Economic Indicators of The Great Depression

Economic Indicators of The nifty stamp1. Start of the considerable DepressionThe Great Depression was a severe worldwide scotch depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it suck uped in nigh 1929 and lasted until the late 1930s or early 1940s.1 It was the longest, most far-flung, and deepest depression of the 20th century. In the 21st century, the Great Depression is comm wholly used as an example of how far the worlds thrift can mitigate. The depression originated in the U.S., starting with the gene direct in derivation prices that began around September 4, 1929 and became worldwide news with the stock commercialise crash of October 29, 1929 (known as Black Tuesday). From on that point, it quickly spread to almost e real country in the world.The Great Depression had devastating effect in virtually every country, rich and unforesightful. Personal income, tax revenue, profits and pric es dropped art object international trade plunged by to . Unemployment in the U.S. rose to 25% and in close to countries rose as higher(pre nominated) as 33%. Cities all around the world were hit hard, oddly those restricted on heavy industry. Construction was virtually halted in m any countries. Farming and rural areas suffered as crop prices fell by approximately 60%. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such(prenominal) as cash cropping, mining and logging suffered the most.Some economies started to rec everywhere by the mid-1930s. However, in many countries the negative effects of the Great Depression lasted until the start of World War II.2. Causes and scotch indicatorsThere were multiple causes for the first downturn in 1929. These include the structural weaknesses and specific events that off it into a major depression and the manner in which the downturn spread from country to country. In relation t o the 1929 downturn, historians emphasize structural factors like spacious verify failures and the stock market crash. In contrast, economists (such as Barry Eichengreen, Milton Friedman and Peter Temin) pane to financial factors such as actions by the US federal hold in that contracted the bullion supply, as well as Britains decision to return to the Gold Standard at pre-World War I parities (US$4.861).Recessions and course cycles are thought to be a normal part of living in a world of inexact balances between supply and demand. What turns a normal recession or ordinary business cycle into an actual depression is a subject of much debate and concern. Scholars start non agreed on the exact causes and their relative importance. Moreover, the search for causes is close connected to the issue of fend offing future depressions.Thus, the personal political and policy discernpoints of scholars greatly color their analysis of historic events occurring eight decades ago. An eve n capaciousr question is whether the Great Depression was primarily a failure on the part of free markets or, alternately, a failure of government efforts to regulate interest rates, curtail widespread savings bank failures, and control the notes supply. Those who believe in a larger economic exercise for the state believe that it was primarily a failure of free markets, while those who believe in a smaller role for the state believe that it was primarily a failure of government that com overreached the problem. flow theories may be broadly classified into two main points of view and several heterodox points of view. First, there are demand-driven theories, most importantly Keynesian economics, but also including those who point to the breakdown of international trade, and Institutional economists who point to under consumption and over-investment (causing an economic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The consensus amon g demand-driven theories is that a large-scale want of confidence direct to a sudden decrease in consumption and investment disbursal. Once panic and deflation set in, many people believed they could avoid advance ventes by keeping clear of the markets. Holding money became profitable as prices dropped lower and a given measuring of money bought ever much goods, exacerbating the drop in demand.Secondly, there are the monetarists, who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the Federal check), caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression. Related to this news report are those who point to debt deflation causing those who borrow to owe ever more in real terms.Lastly, there are various heterodox theories that downplay or reject the explanations of the Keynesians and monetarists . For example, some new classical macroeconomists have argued that various lying-in market policies imposed at the start caused the length and severity of the Great Depression. The Austrian school of economics focuses on the macroeconomic effects of money supply, and how central banking decisions can track to over-investment (economic bubble). The Marxist critique of political economy emphasizes the tendency of niftyist economy to create unbalanced accumulations of wealth, leading to over accumulations of capital and a repeating cycle of devaluations by means of economic crises.Table 1 Change in economic indicators 1929-32USABritainFranceGermanyIndustrial production46%232441Wholesale prices32%333429Foreign trade70%605461Unemployment+607%+129+214+2323. Breakdown of international tradeMany economists have argued that the sharp decline in international trade later on 1930 helped to correct the depression, especially for countries significantly dependent on foreign trade. Most his torians and economists partly infernal the American Smoot-Hawley Tariff bend (enacted June 17, 1930) for worsening the depression by disadvantageously diminution 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 number ad valorem rate of duties on dutiable imports for 1921-1925 was 25.9% but under the new tariff it jumped to 50% in 1931-1935.In dollar terms, American exports declined from about $5.2 meg in 1929 to $1.7 billion in 1933 but prices also fell, so the physical volume of exports only fell by half. