"Night wind hawkers" sold stock on the streets during the South Sea Bubble. (The Great Picture of Folly, 1720)
A satirical "Bubble card"
Extraordinary Popular Delusions and the Madness of Crowds is an early study of crowd psychology by Scottish journalist Charles Mackay, first published in 1841 under the title Memoirs of Extraordinary Popular Delusions. The book was published in three volumes: "National Delusions", "Peculiar Follies", and "Philosophical Delusions". Mackay was an accomplished teller of stories, though he wrote in a journalistic and somewhat sensational style.
In later editions, Mackay added a footnote referencing the Railway Mania of the 1840s as another "popular delusion" which was at least as important as the South Sea Bubble. Mathematician Andrew Odlyzko has pointed out, in a published lecture, that Mackay himself played a role in this economic bubble; as a leader writer in The Glasgow Argus, Mackay wrote on 2 October 1845: "There is no reason whatever to fear a crash".
Volume I: National Delusions
Economic bubbles
The first volume begins with a discussion of three economic bubbles, or financial manias: the South Sea Company bubble of 1711–1720, the Mississippi Company bubble of 1719–1720, and the Dutch tulip mania of the early seventeenth century. According to Mackay, during this bubble, speculators from all walks of life bought and sold tulip bulbs and had even declared futures contracts on them. Allegedly, some tulip bulb varieties briefly became the most expensive objects in the world during 1637.
Mackay's accounts are enlivened by colorful, comedic anecdotes, such as
the Parisian hunchback who supposedly profited by renting out his hump
as a writing desk during the height of the mania surrounding the Mississippi Company.
Two modern researchers, Peter Garber and Anne Goldgar,
independently conclude that Mackay greatly exaggerated the scale and
effects of the Tulip bubble,
and Mike Dash, in his modern popular history of the alleged bubble,
notes that he believes the importance and extent of the tulip mania were
overstated.
Mackay describes the history of the Crusades as a kind of mania of the Middle Ages, precipitated by the pilgrimages of Europeans to the Holy Land.
Mackay is generally unsympathetic to the Crusaders, whom he compares
unfavourably to the superior civilisation of Asia: "Europe expended
millions of her treasures, and the blood of two millions of her
children; and a handful of quarrelsome knights retained possession of Palestine for about one hundred years!"
Witch mania
Witch trials in 16th- and 17th-century Western Europe are the primary
focus of the "Witch Mania" section of the book, which asserts that this
was a time when ill fortune was likely to be attributed to supernatural
causes. Mackay notes that many of these cases were initiated as a way
of settling scores among neighbors or associates, and that extremely low
standards of evidence were applied to most of these trials. Mackay
claims that "thousands upon thousands" of people were executed as
witches over two and a half centuries, with the largest numbers killed
in Germany and Spain.
An alchemist, from the 1841/1852 editions of Extraordinary Popular Delusions.
Alchemists
The section on alchemysts focuses primarily on efforts to turn
base metals into gold. Mackay notes that many of these practitioners
were themselves deluded, convinced that these feats could be performed
if they discovered the correct old recipe or stumbled upon the right
combination of ingredients. Although alchemists gained money from their
sponsors, mainly noblemen, he notes that the belief in alchemy by
sponsors could be hazardous to its practitioners, as it wasn't rare for
an unscrupulous noble to imprison a supposed alchemist until he could
produce gold.
The
book remains in print, and writers continue to discuss its influence,
particularly the section on financial bubbles. (See Goldsmith and Lewis,
below.)
Financier Bernard Baruch credited the lessons he learned from Extraordinary Popular Delusions and the Madness of Crowds with his decision to sell all of his stock ahead of the Wall Street Crash of 1929.
Neil Gaiman borrows from the title in an issue of his popular comic series, The Sandman, in a story featuring a writer whose novel is titled "... And the Madness of Crowds".
Author and executive coach Marshall Goldsmith discussed the book in depth in BusinessWeek, drawing extensive parallels between the financial bubbles Mackay wrote about and financial bubbles today. Other writers also frequently point to the book to explain recent financial bubbles.
Author and journalist Will Self writes a column for New Statesman, "Madness of Crowds", which Self says takes its title from Mackay's book.
James Surowiecki, in The Wisdom of Crowds
(2004), takes a different view of crowd behavior, saying that under
certain circumstances, crowds or groups may have better information and
make better decisions than even the best-informed individual.
Quotations
"Men,
it has been well said, think in herds; it will be seen that they go mad
in herds, while they only recover their senses slowly, and one by one."
"Of all the offspring of Time, Error is the most ancient, and is so
old and familiar an acquaintance, that Truth, when discovered, comes
upon most of us like an intruder, and meets the intruder's welcome."
"How flattering to the pride of man to think that the stars on their
courses watch over him, and typify, by their movements and aspects, the
joys or the sorrows that await him! He, less in proportion to the
universe than the all-but invisible insects that feed in myriads on a
summer's leaf are to this great globe itself, fondly imagines that
eternal worlds were chiefly created to prognosticate his fate."
"We go out of our course to make ourselves uncomfortable; the cup of
life is not bitter enough to our palate, and we distill superfluous
poison to put into it, or conjure up hideous things to frighten
ourselves at, which would never exist if we did not make them."
"We find that whole communities suddenly fix their minds upon one
object, and go mad in its pursuit; that millions of people become
simultaneously impressed with one delusion, and run after it, till their
attention is caught by some new folly more captivating than the first."
"The obnoxious hat was often snatched from his head and thrown into
the gutter by some practical joker, and then raised, covered with mud,
upon the end of a stick, for the admiration of the spectators, who held
their sides with laughter, and exclaimed, in the pauses of their mirth,
'Oh, what a shocking bad hat!' 'What a shocking bad hat!'"
US annual real GDP from 1910 to 1960, with the years of the Great Depression (1929–1939) highlighted
The unemployment rate in the US during 1910–60, with the years of the Great Depression (1929–39) highlighted
The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States.
The timing of the Great Depression varied across the world; in most
countries, it started in 1929 and lasted until the late 1930s. It was the longest, deepest, and most widespread depression of the 20th century. The Great Depression is commonly used as an example of how intensely the global economy can decline.
The Great Depression started in the United States after a major
fall in stock prices that began around September 4, 1929, and became
worldwide news with the stock market crash of October 29, 1929, (known as Black Tuesday). Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession.
Some economies started to recover by the mid-1930s. However, in many
countries, the negative effects of the Great Depression lasted until the
beginning of World War II.
The Great Depression had devastating effects in both rich and poor countries. Personal income,
tax revenue, profits and prices dropped, while international trade fell
by more than 50%. Unemployment in the U.S. rose to 23% and in some
countries rose as high as 33%.Cities around the world were hit hard, especially those dependent on heavy industry.
Construction was virtually halted in many countries. Farming
communities and rural areas suffered as crop prices fell by about 60%. Facing plummeting demand with few alternative sources of jobs, areas dependent on primary sector industries such as mining and logging suffered the most.
Economic historians usually consider the catalyst of the Great Depression to be the sudden devastating collapse of U.S. stock market prices,
starting on October 24, 1929. However, some dispute this conclusion and
see the stock crash as a symptom, rather than a cause, of the Great
Depression.
Even after the Wall Street Crash of 1929, where the Dow Jones Industrial Average
dropped from 381 to 198 over the course of two months, optimism
persisted for some time. The stock market turned upward in the early
1930, with the Dow returning to 294 (pre-depression levels) in April
1930, before steadily declining for years, to a low of 41 in 1932.
At the beginning, governments and businesses spent more in the
first half of 1930 than in the corresponding period of the previous
year. On the other hand, consumers, many of whom suffered severe losses
in the stock market the previous year, cut their expenditures by 10%. In
addition, beginning in the mid-1930s, a severe drought ravaged the agricultural heartland of the U.S.
Interest rates dropped to low levels by the mid-1930, but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment remained low.
By May 1930, automobile sales declined to below the levels of 1928.
Prices, in general, began to decline, although wages held steady in
1930. Then a deflationary spiral
started in 1931. Farmers faced a worse outlook; declining crop prices
and a Great Plains drought crippled their economic outlook. At its peak,
the Great Depression saw nearly 10% of all Great Plains farms change
hands despite federal assistance.
