Great Depression: Summary | Cause | Facts & Effects

• 25 April 2020 | 1320 Views | By Mansi Jain

It is impossible to think about the current Great Recession without flashing back to the “Great Depression” of 1930’s. There are several reasons to remember it. One of the reasons is that it was by far the worst economic catastrophe of the 20^th century and perhaps the worst in a nation’s history. It took place mostly during the beginning of 1930 in the United States.

Another reason to remember The Great Depression is that it involved every aspect of the economy and region of the country. It can be used to learn important aspects of economic concepts along with inflation, deflation, Gross domestic product (GDP), and unemployment by comparing the depression with more recent experiences. Further, the Great Depression shows the importance of money, stock market and banks in our economy.  

One more reason is that it dramatically changed the role of government in a nation’s economy. Before the great depression the government spending accounted for 3% of GDP which increased to 10% of GDP by 1939 and in present accounts for 20% of GDP. It also gave us the Insurance corporations, regulation of securities markets, security systems and the first national minimum wage. 

What were the major causes of the Great Depression?

The depression was caused by several serious weaknesses in the economy. Although the 1920’s appeared on the surface to be financially healthy, income was unevenly distributed. The after effects of World War I (194-1918) caused economic and financial problems in many European countries as they struggled to pay war debts. These problems contributed to the crisis that eventually led to great depression.

The major cause was the Stock market crash of 1929. During the 1920’s the U.S. stock market underwent a historic expansion. There was a rise in stock prices and investing in the stock market became an easy way to make money. To buy stocks even common man started using their disposable income and mortgaged their homes.

However, the prices of stock began to decline from September and on October 18^th the fall began. Panic set in and investors rushed in to liquidate their holdings. On October 24^th often termed as Black Thursday a record of 12 million shares were traded. Financial Institutions or companies and leading bankers tried to stabilize the market. On Monday, October 28^th, 1929, the market was in complete free fall. Black Monday was followed by Black Tuesday (October 29^th, 1929), on which stock prices collapsed completely. However, as big as it was the stock market crash alone did not cause the great depression. 

There are many other reasons for great depression, and from time to time economists have come up with different theories for the same and one of them is panic in the banking sector and monetary contractions. Between 1930 and 1932 the depositors, fearful of their bank’s solvency, attempted to withdraw their deposits. Government guarantees, and federal reserves were not able to prevent such panics. Banks collapsed, and their reserves were wiped out. Also, most of the banks contracted their deposits and loans. The monetary contraction, as well as the financial chaos associated with the failure of a large number of banks, caused the economy to collapse.

Another predominant factor leading to the great depression is termed as “Debt Deflation” i.e., over indebtedness and deflation. Nine factors were outlined by Fisher which interacted with one another to create the mechanics of boom to bust under conditions of debt and deflation.

What were the effects of the Great Depression?

The chain of events is proceeded as follows: 

1. Debt liquidation and distress selling. 
2. Contraction of money supply as bank loans are paid off. 
3. A fall in level of asset prices. 
4. A still greater fall in the net worth’s of business, precipitating bankruptcies.
5. A fall in profits. 
6. A reduction in profits, trade and unemployment. 
7. Loss of confidence. 
8. Hoarding of money. 
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

Another strategy of the past was the implementation of higher tariffs also known as The Smoot Hawley Tariff Act. In 1930, with an eye towards protecting US business and American workers, the act was passed. The thinking was that with higher tax on foreign goods, people would buy more American goods, which would lead to a boost to the economy. However, it backfired. People didn’t begin to buy in large numbers and other nations retaliated. This move came in the form of a double edge sword as it reduced production and revenue of foreign goods and such companies. As a result, jobs were cut which added fuel to the economic crisis.

How did the Great Depression end?

Everything comes to an end and the monetary hemorrhage experience during the Great Depression finally ended when President Franklin D. Roosevelt enacted the Emergency Bank Act. A mandatory bank holiday was declared. With all the banks closed, the federal government assessed which banks were healthy, which could be saved, and which were too far gone and needed to be closed permanently. The banks that could be saved were brought under the management of the government. The eventual goal of the program was to restore faith in the banking system. Meanwhile, the government created the Federal Deposit Insurance Corporation (FDIC) and a permanent deposit insurance system. 

Civilian Conservation Corps

Roosevelt’s New Deal was applauded by many historians as it played a lead role in the economic recovery from the Great Depression. Another key provision of the New Deal platform was short term relief for the jobless people. To that end the Roosevelt administration created the Civilian Conservation Corps. The CCC was a program to employ single young men at the onset but later expanded to a greater portion of the population. The program was a huge success. Most of the problems were solved and it helped in solving financial and psychological problems.

Although some aspects of the New Deal might have hampered recovery. For example, the National Recovery Act (NRA) slowed the recovery by encouraging the formation of industrial cartels, which limited the competition and discouraged employment. Still by restoring confidence in the financial system the above policies did help in economic recovery. 

Will Great Depression happen again?

It is doubtful that a 1929 style depression could happen as financial matters like commercial and investment banking are substantially regulated. However, these regulations may not prevent depression but may soften the blow. Recession and depression are regular and recurring features of an economy. The recession of 2008 had the potential to become a bona fide depression. Existing regulations of 2008 controlled the damage which permitted the bailout and stimulus measures gave a boost to the economy. Depression was avoided.  

However, Government indecision amid the coronavirus crisis has again fueled fears of a long recession or rather gave a way to a question “Will there be another Great Depression?”. 

How is the Global Market Currently?

Recently, there was a global market crash in the wake of the coronavirus outbreak. The stock market crash of 1929 and the ensuing great depression of the 1930’s have been raised. Comparisons no longer seem fanciful. The failure of the US and UK to swing into action with a wide range of mitigation measures has heightened concerns that a sustained economic downturn lies in wait. In the same way, the third decade of the 21st century could add another 10 years of depression that followed the 2008 financial crash.

Also, V shaped recovery as predicted by Wall Street is now moving towards low growth L-shaped recovery due to current COVID -19 outbreak. However, there are still economic forecasters who predict a speedy return to health and a V shaped recovery. Problem is global in nature and protections are local in nature, if there is another Great Depression it will make 1929 look like a day at the beach. 

In the meantime, when the economy is uncertain, in such times we should try to increase savings and reduce the debts. We should look to build up emergency funds and savings which will help in the time of economic crisis.