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this guess, the collapse of farm exports caused many American farmers to default on their loans, leading to the bank runs on small rural banks that characterized the early y ears of the Great Depression.4. Debt deflationIrving Fisher argued that the predominant factor leading to the Great Depression was over-indebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles. He because outlined 9 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 followsDebt liquidation and distress sellingContraction of the money supply as bank loans are paid offA fall in the level of asset pricesA still greater fall in the net worth of business, precipitating bankruptciesA fall in profitsA reduction in output, in trade and in employment.Pessimism and loss of confidenceHoarding of moneyA fall in nominal interest rates and a rise in deflation adjusted interest rates.During the disrupt 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 obstruct 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(prenominal)(prenominal) the panic of 1929, and during the first 10 months of 1930, 744 US 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 which the 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 rein get outd up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral speed up.The liquidation of debt could not keep up with the fall of prices which 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 slighten 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.5 KeynesianBritish economist John Maynard Keynes argued in General Theory of Employment Interest and Money that lower aggregate expenditures in the economy contributed to a massiv e decline in income and to employment that was well below the average. In such a situation, the economy reached equilibrium at low levels of economic activity and high unemployment. Keynes 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 exuberant 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 shirk by increasing government spending and/or cutting taxes.As the Depression wore on, Franklin D. Roosevelt tried public works, farm subsidies, and other devices to restart the 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.5.1 MonetaristMonetarists, including Milton Friedman and current Fe deral Reserve System chairman Ben Bernanke, argue that the Great Depression was mainly caused by monetary contraction, the consequence of poor policymaking by the American Federal Reserve System and continued crisis in the banking system. In this view, the Federal Reserve, by not acting, allowed the money supply as mensurable by the M2 to shrink by one-third from 1929-1933, thereby transforming a normal recession into the Great Depression. Friedman argued that the downward turn in the economy, starting with the stock market crash, would have been just another recession. However, the Federal Reserve allowed some large public bank failures particularly that of the New York Bank of the linked States which produced panic and widespread runs on local banks, and the Federal Reserve sat idly by while banks collapsed. He claimed that, if the Fed had provided emergency lending to these key banks, or precisely bought government bonds on the open market to provide liquidity and increase th e 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, businessmen 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 regulation. At that time, the amount of credit the Federal Reserve could issue was limited by the Federal Reserve Act, which required 40% sumptuous backing of Federal Reserve Notes issued. By the late mid-twenties, the Federal Reserve had almost hit the limit of allowable credit that could be backed by the golden 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, particul arly 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 were 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.5.2 New classical approachRecent work from a neoclassical perspective focuses on the decline in productivity that caused the initial decline in output and a prolonged retrieval due to policies that masked the labor market. This work, collected by Kehoe and Prescott, decomposes the economic decline into a decline in the labor storm, capital stock, and the productivity with which these inputs are used. This study suggests that theories of the Great Depression have to explain an initial severe decline but rapid recovery in productivity, relatively little change in the capital stock, and a prolonged depression in the labor force. This analysis rejects theories that focus on the role of savings and posit a decline in the capital stock.5.3 Austrian SchoolAnother explanation comes from the Austrian School of economics. Theorists of the Austrian School who wrote about the Depression include Austrian economist Friedrich Hayek and American economist Murray Rothbard, who wrote Americas Great Depression (1963). In their view and like the monetarists, the Federal Reserve, which was created in 1913, shoulders much of the blame but in opposition to the monetarists, they argue that the key cause of the Depression was the expansion of the money supply in the 1920s that 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 c apital goods. By the time the Fed belatedly tightened in 1928, it was far too late and, in the Austrian view, a significant economic contraction was inevitable. According to the Austrians, the artificial interference in the economy was a disaster prior to the Depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. According to Rothbard, government intervention delayed the markets readjustment and made the road to complete recovery more difficult.5.4 MarxistMarx saw recession and depression as unavoidable under free-market capitalism as there are no restrictions on accumulations of capital other than the market itself. In the Marxist view, capitalism tends to create unbalanced accumulations of wealth, leading to over-accumulations of capital which inevitably lead to a crisis. This especially sharp bust is a regular feature of the boom and bust pattern of what Marxists term chaotic capitalist developing. It is a doctrine of many Mar xists groupings that such crises are inevitable and will be increasingly severe until the contradictions inherent in the mismatch between the mode of production and the development of productive forces reach the final point of failure, at which point, the crisis period encourages intensified class conflict and forces societal change6. InequalityTwo economists of the 1920s, Waddill Catchings and William Trufant Foster, popularized a theory that influenced many policy makers, including Herbert Hoover, Henry A. Wallace, Paul Douglas, and Marriner Eccles. It held the economy produced more than it consumed, because the consumers did not have enough income. Thus the unequal distribution of wealth throughout the 1920s caused the Great Depression.