The decline in the U.S. economy
was the factor that pulled down most other countries at first; then,
internal weaknesses or strengths in each country made conditions worse
or better. Frantic attempts by individual countries to shore up their economies through protectionist policies – such as the 1930 U.S. Smoot–Hawley Tariff Act and retaliatory tariffs in other countries – exacerbated the collapse in global trade, contributing to the depression. By 1933, the economic decline pushed world trade to one third of its level compared to four years earlier.
Crowd gathering at the intersection of Wall Street and Broad Street after the 1929 crash
U.S. industrial production, 1928–1939
The two classic competing economic theories of the Great Depression are the Keynesian (demand-driven) and the monetarist explanation. There are also various heterodox theories
that downplay or reject the explanations of the Keynesians and
monetarists. The consensus among demand-driven theories is that a
large-scale loss of confidence led to a sudden reduction in consumption
and investment spending. Once panic and deflation set in, many people
believed they could avoid further losses by keeping clear of the
markets. Holding money became profitable as prices dropped lower and a
given amount of money bought ever more goods, exacerbating the drop in
demand. Monetarists believe that the Great Depression started as an
ordinary recession, but the shrinking of the money supply greatly exacerbated the economic situation, causing a recession to descend into the Great Depression.
Economists and economic historians are almost evenly split as to
whether the traditional monetary explanation that monetary forces were
the primary cause of the Great Depression is right, or the traditional
Keynesian explanation that a fall in autonomous spending, particularly
investment, is the primary explanation for the onset of the Great
Depression. Today there is also significant academic support for the debt deflation theory and the expectations hypothesis that — building on the monetary explanation of Milton Friedman and Anna Schwartz — add non-monetary explanations.
There is a consensus that the Federal Reserve System should have cut short the process of monetary deflation and banking collapse, by expanding the money supply and acting as lender of last resort. If they had done this, the economic downturn would have been far less severe and much shorter.
Mainstream explanations
Modern mainstream economists see the reasons in
Insufficient demand from the private sector and insufficient fiscal spending (Keynesians).
A money supply reduction (Monetarists) and therefore a banking crisis, reduction of credit and bankruptcies.
Insufficient spending, the money supply reduction, and debt on margin led to falling prices and further bankruptcies (Irving Fisher's debt deflation).
Keynes's basic idea was simple: to keep people fully employed,
governments have to run deficits when the economy is slowing, as the
private sector would not invest enough to keep production at the normal
level and bring the economy out of recession. Keynesian economists
called on governments during times of economic crisis to pick up the slack by increasing government spending or cutting taxes.
As the Depression wore on, Franklin D. Roosevelt tried public works, farm subsidies,
and other devices to restart the U.S. economy, but never completely
gave up trying to balance the budget. According to the Keynesians, this
improved the economy, but Roosevelt never spent enough to bring the
economy out of recession until the start of World War II.
Monetarist view
The Great Depression in the U.S. from a monetary view. Real gross domestic product in 1996-Dollar (blue), price index (red), money supply M2 (green) and number of banks (grey). All data adjusted to 1929 = 100%.
Crowd at New York's American Union Bank during a bank run early in the Great Depression
The monetarist explanation was given by American economists Milton Friedman and Anna J. Schwartz.
They argued that the Great Depression was caused by the banking crisis
that caused one-third of all banks to vanish, a reduction of bank
shareholder wealth and more importantly monetary contraction of 35%, which they called "The Great Contraction". This caused a price drop of 33% (deflation).
By not lowering interest rates, by not increasing the monetary base and
by not injecting liquidity into the banking system to prevent it from
crumbling, the Federal Reserve passively watched the transformation of a
normal recession into the Great Depression. Friedman and Schwartz
argued that the downward turn in the economy, starting with the stock
market crash, would merely have been an ordinary recession if the
Federal Reserve had taken aggressive action. This view was endorsed by Federal Reserve GovernorBen Bernanke in a speech honoring Friedman and Schwartz with this statement:
Let me end my talk by abusing
slightly my status as an official representative of the Federal Reserve.
I would like to say to Milton and Anna: Regarding the Great Depression,
you're right. We did it. We're very sorry. But thanks to you, we won't
do it again.
— Ben S. Bernanke
The Federal Reserve allowed some large public bank failures – particularly that of the New York Bank of United States
– which produced panic and widespread runs on local banks, and the
Federal Reserve sat idly by while banks collapsed. Friedman and Schwartz
argued that, if the Fed had provided emergency lending to these key
banks, or simply bought government bonds on the open market
to provide liquidity and increase the quantity of money after the key
banks fell, all the rest of the banks would not have fallen after the
large ones did, and the money supply would not have fallen as far and as
fast as it did.
With significantly less money to go around, businesses could not
get new loans and could not even get their old loans renewed, forcing
many to stop investing. This interpretation blames the Federal Reserve
for inaction, especially the New York branch.
One reason why the Federal Reserve did not act to limit the decline of the money supply was the gold standard. At that time, the amount of credit the Federal Reserve could issue was limited by the Federal Reserve Act, which required 40% gold backing of Federal Reserve Notes issued. By the late 1920s,
the Federal Reserve had almost hit the limit of allowable credit that
could be backed by the gold in its possession. This credit was in the
form of Federal Reserve demand notes.
A "promise of gold" is not as good as "gold in the hand", particularly
when they only had enough gold to cover 40% of the Federal Reserve Notes
outstanding. During the bank panics, a portion of those demand notes
was redeemed for Federal Reserve gold. Since the Federal Reserve had hit
its limit on allowable credit, any reduction in gold in its vaults had
to be accompanied by a greater reduction in credit. On April 5, 1933,
President Roosevelt signed Executive Order 6102 making the private ownership of gold certificates, coins and bullion illegal, reducing the pressure on Federal Reserve gold.
Modern non-monetary explanations
The monetary explanation has two weaknesses. First, it is not able to
explain why the demand for money was falling more rapidly than the
supply during the initial downturn in 1930–31.
Second, it is not able to explain why in March 1933 a recovery took
place although short term interest rates remained close to zero and the
money supply was still falling. These questions are addressed by modern
explanations that build on the monetary explanation of Milton Friedman
and Anna Schwartz but add non-monetary explanations.
Irving Fisher
argued that the predominant factor leading to the Great Depression was a
vicious circle of deflation and growing over-indebtedness.
He outlined nine factors interacting with one another under conditions
of debt and deflation to create the mechanics of boom to bust. The chain
of events proceeded as follows:
Debt liquidation and distress selling
Contraction of the money supply as bank loans are paid off
A fall in the level of asset prices
A still greater fall in the net worth of businesses, precipitating bankruptcies
A fall in nominal interest rates and a rise in deflation adjusted interest rates
During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%. Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs.
Government guarantees and Federal Reserve banking regulations to
prevent such panics were ineffective or not used. Bank failures led to
the loss of billions of dollars in assets.
Outstanding debts became heavier, because prices and incomes fell
by 20–50% but the debts remained at the same dollar amount. After the
panic of 1929 and during the first 10 months of 1930, 744 U.S. banks
failed. (In all, 9,000 banks failed during the 1930s.) By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.
Bank failures snowballed as desperate bankers called in loans that
borrowers did not have time or money to repay. With future profits
looking poor, capital investment
and construction slowed or completely ceased. In the face of bad loans
and worsening future prospects, the surviving banks became even more
conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.
The liquidation of debt could not keep up with the fall of prices
that it caused. The mass effect of the stampede to liquidate increased
the value of each dollar owed, relative to the value of declining asset
holdings. The very effort of individuals to lessen their burden of debt
effectively increased it. Paradoxically, the more the debtors paid, the
more they owed. This self-aggravating process turned a 1930 recession into a 1933 great depression.
Fisher's debt-deflation theory initially lacked mainstream
influence because of the counter-argument that debt-deflation
represented no more than a redistribution from one group (debtors) to
another (creditors). Pure re-distributions should have no significant
macroeconomic effects.
Building on both the monetary hypothesis of Milton Friedman and
Anna Schwartz and the debt deflation hypothesis of Irving Fisher, Ben Bernanke
developed an alternative way in which the financial crisis affected
output. He builds on Fisher's argument that dramatic declines in the
price level and nominal incomes lead to increasing real debt burdens,
which in turn leads to debtor insolvency and consequently lowers aggregate demand;
a further price level decline would then result in a debt deflationary
spiral. According to Bernanke, a small decline in the price level simply
reallocates wealth from debtors to creditors without doing damage to
the economy. But when the deflation is severe, falling asset prices
along with debtor bankruptcies lead to a decline in the nominal value of
assets on bank balance sheets. Banks will react by tightening their
credit conditions, which in turn leads to a credit crunch
that seriously harms the economy. A credit crunch lowers investment and
consumption, which results in declining aggregate demand and
additionally contributes to the deflationary spiral.
