The Real Cost Of Depression

The Great Depression due to stock market crash on the New York Stock Exchange in October 1929, was an economic slump which affected North America, Europe and other industrialised nations. The stock prices in 1932 were believed to be of 20% of their value in 1929.People started investing heavily in stock markets pouring their life savings into it and borrowing more money from the banks. By 1929 investments went up by 218%. Production now started slowing down, because companies overestimated their growth, they were struggling to pay wages. But the stock market was still positive which is why people continued to invest in the stock market. By 1933 about 11,000 out of 25,000 banks failed in  the United States. This led to investors losing their confidence in the economy which in turn resulted in a fall of demand and spending which hampered the production. Because there was a fall in production the output reduced drastically and rate of unemployment increased sharply. This downward spiral was now a trap. The post war Europe was majorly credited by the United States but they were already in a weak financial position due to the First World War. Because American credit inflows in the European market was disrupted the European economy collapsed. Unemployment in British and German economy rose to 25% in 1929. This was followed by the second world war in 1938.

Roots of the Great Depression

Even though it was the stock market crash of 1929 which was blamed for this economic slowdown, this downturn can be attributed to the First World War. America emerged as one of the winners of the 1918 war, the economy was now blooming, this era was known as the roaring 20s with introduction of new technology and women now entering the workforce. But the war had impacted the international political and economic order. It had affected the industrialised nations like Germany, Frand and The Great Britain. The post-war atmosphere was now toxic with  distorted exchange rates, capital flows and trade which were brought about by the ‘Treaty Of Versailles’. Economies were still relying on laissez-faire, balanced national budgets, and the gold standard. By the 1920s the United States was a closed economy in 1922 the market was closed for foreign vendors with the Fordney-McCumber Tariff. The Smoot – Hawley tariff was introduced eight years later which worsened the situation. Because America extended its support to both the parties of the warfare, Washington now insisted European economies to repay the loan. This was accompanied by a crisis which had hit the farm belt in 1918. In 1920s public spending at all levels (country, state and cities) was just about 15% of the total GDP.

Domino Effect

The next decade was marked by the presence of higher unemployment and widespread poverty in America and the Great Britain. Unemployment benefits were minimal because of which the workers were prone to absolute poverty. The Sterling was overvalued by 10-14%, which affected the exports hence slowing down the recovery. This overvaluation combined with high interest rates led to a deflation. This was followed by The European Crisis (failure of German and Austrian banks ),which threatened the financial systems of both the UK and the US. Many new policies were adopted by the government in both the nations which would help them in economic recovery. Expansionary policy in the UK which included – lowering of interest rates, the rates fell to 0.6% in 1933, devaluation of the Pound by 28% against the Dollar and higher inflation. 

The Anti – Depressant 

The ‘New Deal’ was introduced in the US by Franklin Roosevelt. This deal included many federal government activities which would be a relief from the suffering and regulate private industries. The second phase of the ‘New Deal’ turned out to be successful ,because millions of Americans were employed for construction of public work projects. This period was important for the welfare for workers. 1930s could be said to be recovery period for economies which were hit by the depression. In 1939  German troops invaded Poland from the west which marked the beginning of the ‘Second World War’. A war would now mean need of armistice and war machinery, the production once again started booming, government spending increased and the unemployment rate fell. Ironically, it took a war to get over the effects of previous war.

Advent Of Keynesian

The Great Depression was triggered, at least in part, by underlying weaknesses and imbalances within the American economy obscured by the 1920’s boom psychology and speculative euphoria. These weaknesses were revealed by the failure of the nation’s political and financial institutions to deal with the vicious downward economic cycle set in 1930. Before the depression came into the picture most of the economies relied on the market forces without the government taking any necessary actions during economic slowdowns. But relying on these forces during the Great Depression couldn’t help the economies achieve the desired correction which was needed to keep them going. It was only after the 1930s when the United States restructured the economy. The importance of government intervention during the slowdown was now a necessity. After World War 2, the economies which struggled during the Great depression realised that, government intervention in any form like taxation, regulation of industries,  spending on public welfare or deficit spending is necessary in order to maintain economic stability.

Author: Ishita Gupta
B.Sc. Economics (Hons.) Symbiosis Schoo Of Economics

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