controversy concerns the roles of fiscal and monetary policy. In their time, Friedrich Hayek had laid the entire blame for the depression upon the Federal Reserve's 1924 monetary expansion, whereas John Maynard Keynes and Milton Friedman had held its 1928 monetary contraction to have been largely responsible. Milton Friedman blamed the Federal Reserve for continuing to restrict the money supply after the depression had started, whereas John Maynard Keynes had warned President Roosevelt against reliance upon expanding the money supply and voiced concern about what he considered to be the President's reluctance to introduce an adequate fiscal expansion.

Consequences

Among the observable consequences of the Great Depression were personal losses of jobs, savings and homes, and there were reports that in Germany and the United States, in particular, that was accompanied by hunger, ill-health, and even starvation. It must also have had effects upon social attitudes that were not observable, except indirectly in the form of occasional riots and hunger marches. It would be rash to attribute the political upheavals of the 1930s exclusively to the widespread personal hardships that were being suffered at the time, but an association between those developments was certainly evident. Political organisations that offered relief by means of increased social intervention in the conduct of industry and commerce gained power at the expense of the mainly laissez-faire governments of the 1920s. In Germany, Italy and Japan the gains went to totalitarians, in France to social democrats, and in the United States to Roosevelt's New Deal Democrats. The chief exception was the UK, where the social democrat Labour Party was displaced by a conventionally conservative coalition.

In contrast to the reported tendency toward increased social cohesion of the 1930s [8] within countries, it was a period of strained relations and intensified rivalry between countries.

References

  1. ↑ The editors of the British journal The Economist have suggested that the term depression is conventionally applied to a decline in real GDP that exceeds 10%, or one that lasts more than three years. [1]. But The Economist also notes that prior to the Great Depression any economic recession was called a "depression." Economists since 1929 have used the term "recession" "to avoid stirring up nasty memories."
  2. ↑ Daniel Costillo: German Economy in the 1920s 2003. Editor's note: Costillo may have made the argument that Germany was attempting to reflate its economy in 1922 which precipitated the German hyperinflation. Someone needs to verify the applicability of Costillo as a source for this paragraph.
  3. ↑ See the statistics on the tutorials page of the article on the Great Depression in the United States [2]
  4. ↑ The fiscal stimulus is described as modest, because it only amounted to about 3 per cent of gdp [3] in face of a 40 per cent downturn in activity.
  5. ↑ Summaries of the recoveries of countries other than the United States are available on the Addendum subpage
  6. ↑ Because the economic downturn started before the crash - see the paragraph on the crash on the tutorials subpage
  7. ↑ For the evidence supporting the contention that stocks were not overvalued, see the article on the Crash of 1929
  8. ↑ Matthew Bruccoli and Richard Layman (eds): 1930's Lifestyles and Social Trends: The Red Decade: Solidarity and Individualism in the 1930s., eNotes.com. 2006
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