Expectations hypothesis
Since economic mainstream turned to the new neoclassical synthesis, expectations are a central element of macroeconomic models. According to Peter Temin, Barry Wigmore, Gauti B. Eggertsson and Christina Romer,
the key to recovery and to ending the Great Depression was brought
about by a successful management of public expectations. The thesis is
based on the observation that after years of deflation and a very severe
recession important economic indicators turned positive in March 1933
when Franklin D. Roosevelt
took office. Consumer prices turned from deflation to a mild inflation,
industrial production bottomed out in March 1933, and investment
doubled in 1933 with a turnaround in March 1933. There were no monetary
forces to explain that turnaround. Money supply was still falling and
short-term interest rates remained close to zero. Before March 1933,
people expected further deflation and a recession so that even interest
rates at zero did not stimulate investment. But when Roosevelt announced
major regime changes, people began to expect inflation and an economic
expansion. With these positive expectations, interest rates at zero
began to stimulate investment just as they were expected to do.
Roosevelt's fiscal and monetary policy regime change helped make his
policy objectives credible. The expectation of higher future income and
higher future inflation stimulated demand and investment. The analysis
suggests that the elimination of the policy dogmas of the gold standard,
a balanced budget in times of crisis and small government led
endogenously to a large shift in expectation that accounts for about
70–80% of the recovery of output and prices from 1933 to 1937. If the
regime change had not happened and the Hoover policy had continued, the
economy would have continued its free fall in 1933, and output would
have been 30% lower in 1937 than in 1933.
The recession of 1937–38,
which slowed down economic recovery from the Great Depression, is
explained by fears of the population that the moderate tightening of the
monetary and fiscal policy in 1937 were first steps to a restoration of
the pre-1933 policy regime.
Common position
There is common consensus among economists today that the government
and the central bank should work to keep the interconnected
macroeconomic aggregates of gross domestic product and money supply on a stable growth path. When threatened by expectations of a depression, central banks
should expand liquidity in the banking system and the government should
cut taxes and accelerate spending in order to prevent a collapse in
money supply and aggregate demand.
At the beginning of the Great Depression, most economists believed in Say's law and the equilibrating powers of the market, and failed to understand the severity of the Depression. Outright leave-it-alone liquidationism was a common position, and was universally held by Austrian School economists.
The liquidationist position held that a depression worked to liquidate
failed businesses and investments that had been made obsolete by
technological development – releasing factors of production
(capital and labor) to be redeployed in other more productive sectors
of the dynamic economy. They argued that even if self-adjustment of the
economy caused mass bankruptcies, it was still the best course.
Economists like Barry Eichengreen and J. Bradford DeLong note that President Herbert Hoover tried to keep the federal budget balanced until 1932, when he lost confidence in his Secretary of the Treasury Andrew Mellon and replaced him.
An increasingly common view among economic historians is that the
adherence of many Federal Reserve policymakers to the liquidationist
position led to disastrous consequences.
Unlike what liquidationists expected, a large proportion of the capital
stock was not redeployed but vanished during the first years of the
Great Depression. According to a study by Olivier Blanchard and Lawrence Summers, the recession caused a drop of net capital accumulation to pre-1924 levels by 1933. Milton Friedman called leave-it-alone liquidationism "dangerous nonsense". He wrote:
I think the Austrian business-cycle
theory has done the world a great deal of harm. If you go back to the
1930s, which is a key point, here you had the Austrians sitting in
London, Hayek and Lionel Robbins, and saying you just have to let the
bottom drop out of the world. You've just got to let it cure itself. You
can't do anything about it. You will only make it worse. ... I think by
encouraging that kind of do-nothing policy both in Britain and in the
United States, they did harm.
Heterodox theories
Austrian School
Two prominent theorists in the Austrian School on the Great Depression include Austrian economist Friedrich Hayek and American economist Murray Rothbard, who wrote America's Great Depression (1963). In their view, much like the monetarists, the Federal Reserve (created in 1913) shoulders much of the blame; however, unlike the Monetarists, they argue that the key cause of the Depression was the expansion of the money supply in the 1920s which led to an unsustainable credit-driven boom.
In the Austrian view, it was this inflation of the money supply
that led to an unsustainable boom in both asset prices (stocks and
bonds) and capital goods. Therefore, by the time the Federal Reserve tightened in 1928 it was far too late to prevent an economic contraction. In February 1929 Hayek published a paper predicting the Federal Reserve's actions would lead to a crisis starting in the stock and credit markets.
According to Rothbard, the government support for failed
enterprises and efforts to keep wages above their market values actually
prolonged the Depression. Unlike Rothbard, after 1970 Hayek
believed that the Federal Reserve had further contributed to the
problems of the Depression by permitting the money supply to shrink
during the earliest years of the Depression. However, during the Depression (in 1932 and in 1934) Hayek had criticized both the Federal Reserve and the Bank of England for not taking a more contractionary stance.
Ludwig von Mises
wrote in the 1930s: "Credit expansion cannot increase the supply of
real goods. It merely brings about a rearrangement. It diverts capital
investment away from the course prescribed by the state of economic
wealth and market conditions. It causes production to pursue paths which
it would not follow unless the economy were to acquire an increase in
material goods. As a result, the upswing lacks a solid base. It is not
real prosperity. It is illusory prosperity. It did not develop from an
increase in economic wealth, i.e. the accumulation of savings made
available for productive investment. Rather, it arose because the credit
expansion created the illusion of such an increase. Sooner or later, it
must become apparent that this economic situation is built on sand."
According to this view, the root cause
of the Great Depression was a global over-investment in heavy industry
capacity compared to wages and earnings from independent businesses,
such as farms. The proposed solution was for the government to pump
money into the consumers' pockets. That is, it must redistribute
purchasing power, maintaining the industrial base, and re-inflating
prices and wages to force as much of the inflationary increase in
purchasing power into consumer spending. The economy was overbuilt, and new factories were not needed. Foster and Catchings recommended federal and state governments to start large construction projects, a program followed by Hoover and Roosevelt.
Productivity shock
It cannot be emphasized too
strongly that the [productivity, output, and employment] trends we are
describing are long-time trends and were thoroughly evident before 1929.
These trends are in nowise the result of the present depression, nor
are they the result of the World War. On the contrary, the present
depression is a collapse resulting from these long-term trends.
The first three decades of the 20th century saw economic output surge with electrification, mass production,
and motorized farm machinery, and because of the rapid growth in
productivity there was a lot of excess production capacity and the work
week was being reduced. The dramatic rise in productivity
of major industries in the U.S. and the effects of productivity on
output, wages and the workweek are discussed by Spurgeon Bell in his
book Productivity, Wages, and National Income (1940).
The gold standard and the spreading of global depression
The gold standard
was the primary transmission mechanism of the Great Depression. Even
countries that did not face bank failures and a monetary contraction
first hand were forced to join the deflationary policy since higher
interest rates in countries that performed a deflationary policy led to a
gold outflow in countries with lower interest rates. Under the gold
standard's price–specie flow mechanism,
countries that lost gold but nevertheless wanted to maintain the gold
standard had to permit their money supply to decrease and the domestic
price level to decline (deflation).
There is also consensus that protectionist policies such as the Smoot–Hawley Tariff Act helped to worsen the depression.
Gold standard
The Depression in international perspective
Some economic studies have indicated that just as the downturn was spread worldwide by the rigidities of the gold standard, it was suspending gold convertibility (or devaluing the currency in gold terms) that did the most to make recovery possible.
Every major currency left the gold standard during the Great Depression. The UK was the first to do so. Facing speculative attacks on the pound and depleting gold reserves, in September 1931 the Bank of England ceased exchanging pound notes for gold and the pound was floated on foreign exchange markets.
Japan and the Scandinavian countries joined the UK in leaving the
gold standard in 1931. Other countries, such as Italy and the US,
remained on the gold standard into 1932 or 1933, while a few countries
in the so-called "gold bloc", led by France and including Poland,
Belgium and Switzerland, stayed on the standard until 1935–36.
