The great depression which caused a worldwide economic recession beginning from 1929 and lasting for nearly 10 years is considered to be the longest and most severe depression to have occurred in industrialized countries. Though it had its origins in the United States, it affected several countries around the world including Europe, Japan and Latin America. The causes which led to such a catastrophic depression include a decline in consumer spending, financial instability and panics such as the stock market crash and banking failures, the gold standard and foreign lending and trade. The depression drastically changed living standards worldwide as people suffered losses of wealth and regular income. However, the depression initiated several policy responses to change the economic downturn. The period also witnessed the growth of the labor unions and various welfare schemes were introduced by the US government to cater for the unemployed. Several key government regulations and policies were also introduced to counteract the effect of the depression. Some of these policies did not help in improving the situation and contributed to a slower recovery period. It was only after the World War II that the country’s economy was back on the recovery track with increases in consumer spending and rises in employment (Romer; Smiley).
The great depression caused huge declines employment, industrial production and growth and deflation in all countries worldwide. Beginning in the United States in the summer of 1929, the effect of the depression spread far and wide across many countries in Europe and Latin America and in Japan. The depression worsened during late 1929 and lasted up to 1933. During this period the industrial production in America declined by 47 percent and the GDP reduced by 30 percent. The wholesale price index or the deflation rate slumped by 33 percent and the unemployment rate increased by 20 percent (Romer). Several causes have been attributed to have caused the great depression. Monetary contractions by the Federal Reserve and a general decline in consumer spending are considered to be principle causes that initiated the depression. The stock market grew explosively during the 1920’s with the stock prices reaching its peak in 1929. In order to curb this rapid rise in stock prices the Federal Reserve increased the interest rates which caused the initial decline in consumer spending. This was followed by a gradual decline in stock prices which eventually led to rapid selling as investors began to lose confidence in the value of the stocks. In a span of three months the US stock prices reduced by nearly 33 percent. Consumer spending drastically reduced following this stock market crash which in turn affected industrial production rates and employment. Thus while many lost all their savings in the stock market millions were left unemployed which compounded the problem further (Romer).
The stock market crisis was followed by the banking panics with depositors losing their trust in banks and demanding back their deposits in cash. This resulted in banks resorting to liquidation of their assets to pay back the deposits. This heavy liquidation caused many banks to fail between the years 1930 to 1933. In an attempt to end these banking panics President Franklin Roosevelt declared a national bank holiday on March 6, 1933, which required all banks to close and reopen only after being duly inspected by government authorities and their solvent status determined. By the time the banks reopened in 1933 nearly one-fifth of the banks had failed and was forced to close down. A major reason for these banking panics was attributed to the heavy farm debt faced by agriculturalists who had borrowed heavily after the prices of agriculture goods soared following the World War I. however, after the war the prices of goods fell sharply and as a result these farmers found it extremely difficult to pay back their loans. With the Federal Reserve doing very little to save the banks from failure, the money supply within the US reduced by 31 percent between 1929 and 1933. As a result of a heavy decline in the money supply, people expected a deflation in future by which both the prices of goods as well as wages were expected to decrease. This resulted in a rapid decline in the money borrowed for interest as people feared that they may not be able to repay their loans when the wages decrease. This trend eventually affected consumer spending and business investments (Romer).
Economists also attributed the reduction in money supply to the commitment of the US government to maintain the gold standard through which the country defended its currency rate. They believed that if the Federal Reserve had responded to the banking panics through an expansion its commitment to the gold standard would have been affected and eventually its currency devalued. The monetary contraction and increase in the interest rates by the Federal Reserve are also seen as an attempt to prevent an attack on the US dollar by other countries. However, the sharp declines in the monetary supply resulted in heavy gold outflows from other countries to the US as goods produced in America became affordable to foreigners and the demand for foreign products reduced in America. In response to this increased trade in the US and gold outflows from other countries heavy monetary contractions occurred throughout the world in an attempt to maintain the international gold standard. This ultimately led to a decline in production and prices in many countries which caused widespread banking failures and deepened the financial crisis (Romer; Smiley). Other less significant causes suggested by some economists include the reduction in international lending especially by the US due to the high interest rates and expanding stock markets. This in turn affected trade and production in countries which borrowed money from the US. Certain policies enacted by the US such as the Smoot-Hawley tariff which was initiated to increase the income from agricultural products and thereby reduce competition from foreign products was a protectionist policy targeted to boost indigenous goods and its market within the country. Such policies had a drastic effect on the trade and also contributed to the huge declines in the price of raw materials worldwide (Romer).
Thus the great depression had a tremendous impact on the living standards of the people and economy of the country. Nearly one-fourth of the labor force was unemployed at the start of the depression and the trend continued till the mid-1930s. The situation continued for nearly a decade despite several key policies and welfare acts passed by the government. Many economists have pointed to the functioning of the labor markets for the delayed recovery process. They have blamed the reduced spending by the government and the monetary contractions to be contributing factors for the slow recovery period. It is a normal phenomenon to expect low wages during periods of depression, which would have resulted in reduced business costs and thereby increased the employment rate and productivity. However, by the end of the 1930s the wages paid in the industrial sectors were more than 20% above the expected wages. One of the major factors attributed to the rise in wages is the various governmental policies that were introduced in order to prevent competition from outside. One such policy was the The National Industrial Recovery Act (NIRA) which focused on reducing the production while increasing the wages of the workers. Industries collectively worked and fixed prices for the products and expansion and productivity in industries was severely affected. Codes were established by industries through which industry prices and wages were increased. While the NIRA was eventually ruled out in the later period as many believed that it was unconstitutional, the National Labor Relations Act that followed it led to further bargaining by labor unions and increase in labor wages in the years following the passage of the Act (Smiley; Ohanian). This trend resulted in severe unemployment which led to a rise in union membership between the years 1930 and 1940. As a response to the rising unemployment and increasing hardships faced by the people the government introduced various monetary policies such as the Social Security Act by which compensations were provided to the unemployed and insurance was provided to older citizens and survivors. On the positive front the depression also led to the establishment of various macroeconomic regulations and policies. The Securities and Exchange Commission was established to regulate the stock market and the Banking Act was put in place in order to restore the smooth functioning of banks following the banking crisis (Romer).
However, the employment situation began to change with increased working hours and the modification of the National Labor Relations Act by the end of the 1940s by the Taft-Hardley Act. This Act caused a rise in industrial productivity and the labor wages were reduced to the normal expected levels based on the per capita hours worked (Smiley; Ohanian). Looking back at the depression many scholars now suggest that a rise in government spending along with suitable tax deductions and financial expansions could have hastened the recovery path. In addition stabilization of employment and industrial productivity by the government has also been recommended as a means to counteract depressions (Romer).
Thus in conclusion, while the experiences of the great depression will be a vivid memory for those who endured all the hardships, the lessons learnt from it will help governments and other policymakers to safeguard the economy and prevent similar situation from arising in future.
Ohanian, Lee E. Why did the Great Depression Last so Long? Forbes. 5 Jan. 2009. Web. 10 December 2013. http://www.forbes.com/2009/04/30/1930s-labor-wages-business-ohanian.html
Romer, Christina D. Great Depression. 20 December 2003. Web. 10 December 2013. http://elsa.berkeley.edu/~cromer/great_depression.pdf
Smiley, Gene. Great Depression. Library of Economics and Liberty. n.d. Web.10 December 2013. http://www.econlib.org/library/Enc/GreatDepression.html