Great Depression

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

In 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 programmes, many depended on charity to survive. At its worst, in 1933, 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; and most of the other industrialised countries and their suppliers experienced substantial downturns in economic activity that caused hardship and political unrest.

Subsequent investigations have attempted to discover why the downturn in economic activity had been so deep and so prolonged, why there it had happened in so many different countries, and what policy actions might have been effective in combatting it. The answers to those questions remain controversial but a limited consensus has emerged concerning the appropriate policy response to a threat of a comparable downturn.

Note on numerical sources

The ability to make reliable quantitative statements about events in the 1930s is limited by the availability and accuracy of the economic statistics of that time. By the late 1930s the League of Nations was publishing a limited range of statistics of unemployment and production collated from national sources, but many countries had not yet to begun publication of national statistics.

Links and subpages

For an annotated chronology of the main events in the countries affected, see the Timelines subpage;

for more about events within the United States, see the article on the Great Depression in the United States;

for more about the events in countries outside the United States, see the Addendum subpage; and,

for a discussion of economic theories concerning causes and remedies, see the Tutorials subpage.)

Overview

The great depression , which is generally considered to have started in the United States in 1929, reached its zenith there in 1933 and lasted until 1939. Severe downturns in economic activity also occurred during that period in most of the other industrialised countries and among their suppliers of raw materials; and there was a major reduction in the volume of international trade.

In the United States, it was accompanied during that period by the stock exchange crash of 1929, the banking crisis of 1931, a credit crunch, and a severe deflation; and it resulted in a massive loss of output, persistently high unemployment and widespread deprivation. There were depressions of comparable severity in the industrialised economies of Canada and Germany, and of lesser magnitude in Britain, France and Scandinavia. There were major price reductions reductions in the international commodity markets, and severe downturns in the commodity-producing economies of Australia and South America. The resulting hardships had significant repercussions upon the conduct of politics, including the replacement of existing national governments - notably in Germany - and a deterioration of international relations, reflected in the development of trade wars.

Besides causing widespread human suffering, the great depression stimulated major investigations of its causes and 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 economists' beliefs and policy recommendations and political ideologies; and despite continuing controversy, it has generated major changes in the consensus views of those matters among economists and politicians, It has also led to international agreements on economic issues, such as 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

(The chronological list of the events referred to in this paragraph that appears on the Timelines subpage, also provides links to the sources of the statements that it contains)

Although it ended eleven years earlier, there are reasons to suppose that the economic disruption created by First World War played a part in the development of the great depression. Professor Peter Temin of the Massachussets Institute of Technology argues that the war had been the shock that had set the process in motion, by producing disruptive changes to the economic systems that were so severe that they required a long and difficult period of adaptation . He argues that the pattern of international capital movements, in particular, had been disrupted by the fact that when the war ended, the American economy was much stronger and European economies were much weaker; and by the fact that Britain and France had to repay the debts to America that they had incurred during the war. In most countries, membership of the international gold standard had been suspended during the war, and in its absence, many of them experienced bouts of inflation. It was generally accepted that a return to the gold standard was necessary in order to re-establish financial stability, but attempts to do so are since considered to have prolonged the disruptive influence of the war.

After a turbulent post-war period during which there were deep but short-lived recessions on both sides of the Atlantic, economic growth had returned to the United States and Europe, although attempts to reflate the German economy had led to its interruption by the German hyperinflation of 1923 . After the restoration of price stability, German economic growth resumed in 1924 with the assistance of Dawes Plan loans from the United States.

Britain 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 Frence trade surpluses an gold inflow. By 1927, the Bank of Englands gold reserves were running low and its Governor persuaded the Governor of the Federal Reserve Bank of New York to help by organising a major addition to the United States money supply.

There followed a sharp increase in America's output growth rate (prompting John Maynard Keynes to remark that "...the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history" .) and an even sharper increase in the the growth of prices on the New York Stock Exchange.

The downturn in activity that was to became the Great Depression began at the end of the 1920s with restrictionary policies in the United States and in Germany (said to have been prompted both by a wish to restrain stock exchange speculation and by concern about gold outflows). At first, the downturns in both countries during 1929 were comparatively mild, but they became exceptionally severe in the years following the New York Stock Exchange crash of 1929. Their severity was subsequently increased by unusually severe banking crises and consequent credit shortages.

Recovery from the recession began in 1931 in Britain, Scandinavia and Japan following currency devaluations made possible by departures from the gold standard, but not until 1933 in America and Germany, nor until 1935 in France. In the United States a new administration under the Presidency of Franklin D. Roosevelt left the gold standard and imposed an immediate banking "holiday" that closed most financial companies and markets. It also created the Reconstruction Finance Corporation and used it to provide very large amount of financial assistance to the banks. The credit shortage was only very gradually relieved and small firms continued to experience credit difficulties for several years after 1933. The Roosevelt administration also introduced a major programme of public works known as the New Deal, and a gradual recovery of economic ensued. 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 did not begin in France until its departure from the gold standard in 1936.

Explanations

The question of causation

There have been a great number of attempts to establish the cause of what has come to be seen as an unprecedented self-inflicted injury, and a great deal of disagreement. However, the unprecedented feature of the great depression was not its initiation (there had been a succession of recessions in the United States throughout the previous eighty years , and it was no worse in its early months than the preceding recession of 1921 ) - but, rather, its unprecedented severity and persistent depth. That consideration and others suggest 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 , it 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, it intensified its subsequent severity. However, the term "cause" is often used loosely, and - as will be seen - neither of the proponents of the principal rival explanations suggests that no other factors contributed to the great depression. Subsequent studies - other than those that sought to elaborate on one or other of the rival hypotheses - have mainly been attempts to assess the importance of various contributory factors. However, the fact that something has been treated as a contributory factor does not exclude the possibility that its contribution to the depth or length of the depression might have been greater than that of something else that has been assigned the role of "cause".

Rival Theories

(The economic thinking behind the explanations considered under this heading is examined in more detail on the tutorials subpage)

The Keynesian explanation

In an article written during the course of the depression, but before the banking crisis, John Maynard Keynes firmly attributed it to lack of investment brought about by high interest rates, tight Federal Reserve monetary policies, and diminishing returns to investment. (The fall in investment rather than consumption is very apparent in the expenditure statistics). He considered the stock market crash to have been a secondary factor, but one that had "greatly aqggravated" matters.

Contributory factors

U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934.