According to later analysis, the earliness with which a country
left the gold standard reliably predicted its economic recovery. For
example, The UK and Scandinavia, which left the gold standard in 1931,
recovered much earlier than France and Belgium, which remained on gold
much longer. Countries such as China, which had a silver standard,
almost avoided the depression entirely. The connection between leaving
the gold standard as a strong predictor of that country's severity of
its depression and the length of time of its recovery has been shown to
be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between regions and states across the world.
Breakdown of international trade
Many economists have argued that the sharp decline in international
trade after 1930 helped to worsen the depression, especially for
countries significantly dependent on foreign trade. In a 1995 survey of
American economic historians, two-thirds agreed that the Smoot–Hawley Tariff Act (enacted June 17, 1930) at least worsened the Great Depression.Most historians and economists blame this Act for worsening the
depression by seriously reducing international trade and causing
retaliatory tariffs in other countries. While foreign trade was a small
part of overall economic activity in the U.S. and was concentrated in a
few businesses like farming, it was a much larger factor in many other
countries. 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% during 1931–1935. In dollar terms,
American exports declined over the next four years from about
$5.2 billion in 1929 to $1.7 billion in 1933; so, not only did the
physical volume of exports fall, but also the prices fell by about 1⁄3 as written. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber.
Governments around the world took various steps into spending
less money on foreign goods such as: "imposing tariffs, import quotas,
and exchange controls". These restrictions triggered much tension among
countries that had large amounts of bilateral trade, causing major
export-import reductions during the depression. Not all governments
enforced the same measures of protectionism. Some countries raised
tariffs drastically and enforced severe restrictions on foreign exchange
transactions, while other countries reduced "trade and exchange
restrictions only marginally":
"Countries that remained on the gold standard, keeping
currencies fixed, were more likely to restrict foreign trade." These
countries "resorted to protectionist policies to strengthen the balance of payments and limit gold losses." They hoped that these restrictions and depletions would hold the economic decline.
Countries that abandoned the gold standard, allowed their currencies to depreciate
which caused their balance of payments to strengthen. It also freed up
monetary policy so that central banks could lower interest rates and act
as lenders of last resort. They possessed the best policy instruments
to fight the Depression and did not need protectionism.
"The length and depth of a country's economic downturn and the
timing and vigor of its recovery are related to how long it remained on
the gold standard.
Countries abandoning the gold standard relatively early experienced
relatively mild recessions and early recoveries. In contrast, countries
remaining on the gold standard experienced prolonged slumps."
Effect of tariffs
The consensus view among economists and economic historians
(including Keynesians, Monetarists and Austrian economists) is that the
passage of the Smoot-Hawley Tariff exacerbated the Great Depression,
although there is disagreement as to how much. In the popular view, the
Smoot-Hawley Tariff was a leading cause of the depression. According to the U.S. Senate website the Smoot–Hawley Tariff Act is among the most catastrophic acts in congressional history
German banking crisis of 1931 and British crisis
The financial crisis escalated out of control in mid-1931, starting with the collapse of the Credit Anstalt in Vienna in May.
This put heavy pressure on Germany, which was already in political
turmoil. With the rise in violence of Nazi and communist movements, as
well as investor nervousness at harsh government financial policies.
Investors withdrew their short-term money from Germany, as confidence
spiraled downward. The Reichsbank lost 150 million marks in the first
week of June, 540 million in the second, and 150 million in two days,
June 19–20. Collapse was at hand. U.S. President Herbert Hoover called
for a moratorium on Payment of war reparations.
This angered Paris, which depended on a steady flow of German payments,
but it slowed the crisis down, and the moratorium was agreed to in July
1931. An International conference in London later in July produced no
agreements but on August 19 a standstill agreement froze Germany's
foreign liabilities for six months. Germany received emergency funding
from private banks in New York as well as the Bank of International
Settlements and the Bank of England. The funding only slowed the
process. Industrial failures began in Germany, a major bank closed in
July and a two-day holiday for all German banks was declared. Business
failures were more frequent in July, and spread to Romania and Hungary. The crisis continued to get worse in Germany, bringing political upheaval that finally led to the coming to power of Hitler's Nazi regime in January 1933.
The world financial crisis now began to overwhelm Britain;
investors across the world started withdrawing their gold from London at
the rate of £2.5 million per day.
Credits of £25 million each from the Bank of France and the Federal
Reserve Bank of New York and an issue of £15 million fiduciary note
slowed, but did not reverse the British crisis. The financial crisis now
caused a major political crisis in Britain in August 1931. With
deficits mounting, the bankers demanded a balanced budget; the divided
cabinet of Prime Minister Ramsay MacDonald's Labour government agreed;
it proposed to raise taxes, cut spending, and most controversially, to
cut unemployment benefits 20%. The attack on welfare was unacceptable to
the Labour movement. MacDonald wanted to resign, but King George V
insisted he remain and form an all-party coalition "National Government".
The Conservative and Liberals parties signed on, along with a small
cadre of Labour, but the vast majority of Labour leaders denounced
MacDonald as a traitor for leading the new government. Britain went off
the gold standard,
and suffered relatively less than other major countries in the Great
Depression. In the 1931 British election, the Labour Party was virtually
destroyed, leaving MacDonald as Prime Minister for a largely
Conservative coalition.
Turning point and recovery
The
overall course of the Depression in the United States, as reflected in
per-capita GDP (average income per person) shown in constant year 2000
dollars, plus some of the key events of the period. Dotted red line =
long-term trend 1920–1970.
In most countries of the world, recovery from the Great Depression began in 1933. In the U.S., recovery began in early 1933,
but the U.S. did not return to 1929 GNP for over a decade and still had
an unemployment rate of about 15% in 1940, albeit down from the high of
25% in 1933.
There is no consensus among economists regarding the motive force
for the U.S. economic expansion that continued through most of the Roosevelt years (and the 1937 recession that interrupted it). The common view among most economists is that Roosevelt's New Deal
policies either caused or accelerated the recovery, although his
policies were never aggressive enough to bring the economy completely
out of recession. Some economists have also called attention to the
positive effects from expectations of reflation and rising nominal interest rates that Roosevelt's words and actions portended. It was the rollback of those same reflationary policies that led to the interruption of a recession beginning in late 1937. One contributing policy that reversed reflation was the Banking Act of 1935, which effectively raised reserve requirements, causing a monetary contraction that helped to thwart the recovery. GDP returned to its upward trend in 1938.
According to Christina Romer,
the money supply growth caused by huge international gold inflows was a
crucial source of the recovery of the United States economy, and that
the economy showed little sign of self-correction. The gold inflows were
partly due to devaluation of the U.S. dollar and partly due to deterioration of the political situation in Europe. In their book, A Monetary History of the United States, Milton Friedman and Anna J. Schwartz also attributed the recovery to monetary factors, and contended that it was much slowed by poor management of money by the Federal Reserve System. Former (2006–2014) Chairman of the Federal ReserveBen Bernanke agreed that monetary factors played important roles both in the worldwide economic decline and eventual recovery.
Bernanke also saw a strong role for institutional factors, particularly
the rebuilding and restructuring of the financial system, and pointed out that the Depression should be examined in an international perspective.
Role of women and household economics
Women's primary role was as housewives; without a steady flow of
family income, their work became much harder in dealing with food and
clothing and medical care. Birthrates fell everywhere, as children were
postponed until families could financially support them. The average
birthrate for 14 major countries fell 12% from 19.3 births per thousand
population in 1930, to 17.0 in 1935. In Canada, half of Roman Catholic women defied Church teachings and used contraception to postpone births.
Among the few women in the labor force, layoffs were less common
in the white-collar jobs and they were typically found in light
manufacturing work. However, there was a widespread demand to limit
families to one paid job, so that wives might lose employment if their
husband was employed. Across Britain, there was a tendency for married women to join the labor force, competing for part-time jobs especially.
In France, very slow population growth, especially in comparison
to Germany continued to be a serious issue in the 1930s. Support for
increasing welfare programs during the depression included a focus on
women in the family. The Conseil Supérieur de la Natalité campaigned for
provisions enacted in the Code de la Famille (1939) that increased
state assistance to families with children and required employers to
protect the jobs of fathers, even if they were immigrants.
