Great Depression
Great depression was one of the worst and first blow to the global economy. Initiated in 1930, the global economy witnessed a economic collapse. This kind of economic failure was never experienced before and the one that started in 1930’s lasted till 1939 and the magnitude of after effects were extreme and harsh for liberal and democratic economies. Most of major global economies were shaken with total production falling by 25-30%, unemployment rates touching sky high with 25% in USA and UK and 40% in Germany. Stock Market Crashes, Bank Failures and a lot more left the governments ineffective and this lead the global economy to what we call today- ‘’Great Depression’’.
As for the cause of Great Depression, there is no one set of issues or cause that led to this economic disaster, but as per various economists and academicians, it was a mix outcome of interaction of complex set of factors; economical, social and political. Below are some factors that lead to Great Depression from 1930-1939:
Stock Market Bubble:
Post the era of World War I, Europe and Germany were trying to get back on their feet and it was only United States that was enjoying the win in the war. Both during and post the war, the US economy grew tremendously as Europe purchased more goods from US and also new innovations in technology, automobiles, electrical appliances were boon to US economy as profits went high that pushed up stock prices and gold reserves. Thus, US became world’s biggest credit nation. US started investing through FDI in Europe and Austria while at this time american investors believed and invested heavy amount on Stocks. With low margins, they were able to purchase multiple dollars stocks and thus stock market was more magnetic now amongst US Investors and thus a market bubble was established with everyone in wn-win situation. Then came a stage when investors starting betting on stocks rather than analyzing the company’s performances.
Then, when new monetary authority-Federal Reserve was established to deflate the bubble, it increased the interest rates in the US and this increased the cost of capital for the businesses to operate and finally, the stock market crashed when on 24th October, 1929, Dow Jones fell by 20% within two days and panic was created amongst the Wall Street Brokers as the stock prices fell well below even the margins of the investors.Unable to pay, many brokerage firms and companies went into insolvency. And finally, it was the inability of the banks to provide credit, which accelerated the pace of depression and left US and Global economy into economical nightmares as it was the US economy which had become financial pillar for the Global Economy and with fall of US economy, ill effects were obvious on rest of the world.
Collapse of Gold Standard:
Well known economist, Lionel Robbins has blamed the collapse of Gold Standard as the reason for great depression. When the first world war broke out, many countries suspended the use of Gold Standards as with ill effects of war, msot of the country required printing of money to pay for the war effect and thus, suspension of Gold Standard was necessary. However, years later many economies felt the need to go pack to gold standards. However, as it was not easy to suspend Gold Standards, so it was more difficult to coming back to it.
No more economy faced these pressures as much as British Economy. On May 14th, 1925 went back to pre-war parity to US$. However, going back to gold standard meant, fixing pre-war prices, adopting deflationary polices, cutting salaries etc. This led to downward economic pressure and high unemployment in Britian. However, the effect was not only restrained to Britian but also in other countries that relied on the pound sterling and British Capital Market for their financing and thus deflation spread to rest of the world. Later, on Spetember 19th, 1931, the british government decided to go off the gold standard and pound sterling depreciated by one third of its value on the foreign exchange market. Thus, it was all because of first collapse and then restoration of gold standards that accelerated the great depression in the global economy.
Lack of Global Financial Leadership and Application of Erroneous Economic Policies:
It was not the economy to be blamed for the great depression as there were many mistakes in the standards of policy making after the war that forced the global economy into depression. After the fisrt world war was ended many polic mistakes were made which were compounded with lack of leadership and vision.
First, the treaty of World War, never included any provision for rehabilitation for Europe. No provision for stabilizing new states of Europe, nothing to reclaim Europe, nor does it promote in any way the compact of economic solidarity amongst aliens. Also no clause was embedded for restoring the disordered finances of France and Italy. Thus, this lack of economic vision in the treaty accompanied with poor leadership set the stage for great depression.
Secondly, when the stock market crashed during October, 1929, both Britain and US which at that time had became economic leader of the world, failed to act in meaningful way of being lender as a last resort and as guarantor to international monetary system. For Instance, in order to deflate the economic bubble, US federal reserve was aggressive in increasing the interest rate without thinking over the severe economic impacts as at that time US had invested heavy sums in Europe through Foreign Direct Investment. Also, after the rise in interest rates, even the Federal Reserve failed to act as a lender of last resort to bail the banks and provide a heal to the financial system. Thus, bad leadership vaccum and wrong economic chocies by USA dealth the final blow in the form of Great Depression.However, this whole debate was confirmed with a statement by Milton Friedman, when he cited that:
“The stock market crash in 1929 was a momentous event, but it did not produce the Great Depression and it was not a major factor in the Depression’s severity. A sharp but not unprecedented contraction was concerted into a catastrophe by bad monetary policy Whatever happens in a stock market, it cannot lead to a great depression unless it produces or is accompanied by a monetary collapse”
Thus, it was proved that it was not just stock market crashes or collapse of Gold Standard, but an alliance of these disasters with poor macro economic policies that forced Great Depression.
Why Great Depression lasted so long?
Economists argue that depression lasted for more than it should have. After 1933, the Global Economy saw a rise in productivity growth, stable liquidity, stable banking system, no deflation and increased consumer demand as Federal Reserve was more than double of its currency base. Thus, despite of such positive factors, depression extended till late 1939 and the primary reason for such extended time was little recovery in labor hours worked and also because wages in the industrial sectors of the economy were more than 20% of the above trend by the end of 1930’s. Also, what prevented the normal force of price mechanism(demand-supply) to work was the uneconomic government policies that restricted competition. The National Industry Recovery Act was passed in 1993 with the objective of restoring prosperity and also allowed the formation of cartels and other anti-trust activities such as allowing minimum prices and restructuring capacity expansion and with monopoly profits of cartel holders, wages were still above market trend.
However, it was only during the end of 1930’s when these policy of NIRA was replaced with Taft-Harley Act and thus labor hours began to rise. Further, the industrial wages were back in line with productivity and market trends and per capita hours worked were back to their normal level and depression was finally over in late 1939.
Works Cited
Matziorinis, Kenneth. The Causes of the Great Depression: A Retrospective . Research Report. Montreal: McGill University, 2007. PDF Document.
Ohanian, Lee E. Why Did The Great Depression Last So Long? 5 January 2009. Web. 12 December 2013.
