Great Depression: Difference between revisions

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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. 
'''Links and subpages'''
:''For an annotated chronology of the main events in the countries affected, see the [[/Timelines|Timelines subpage]];''
:''for a summary of the statistics of the Great Depression in the United States, go to [http://en.citizendium.org/wiki/Great_Depression_in_the_United_States/Tutorials]
:'' 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|Addendum subpage]]; and,''
:'' for a discussion of economic theories concerning  causes and remedies, see the  [[/Tutorials |Tutorials subpage]].)''
==Overview==
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."  The term "recession" was a fairly-recent invention designed "to avoid stirring up nasty memories." </ref> , 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|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 <ref name=TeminL> Peter Temin: ''Lessons from the Great Depression'', MIT Press 1989]</ref>. 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 <ref>[http://www.history.ucsb.edu/faculty/marcuse/classes/33d/projects/1920s/Econ20s.htm Daniel Costillo: ''German Economy in the 1920s'' 2003]</ref>. 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 England's 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" <ref name=Keynes3> John Maynard Keynes: "An Economic Analysis of Unemployment", in ''The Collected Writings of John Maynard Keynes'', Macmillan 1973 </ref>.) 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 <ref> Summaries of the recoveries of countries other than the United States are avaiable on the Addendum subpage</ref>  following currency devaluations made possible by departures from the gold standard.
In the United States, the recovery began in 1933 after the election of a new administration under the Presidency of [[Franklin D. Roosevelt]]. The new  government left 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 Bank 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 government also introduced 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 economic activity, interrupted by a brief downturn in 1937, which was not complete until the outbreak of the second world war.
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 <ref>[http://www.nber.org/cycles/ ''US Business Cycle Expansions and Contractions'' NBER 2008]</ref>, and it was no worse in its early months than the preceding recession of 1921 <ref>[http://findarticles.com/p/articles/mi_hb5814/is_n3_v29/ai_n28604039  J R Vernon: ''The 1920-21 Deflation'', Economic Inquiry,  July, 1991]</ref>) - 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 <ref> Because the economic downturn started before the crash - see the paragraph on the crash on the [[/Tutorials|tutorials subpage]]</ref>, 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|tutorials subpage]])
====The Keynesian explanation====
====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<ref>[http://en.citizendium.org/wiki/Great_Depression_in_the_United_States/Tutorials see paragraph 2 of the tutorials subpage of the article on the Great Depression in the United States]</ref>). He considered the stock market crash to have been a secondary factor, but one that had "greatly aqggravated" matters.
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<ref>[http://en.citizendium.org/wiki/Great_Depression_in_the_United_States/Tutorials see paragraph 2 of the tutorials subpage of the article on the Great Depression in the United States]</ref>). 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.
<ref>[http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html ''Smoot-Hawley Tariff'', US State Department]</ref>
==Consequences==
<ref>[http://www.baas.ac.uk/resources/pamphlets/pamphdets.asp?id=7 James. Patterson, The Welfare State in America, 1930-1980 BAAS Pamphlet No. 7 British Association for American Studies 1981]</ref>
==Remedies==
===Rescue===
===Reform===
==References==
<references />

Revision as of 14:07, 5 February 2009

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[1]). He considered the stock market crash to have been a secondary factor, but one that had "greatly aqggravated" matters.

  1. ↑ see paragraph 2 of the tutorials subpage of the article on the Great Depression in the United States
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