In rural and small-town areas, women expanded their operation of
vegetable gardens to include as much food production as possible. In the
United States, agricultural organizations sponsored programs to teach
housewives how to optimize their gardens and to raise poultry for meat
and eggs. Rural women made feed sack dresses and other items for themselves and their families and homes from feed sacks.
In American cities, African American women quiltmakers enlarged their
activities, promoted collaboration, and trained neophytes. Quilts were
created for practical use from various inexpensive materials and
increased social interaction for women and promoted camaraderie and
personal fulfillment.
Oral history provides evidence for how housewives in a modern
industrial city handled shortages of money and resources. Often they
updated strategies their mothers used when they were growing up in poor
families. Cheap foods were used, such as soups, beans and noodles. They
purchased the cheapest cuts of meat—sometimes even horse meat—and
recycled the Sunday roast
into sandwiches and soups. They sewed and patched clothing, traded with
their neighbors for outgrown items, and made do with colder homes. New
furniture and appliances were postponed until better days. Many women
also worked outside the home, or took boarders, did laundry for trade or
cash, and did sewing for neighbors in exchange for something they could
offer. Extended families used mutual aid—extra food, spare rooms,
repair-work, cash loans—to help cousins and in-laws.
In Japan, official government policy was deflationary and the
opposite of Keynesian spending. Consequently, the government launched a
campaign across the country to induce households to reduce their
consumption, focusing attention on spending by housewives.
In Germany, the government tried to reshape private household
consumption under the Four-Year Plan of 1936 to achieve German economic
self-sufficiency. The Nazi women's organizations, other propaganda
agencies and the authorities all attempted to shape such consumption as
economic self-sufficiency was needed to prepare for and to sustain the
coming war. The organizations, propaganda agencies and authorities
employed slogans that called up traditional values of thrift and healthy
living. However, these efforts were only partly successful in changing
the behavior of housewives.
World War II and recovery
A female factory worker in 1942, Fort Worth, Texas. Women entered the workforce as men were drafted into the armed forces.
The common view among economic historians is that the Great
Depression ended with the advent of World War II. Many economists
believe that government spending on the war caused or at least
accelerated recovery from the Great Depression, though some consider
that it did not play a very large role in the recovery, though it did
help in reducing unemployment.
The rearmament policies leading up to World War II helped
stimulate the economies of Europe in 1937–1939. By 1937, unemployment in
Britain had fallen to 1.5 million. The mobilization of manpower following the outbreak of war in 1939 ended unemployment.
When the United States entered the war in 1941, it finally
eliminated the last effects from the Great Depression and brought the
U.S. unemployment rate down below 10%.
In the US, massive war spending doubled economic growth rates, either
masking the effects of the Depression or essentially ending the
Depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts.
Socio-economic effects
An impoverished American family living in a shanty, 1936
The majority of countries set up relief programs and most underwent
some sort of political upheaval, pushing them to the right. Many of the
countries in Europe and Latin America that were democracies saw them
overthrown by some form of dictatorship or authoritarian rule, most famously in Germany in 1933. The Dominion of Newfoundland gave up democracy voluntarily.
Australia
Australia's dependence on agricultural and industrial exports meant it was one of the hardest-hit developed countries.
Falling export demand and commodity prices placed massive downward
pressures on wages. Unemployment reached a record high of 29% in 1932, with incidents of civil unrest becoming common. After 1932, an increase in wool and meat prices led to a gradual recovery.
Harshly affected by both the global economic downturn and the Dust Bowl,
Canadian industrial production had by 1932 fallen to only 58% of its
1929 figure, the second-lowest level in the world after the United
States, and well behind countries such as Britain, which fell to only
83% of the 1929 level. Total national income
fell to 56% of the 1929 level, again worse than any country apart from
the United States. Unemployment reached 27% at the depth of the
Depression in 1933.
Chile
The League of Nations labeled Chile
the country hardest hit by the Great Depression because 80% of
government revenue came from exports of copper and nitrates, which were
in low demand. Chile initially felt the impact of the Great Depression
in 1930, when GDP dropped 14%, mining income declined 27%, and export
earnings fell 28%. By 1932, GDP had shrunk to less than half of what it
had been in 1929, exacting a terrible toll in unemployment and business
failures.
Influenced profoundly by the Great Depression, many government
leaders promoted the development of local industry in an effort to
insulate the economy from future external shocks. After six years of
government austerity measures,
which succeeded in reestablishing Chile's creditworthiness, Chileans
elected to office during the 1938–58 period a succession of center and
left-of-center governments interested in promoting economic growth
through government intervention.
Prompted in part by the devastating 1939 Chillán earthquake, the Popular Front government of Pedro Aguirre Cerda created the Production Development Corporation (Corporación de Fomento de la Producción, CORFO) to encourage with subsidies and direct investments an ambitious program of import substitution industrialization. Consequently, as in other Latin American countries, protectionism became an entrenched aspect of the Chilean economy.
China
China was largely unaffected by the Depression, mainly by having stuck to the Silver standard.
However, the U.S. silver purchase act of 1934 created an intolerable
demand on China's silver coins, and so, in the end, the silver standard
was officially abandoned in 1935 in favor of the four Chinese national
banks' "legal note" issues. China and the British colony of Hong Kong, which followed suit in this regard in September 1935, would be the last to abandon the silver standard. In addition, the Nationalist Government
also acted energetically to modernize the legal and penal systems,
stabilize prices, amortize debts, reform the banking and currency
systems, build railroads and highways, improve public health facilities,
legislate against traffic in narcotics and augment industrial and
agricultural production. On November 3, 1935, the government instituted
the fiat currency (fapi) reform, immediately stabilizing prices and also
raising revenues for the government.
European African colonies
The sharp fall in commodity prices, and the steep decline in exports,
hurt the economies of the European colonies in Africa and Asia. The agricultural sector was especially hard hit. For example, sisal
had recently become a major export crop in Kenya and Tanganyika. During
the depression, it suffered severely from low prices and marketing
problems that affected all colonial commodities in Africa. Sisal
producers established centralized controls for the export of their
fibre. There was widespread unemployment and hardship among peasants, labourers, colonial auxiliaries, and artisans.
The budgets of colonial governments were cut, which forced the
reduction in ongoing infrastructure projects, such as the building and
upgrading of roads, ports and communications. The budget cuts delayed the schedule for creating systems of higher education.
The depression severely hurt the export-based Belgian Congo
economy because of the drop in international demand for raw materials
and for agricultural products. For example, the price of peanuts fell
from 125 to 25 centimes. In some areas, as in the Katanga
mining region, employment declined by 70%. In the country as a whole,
the wage labour force decreased by 72.000 and many men returned to their
villages. In Leopoldville, the population decreased by 33%, because of
this labour migration.
Political protests were not common. However, there was a growing
demand that the paternalistic claims be honored by colonial governments
to respond vigorously. The theme was that economic reforms were more
urgently needed than political reforms.
French West Africa launched an extensive program of educational reform
centered around "rural schools" designed to modernize agriculture and
stem the flow of under-employed farm workers to cites where unemployment
was high. Students were trained in traditional arts, crafts, and
farming techniques and were then expected to return to their own
villages and towns.
France
The crisis affected France a bit later than other countries, hitting hard around 1931. While the 1920s grew at the very strong rate of 4.43% per year, the 1930s rate fell to only 0.63%.
The depression was relatively mild: unemployment peaked under 5%,
the fall in production was at most 20% below the 1929 output; there was
no banking crisis.
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, led by SFIO socialist leaderLéon Blum, which won the elections in 1936. Ultra-nationalist groups also saw increased popularity, although democracy prevailed into World War II.
France's relatively high degree of self-sufficiency meant the
damage was considerably less than in neighbouring states like 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. The financial crisis escalated out of control in mid-1931, starting with the collapse of the Credit Anstalt in Vienna in May.
This put heavy pressure on Germany, which was already in political
turmoil with the rise in violence of Nazi and communist movements, as
well as with investor nervousness at harsh government financial
policies.
Investors withdrew their short-term money from Germany, as confidence
spiraled downward. The Reichsbank lost 150 million marks in the first
week of June, 540 million in the second, and 150 million in two days,
June 19–20. Collapse was at hand. U.S. President Herbert Hoover called
for a moratorium on Payment of war reparations. This angered Paris,
which depended on a steady flow of German payments, but it slowed the
crisis down, and the moratorium was agreed to in July 1931. An
international conference in London later in July produced no agreements
but on August 19 a standstill agreement froze Germany's foreign
liabilities for six months. Germany received emergency funding from
private banks in New York as well as the Bank of International
Settlements and the Bank of England. The funding only slowed the
process. Industrial failures began in Germany, a major bank closed in
July and a two-day holiday for all German banks was declared. Business
failures became more frequent in July, and spread to Romania and
Hungary.
In 1932, 90% of German reparation payments were cancelled (in the
1950s, Germany repaid all its missed reparations debts). Widespread
unemployment reached 25% as every sector was hurt. The government did
not increase government spending to deal with Germany's growing crisis,
as they were afraid that a high-spending policy could lead to a return
of the hyperinflation that had affected Germany in 1923. Germany's Weimar Republic was hit hard by the depression, as American loans to help rebuild the German economy now stopped.
The unemployment rate reached nearly 30% in 1932, bolstering support
for the Nazi (NSDAP) and Communist (KPD) parties, causing the collapse
of the politically centrist Social Democratic Party. Hitler ran for the
Presidency in 1932, and while he lost to the incumbent Hindenburg in the
election, it marked a point during which both Nazi Party and the
Communist parties rose in the years following the crash to altogether
possess a Reichstag majority following the general election in July 1932.
Hitler followed an autarky
economic policy, creating a network of client states and economic
allies in central Europe and Latin America. By cutting wages and taking
control of labor unions, plus public works spending, unemployment fell
significantly by 1935. Large-scale military spending played a major role
in the recovery.
Greece
The reverberations of the Great Depression hit Greece in 1932. The Bank of Greece
tried to adopt deflationary policies to stave off the crises that were
going on in other countries, but these largely failed. For a brief
period, the drachma was pegged to the U.S. dollar, but this was
unsustainable given the country's large trade deficit and the only
long-term effects of this were Greece's foreign exchange reserves being
almost totally wiped out in 1932. Remittances from abroad declined
sharply and the value of the drachma began to plummet from 77 drachmas
to the dollar in March 1931 to 111 drachmas to the dollar in April 1931.
This was especially harmful to Greece as the country relied on imports
from the UK, France, and the Middle East for many necessities. Greece
went off the gold standard in April 1932 and declared a moratorium on
all interest payments. The country also adopted protectionist policies
such as import quotas, which several European countries did during the
period.
Protectionist policies coupled with a weak drachma, stifling
imports, allowed the Greek industry to expand during the Great
Depression. In 1939, the Greek industrial output was 179% that of 1928.
These industries were for the most part "built on sand" as one report of
the Bank of Greece put it, as without massive protection they would not
have been able to survive. Despite the global depression, Greece
managed to suffer comparatively little, averaging an average growth rate
of 3.5% from 1932 to 1939. The dictatorial regime of Ioannis Metaxas took over the Greek government in 1936, and economic growth was strong in the years leading up to the Second World War.
Iceland
Icelandic post-World War I prosperity came to an end with the
outbreak of the Great Depression. The Depression hit Iceland hard as the
value of exports plummeted. The total value of Icelandic exports fell
from 74 million kronur in 1929 to 48 million in 1932, and was not to
rise again to the pre-1930 level until after 1939.
Government interference in the economy increased: "Imports were
regulated, trade with foreign currency was monopolized by state-owned
banks, and loan capital was largely distributed by state-regulated
funds". Due to the outbreak of the Spanish Civil War,
which cut Iceland's exports of saltfish by half, the Depression lasted
in Iceland until the outbreak of World War II (when prices for fish
exports soared).
India
How much India was affected has been hotly debated. Historians have
argued that the Great Depression slowed long-term industrial
development.
Apart from two sectors—jute and coal—the economy was little affected.
However, there were major negative impacts on the jute industry, as
world demand fell and prices plunged. Otherwise, conditions were fairly stable. Local markets in agriculture and small-scale industry showed modest gains.
Ireland was a largely agrarian economy, trading almost
exclusively with the UK, at the time of the Great Depression. Beef and
dairy products comprised the bulk of exports, and Ireland fared well
relative to many other commodity producers, particularly in the early
years of the depression.
The Great Depression hit 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 led 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.
Japan
The Great Depression did not strongly affect Japan. The Japanese economy shrank by 8% during 1929–31. Japan's Finance Minister Takahashi Korekiyo was the first to implement what have come to be identified as Keynesian economic policies: first, by large fiscal stimulus involving deficit spending; and second, by devaluing the currency.
Takahashi used the Bank of Japan to sterilize the deficit spending and
minimize resulting inflationary pressures. Econometric studies have
identified the fiscal stimulus as especially effective.
The devaluation of the currency had an immediate effect. Japanese
textiles began to displace British textiles in export markets. The
deficit spending proved to be most profound and went into the purchase
of munitions for the armed forces. By 1933, Japan was already out of the
depression. By 1934, Takahashi realized that the economy was in danger
of overheating, and to avoid inflation, moved to reduce the deficit
spending that went towards armaments and munitions.
This resulted in a strong and swift negative reaction from
nationalists, especially those in the army, culminating in his
assassination in the course of the February 26 Incident. This had a chilling effect
on all civilian bureaucrats in the Japanese government. From 1934, the
military's dominance of the government continued to grow. Instead of
reducing deficit spending, the government introduced price controls and
rationing schemes that reduced, but did not eliminate inflation, which
remained a problem until the end of World War II.
The deficit spending had a transformative effect on Japan.
Japan's industrial production doubled during the 1930s. Further, in 1929
the list of the largest firms in Japan was dominated by light
industries, especially textile companies (many of Japan's automakers,
such as Toyota, have their roots in the textile industry). By 1940 light industry had been displaced by heavy industry as the largest firms inside the Japanese economy.
Because of high levels of U.S. investment in Latin American
economies, they were severely damaged by the Depression. Within the
region, Chile, Bolivia and Peru were particularly badly affected.[146]
Before the 1929 crisis, links between the world economy and Latin American
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 U.S. 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.
Netherlands
From roughly 1931 to 1937, the Netherlands
suffered a deep and exceptionally long depression. This depression was
partly caused by the after-effects of the Stock Market Crash of 1929 in
the US, and partly by internal factors in the Netherlands. Government
policy, especially the very late dropping of the Gold Standard, played a
role in prolonging the depression. The Great Depression in the
Netherlands led to some political instability and riots, and can be
linked to the rise of the Dutch fascist political party NSB.
The depression in the Netherlands eased off somewhat at the end of
1936, when the government finally dropped the Gold Standard, but real
economic stability did not return until after World War II.
New Zealand
New Zealand
was especially vulnerable to worldwide depression, as it relied almost
entirely on agricultural exports to the United Kingdom for its economy.
The drop in exports led to a lack of disposable income from the farmers,
who were the mainstay of the local economy. Jobs disappeared and wages
plummeted, leaving people desperate and charities unable to cope. Work
relief schemes were the only government support available to the
unemployed, the rate of which by the early 1930s was officially around
15%, but unofficially nearly twice that level (official figures excluded
Māori and women). In 1932, riots occurred among the unemployed in three
of the country's main cities (Auckland, Dunedin, and Wellington).
Many were arrested or injured through the tough official handling of
these riots by police and volunteer "special constables".
Portugal
Already under the rule of a dictatorial junta, the Ditadura Nacional, Portugal suffered no turbulent political effects of the Depression, although António de Oliveira Salazar, already appointed Minister of Finance in 1928 greatly expanded his powers and in 1932 rose to Prime Minister of Portugal to found the Estado Novo, an authoritariancorporatist dictatorship. With the budget balanced in 1929, the effects of the depression were relaxed through harsh measures towards budget balance and autarky, causing social discontent but stability and, eventually, an impressive economic growth.
Puerto Rico
In the years immediately preceding the depression, negative
developments in the island and world economies perpetuated an
unsustainable cycle of subsistence for many Puerto Rican workers. The
1920s brought a dramatic drop in Puerto Rico's two primary exports, raw
sugar and coffee, due to a devastating hurricane in 1928 and the
plummeting demand from global markets in the latter half of the decade.
1930 unemployment on the island was roughly 36% and by 1933 Puerto
Rico's per capita income dropped 30% (by comparison, unemployment in the
United States in 1930 was approximately 8% reaching a height of 25% in
1933). To provide relief and economic reform, the United States government and Puerto Rican politicians such as Carlos Chardon and Luis Muñoz Marín created and administered first the Puerto Rico Emergency Relief Administration (PRERA) 1933 and then in 1935, the Puerto Rico Reconstruction Administration (PRRA).
Romania
Romania was also affected by the Great Depression.
As world trade slumped, demand for South African agricultural and mineral exports fell drastically. The Carnegie Commission on Poor Whites had concluded in 1931 that nearly one-third of Afrikaners
lived as paupers. The social discomfort caused by the depression was a
contributing factor in the 1933 split between the "gesuiwerde"
(purified) and "smelter" (fusionist) factions within the National Party and the National Party's subsequent fusion with the South African Party. Unemployment programs were begun that focused primarily on the white population.
Soviet Union
The Soviet Union was the world's only socialist state
with very little international trade. Its economy was not tied to the
rest of the world and was mostly unaffected by the Great Depression.
Its forced transformation from a rural to an industrial society
succeeded in building up heavy industry, at the cost of millions of
lives in rural Russia and Ukraine.
At the time of the Depression, the Soviet economy was growing
steadily, fuelled by intensive investment in heavy industry. The
apparent economic success of the Soviet Union at a time when the
capitalist world was in crisis led many Western intellectuals to view
the Soviet system favorably. Jennifer Burns wrote:
As the Great Depression ground
on and unemployment soared, intellectuals began unfavorably comparing
their faltering capitalist economy to Russian Communism [...] More than
ten years after the Revolution, Communism was finally reaching full
flower, according to New York Times reporter Walter Duranty, a Stalin fan who vigorously debunked accounts of the Ukraine famine, a man-made disaster that would leave millions dead.
Due to having very little international trade and its policy of
isolation, they did not receive the benefits of international trade once
the depression ran its course, and were still effectively poorer than
most developed countries at their worst sufferings in the crisis.
The Great Depression caused mass immigration to the Soviet Union,
mostly from Finland and Germany. Soviet Russia was at first happy to
help these immigrants settle, because they believed they were victims of
capitalism who had come to help the Soviet cause. However, when the
Soviet Union entered the war in 1941, most of these Germans and Finns
were arrested and sent to Siberia, while their Russian-born children
were placed in orphanages. Their fate remains unknown.
Spain
Spain had a relatively isolated economy, with high protective tariffs
and was not one of the main countries affected by the Depression. The
banking system held up well, as did agriculture.
By far the most serious negative impact came after 1936 from the heavy destruction of infrastructure and manpower by the civil war, 1936–39. Many talented workers were forced into permanent exile. By staying neutral in the Second World War, and selling to both sides, the economy avoided further disasters.
Sweden
By the 1930s, Sweden had what America's Life magazine called
in 1938 the "world's highest standard of living". Sweden was also the
first country worldwide to recover completely from the Great Depression.
Taking place amid a short-lived government and a less-than-a-decade old
Swedish democracy, events such as those surrounding Ivar Kreuger (who eventually committed suicide) remain infamous in Swedish history. The Social Democrats under Per Albin Hansson formed their first long-lived government in 1932 based on strong interventionist and welfare state policies, monopolizing the office of Prime Minister until 1976 with the sole and short-lived exception of Axel Pehrsson-Bramstorp's
"summer cabinet" in 1936. During forty years of hegemony, it was the
most successful political party in the history of Western liberal
democracy.
Unemployed people in front of a workhouse in London, 1930
The World Depression broke at a time when the United Kingdom had still not fully recovered from the effects of the First World War more than a decade earlier. The country was driven off the gold standard in 1931.
The world financial crisis began to overwhelm Britain in 1931;
investors across the world started withdrawing their gold from London at
the rate of £2.5 million per day.
Credits of £25 million each from the Bank of France and the Federal
Reserve Bank of New York and an issue of £15 million fiduciary note
slowed, but did not reverse the British crisis. The financial crisis now
caused a major political crisis in Britain in August 1931. With
deficits mounting, the bankers demanded a balanced budget; the divided
cabinet of Prime Minister Ramsay MacDonald's Labour government agreed;
it proposed to raise taxes, cut spending and most controversially, to
cut unemployment benefits by 20%. The attack on welfare was totally
unacceptable to the Labour movement. MacDonald wanted to resign, but
King George V insisted he remain and form an all-party coalition "National Government".
The Conservative and Liberals parties signed on, along with a small
cadre of Labour, but the vast majority of Labour leaders denounced
MacDonald as a traitor for leading the new government. Britain went off
the gold standard, and suffered relatively less than other major
countries in the Great Depression. In the 1931 British election, the
Labour Party was virtually destroyed, leaving MacDonald as Prime
Minister for a largely Conservative coalition.
The effects on the northern industrial areas of Britain were
immediate and devastating, as demand for traditional industrial products
collapsed. By the end of 1930 unemployment had more than doubled from
1 million to 2.5 million (20% of the insured workforce), and exports had
fallen in value by 50%. In 1933, 30% of Glaswegians
were unemployed due to the severe decline in heavy industry. In some
towns and cities in the north east, unemployment reached as high as 70%
as shipbuilding fell by 90%. The National Hunger March of September–October 1932 was the largest of a series of hunger marches
in Britain in the 1920s and 1930s. About 200,000 unemployed men were
sent to the work camps, which continued in operation until 1939.
In the less industrial Midlands and Southern England,
the effects were short-lived and the later 1930s were a prosperous
time. Growth in modern manufacture of electrical goods and a boom in the
motor car industry was helped by a growing southern population and an
expanding middle class. Agriculture also saw a boom during this period.
United States
Unemployed men standing in line outside a depression soup kitchen in Chicago 1931.
Hoover's first measures to combat the depression were based on
voluntarism by businesses not to reduce their workforce or cut wages but
businesses had little choice: wages were reduced, workers were laid
off, and investments postponed.
In June 1930, Congress approved the Smoot–Hawley Tariff Act
which raised tariffs on thousands of imported items. The intent of the
Act was to encourage the purchase of American-made products by
increasing the cost of imported goods, while raising revenue for the
federal government and protecting farmers. Most countries that traded
with the US increased tariffs on American-made goods in retaliation,
reducing international trade, and worsening the Depression.
In 1931, Hoover urged bankers to set up the National Credit Corporation
so that big banks could help failing banks survive. But bankers were
reluctant to invest in failing banks, and the National Credit
Corporation did almost nothing to address the problem.
Shacks on the Anacostia flats, Washington, D.C. put up by the Bonus Army (World War I veterans) burning after the battle with the 1,000 soldiers accompanied by tanks and machine guns, 1932
By 1932, unemployment had reached 23.6%, peaking in early 1933 at 25%.
Drought persisted in the agricultural heartland, businesses and
families defaulted on record numbers of loans, and more than 5,000 banks
had failed. Hundreds of thousands of Americans found themselves homeless, and began congregating in shanty towns – dubbed "Hoovervilles" – that began to appear across the country. In response, President Hoover and Congress approved the Federal Home Loan Bank Act,
to spur new home construction, and reduce foreclosures. The final
attempt of the Hoover Administration to stimulate the economy was the
passage of the Emergency Relief and Construction Act (ERA) which included funds for public works programs such as dams and the creation of the Reconstruction Finance Corporation
(RFC) in 1932. The Reconstruction Finance Corporation was a Federal
agency with the authority to lend up to $2 billion to rescue banks and
restore confidence in financial institutions. But $2 billion was not
enough to save all the banks, and bank runs and bank failures continued. Quarter by quarter the economy went downhill, as prices, profits and employment fell, leading to the political realignment in 1932 that brought to power Franklin Delano Roosevelt.
It is important to note, however, that after volunteerism failed,
Hoover developed ideas that laid the framework for parts of the New
Deal.
Buried machinery in a barn lot; South Dakota, May 1936. The Dust Bowl on the Great Plains coincided with the Great Depression.
Shortly after President Franklin Delano Roosevelt was inaugurated in 1933, drought and erosion combined to cause the Dust Bowl, shifting hundreds of thousands of displaced persons
off their farms in the Midwest. From his inauguration onward, Roosevelt
argued that restructuring of the economy would be needed to prevent
another depression or avoid prolonging the current one. New Deal
programs sought to stimulate demand
and provide work and relief for the impoverished through increased
government spending and the institution of financial reforms.
CCC
workers constructing road, 1933. Over 3 million unemployed young men
were taken out of the cities and placed into 2,600+ work camps managed
by the CCC.
These reforms, together with several other relief and recovery measures, are called the First New Deal. Economic stimulus was attempted through a new alphabet soup of agencies set up in 1933 and 1934 and previously extant agencies such as the Reconstruction Finance Corporation. By 1935, the "Second New Deal" added Social Security (which was later considerably extended through the Fair Deal), a jobs program for the unemployed (the Works Progress Administration, WPA) and, through the National Labor Relations Board, a strong stimulus to the growth of labor unions. In 1929, federal expenditures constituted only 3% of the GDP.
The national debt as a proportion of GNP rose under Hoover from 20% to
40%. Roosevelt kept it at 40% until the war began, when it soared to
128%.
By 1936, the main economic indicators
had regained the levels of the late 1920s, except for unemployment,
which remained high at 11%, although this was considerably lower than
the 25% unemployment rate seen in 1933. In the spring of 1937, American
industrial production exceeded that of 1929 and remained level until
June 1937. In June 1937, the Roosevelt administration cut spending and
increased taxation in an attempt to balance the federal budget.
The American economy then took a sharp downturn, lasting for 13 months
through most of 1938. Industrial production fell almost 30 per cent
within a few months and production of durable goods
fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in
1938, rising from 5 million to more than 12 million in early 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.
Producers reduced their expenditures on durable goods, and
inventories declined, but personal income was only 15% lower than it had
been at the peak in 1937. As unemployment rose, consumers' expenditures
declined, leading to further cutbacks in production. By May 1938 retail
sales began to increase, employment improved, and industrial production
turned up after June 1938. After the recovery from the Recession of 1937–38, conservatives were able to form a bipartisan conservative coalition
to stop further expansion of the New Deal and, when unemployment
dropped to 2% in the early 1940s, they abolished WPA, CCC and the PWA
relief programs. Social Security remained in place.
Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state. The Great Depression was a main factor in the implementation of social democracy and planned economies in European countries after World War II. Keynesianism
generally remained the most influential economic school in the United
States and in parts of Europe until the periods between the 1970s and
the 1980s, when Milton Friedman and other neoliberal economists formulated and propagated the newly created theories of neoliberalism and incorporated them into the Chicago School of Economics
as an alternative approach to the study of economics. Neoliberalism
went on to challenge the dominance of the Keynesian school of Economics
in the mainstream academia and policy-making in the United States,
having reached its peak in popularity in the election of the presidency
of Ronald Reagan in the United States, and Margaret Thatcher in the United Kingdom.
Literature
And the great owners,
who must lose their land in an upheaval, the great owners with access to
history, with eyes to read history and to know the great fact: when
property accumulates in too few hands it is taken away. And that
companion fact: when a majority of the people are hungry and cold they
will take by force what they need. And the little screaming fact that
sounds through all history: repression works only to strengthen and knit
the repressed.
The Great Depression has been the subject of much writing, as authors
have sought to evaluate an era that caused both financial and emotional
trauma. Perhaps the most noteworthy and famous novel written on the
subject is The Grapes of Wrath, published in 1939 and written by John Steinbeck, who was awarded both the Nobel Prize for literature and the Pulitzer Prize
for the work. The novel focuses on a poor family of sharecroppers who
are forced from their home as drought, economic hardship, and changes in
the agricultural industry occur during the Great Depression. Steinbeck's Of Mice and Men is another important novella about a journey during the Great Depression. Additionally, Harper Lee's To Kill a Mockingbird is set during the Great Depression. Margaret Atwood's Booker prize-winning The Blind Assassin
is likewise set in the Great Depression, centering on a privileged
socialite's love affair with a Marxist revolutionary. The era spurred
the resurgence of social realism, practiced by many who started their
writing careers on relief programs, especially the Federal Writers' Project in the U.S.
A number of works for younger audiences are also set during the Great Depression, among them the Kit Kittredge series of American Girl books written by Valerie Tripp and illustrated by Walter Rane,
released to tie in with the dolls and playsets sold by the company. The
stories, which take place during the early to mid 1930s in Cincinnati, focuses on the changes brought by the Depression to the titular character's family and how the Kittredges dealt with it. A theatrical adaptation of the series entitled Kit Kittredge: An American Girl was later released in 2008 to positive reviews. Similarly, Christmas After All, part of the Dear America series of books for older girls, take place in 1930s Indianapolis; while Kit Kittredge is told in a third-person viewpoint, Christmas After All
is in the form of a fictional journal as told by the protagonist Minnie
Swift as she recounts her experiences during the era, especially when
her family takes in an orphan cousin from Texas.
Naming
The term "The Great Depression" is most frequently attributed to British economist Lionel Robbins, whose 1934 book The Great Depression is credited with formalizing the phrase, though Hoover is widely credited with popularizing the term,
informally referring to the downturn as a depression, with such uses as
"Economic depression cannot be cured by legislative action or executive
pronouncement" (December 1930, Message to Congress), and "I need not
recount to you that the world is passing through a great depression"
(1931).
The term "depression"
to refer to an economic downturn dates to the 19th century, when it was
used by varied Americans and British politicians and economists.
Indeed, the first major American economic crisis, the Panic of 1819, was described by then-president James Monroe as "a depression", and the most recent economic crisis, the Depression of 1920–21, had been referred to as a "depression" by then-president Calvin Coolidge.
Financial crises were traditionally referred to as "panics", most recently the major Panic of 1907, and the minor Panic of 1910–11,
though the 1929 crisis was called "The Crash", and the term "panic" has
since fallen out of use. At the time of the Great Depression, the term
"The Great Depression" was already used to refer to the period 1873–96
(in the United Kingdom), or more narrowly 1873–79 (in the United
States), which has retroactively been renamed the Long Depression.
Other "great depressions"
Other economic downturns have been called a "great depression", but
none had been as widespread, or lasted for so long. Various states have
experienced brief or extended periods of economic downturns, which were
referred to as "depressions", but none have had such a widespread global
impact.
The collapse of the Soviet Union, and the breakdown of economic ties which followed, led to a severe economic crisis and catastrophic fall in the standards of living in the 1990s in post-Soviet states and the former Eastern Bloc, which was even worse than the Great Depression. Even before Russia's financial crisis of 1998, Russia's GDP was half of what it had been in the early 1990s, and some populations are still poorer as of 2009 than they were in 1989, including Moldova, Central Asia, and the Caucasus.
The causes of the Great Recession seem similar to the Great Depression, but significant differences exist. The previous chairman of the Federal Reserve, Ben Bernanke,
had extensively studied the Great Depression as part of his doctoral
work at MIT, and implemented policies to manipulate the money supply and
interest rates in ways that were not done in the 1930s. Bernanke's
policies will undoubtedly be analyzed and scrutinized in the years to
come, as economists debate the wisdom of his choices. Generally
speaking, the recovery of the world's financial systems tended to be
quicker during the Great Depression of the 1930s as opposed to the late-2000s recession.
If we contrast the 1930s with the Crash of 2008 where gold went
through the roof, it is clear that the U.S. dollar on the gold standard
was a completely different animal in comparison to the fiat
free-floating U.S. dollar currency we have today. Both currencies in
1929 and 2008 were the U.S. dollar, but analogously it is as if one was a
Saber-toothed tiger and the other is a Bengal tiger; they are two
completely different animals. Where we have experienced inflation since
the Crash of 2008, the situation was much different in the 1930s when
deflation set in. Unlike the deflation of the early 1930s, the U.S.
economy currently appears to be in a "liquidity trap," or a situation where monetary policy is unable to stimulate an economy back to health.
In terms of the stock market, nearly three years after the 1929 crash, the DJIA
dropped 8.4% on August 12, 1932. Where we have experienced great
volatility with large intraday swings in the past two months, in 2011,
we have not experienced any record-shattering daily percentage drops to
the tune of the 1930s. Where many of us may have that '30s feeling, in
light of the DJIA, the CPI, and the national unemployment rate, we are
simply not living in the '30s. Some individuals may feel as if we are
living in a depression, but for many others the current global financial crisis simply does not feel like a depression akin to the 1930s.
1928 and 1929 were the times in the 20th century that the wealth gap reached such skewed extremes;
half the unemployed had been out of work for over six months, something
that was not repeated until the late-2000s recession. 2007 and 2008
eventually saw the world reach new levels of wealth gap inequality that
rivalled the years of 1928 and 1929.