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 sovereign businesses, such as farms. The solution was the government must pump money into co nsumers pockets. That is, it must redistribute purchasing power, maintain the industrial base, but re-inflate 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 start large construction projects, a program followed by Hoover and Roosevelt.7. Turning point and recoveryVarious countries around the world started to recover from the Great Depression at different times. In most countries of the world, recovery from the Great Depression began in 1933. In the U.S., recovery began in the spring of 1933. However, 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 mainstream economists is that Roosevelts 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 Roosevelts words and actions portended. However, opposition from the new Conservative Coalition caused a rollback of the New Deal policies in early 1937, which caused a turnaround in the recovery. point 3 The overall course of the Depression in the joined States, as reflected in per-capita GDP (average income per person) shown in constant year 2000 dollars, nonnegative some of the key events of the period.According to Christina Romer, the money supply growth caused by huge international gold inflows was a crucial source of the recovery of the fall in States economy, and that the econom y 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. Current Chairman of the Federal Reserve Ben Bernanke agrees that monetary factors played important roles both in the worldwide economic decline and eventual recovery. Bernanke, also sees a besotted role for institutional factors, particularly the rebuilding and restructuring of the financial system, and points out that the Depression needs to be examined in international perspective. Economists Harold L. Cole and Lee E. Ohanian, believe that the economy should have returned to normal after four years of depression except for continued depressing influences, and point the finger to the lack of downward flexibility in prices and wages, encouraged by Roosevelt Administration policies such as the subject area Industrial Recovery Act.8. Gold idealEconomic 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 most to make recovery possible. What policies countries followed after casting off the gold standard, and what results followed varied widely.Every major currency left the gold standard during the Great Depression. Great Britain 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.Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931. Other countries, such as Italy and the U.S., 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 1935-1936.According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain 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 association between leaving the gold standard as a strong predictor of that countrys severity of its depression and the length of time of its recovery has been shown to be concordant for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies.9. World War II and recoveryThe 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. However, some consider that it did not play a very large role in the recovery, although it did help in reducing unemployment.The massive rearmament policies leading up to World War II helped stimulate the economies of Europe in 1937-39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of work force spare-time activity the outbreak of war in 1939 finally ended unemployment.Americas entry into the war in 1941 finally eliminated the last effects from the Great Depression and brought the unemployment rate down below 10%. In the U.S., 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.Picture 5 A female factory worker in 1942, Fort Worth, Texas. Women entered the workforce as men were drafted into the armed forces.10. EffectsThe majority of countries set up relief programs, and most underwent some sort of political upheaval, pushing them to the left or right. In some states, the desperate citizens turned toward nationalist demagoguesthe most disreputable being Adolf Hitlersetting the stage for World War II in 1939.CanadaHarshly affected by both the global economic downturn and the sprinkle Bowl, Canadian industrial production had fallen to only 58% of the 1929 level by 1932, the second lowest level in the world after the United States, and well behind nations such as Britain, which saw it fall only to 83% of the 1929 level. Total national income fell to 56% of the 1929 level, again worse than any nation apart from the United States. Unemployment reached 27% at the depth of the Depression in 1933. During the 1930s, Cana da employed a highly restrictive immigration policy.FranceThe Depression began to affect France around 1931. Frances relatively high degree of self-sufficiency meant the damage was considerably less than in nations like Germany. However, hardship and unemployment were high enough to lead to bacchanalia and the rise of the socialist Popular Front.GermanyGermanys Weimar Republic was hit hard by the depression, as American loans to help rebuild the German economy now stopped. Unemployment soared, especially in larger cities, and the political system veered toward extremism. The unemployment rate reached nearly 30% in 1932. Repayment of the war reparations due by Germany were suspended in 1932 following the Lausanne Conference of 1932. By that time, Germany had repaid of the reparations. Hitlers Nazi Party came to power in January 1933.JapanThe Great Depression did not strongly affect Japan. The Japanese economy shrank by 8% during 1929-31. However, Japans Finance Minister Takahashi K orekiyo was the first to implement what have come to be place 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 materials began to displace British textiles in export markets. The deficit spending, however proved to be most profound. The deficit spending 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 militarys 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 would remain a problem until the end of World War II.The deficit spending had a transformative effect on Japan. Japans 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 Japans automakers, like 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.Soviet UnionHaving removed itself from the capitalist world system both by choice and as a result of efforts of the capitalist powers to isolat e it, the Great Depression had little effect on the Soviet Union. A Soviet trade agency in New York advertised 6,000 positions and received more than 100,000 applications. Its apparent resistivity to the Great Depression seemed to validate the theory of Marxism and contributed to Socialist and Communist agitation in affected nations.United KingdomThe effects on the northerlyern 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 ship production fell 90%. The National Hunger March of September-October 1932 was the largest of a series of yearning marches in Britain in the 1920s and 1930s. About 20 0,000 unemployed men were sent to the work camps, which continued in operation until 1939.In the less industrial Midlands and South of 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 StatesPresident Herbert Hoover started numerous programs, all of which failed to reverse the downturn. 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. However, other nations increased tariffs on American-made goods in retaliation, reducing international trade, and worsening the Depression. In 1931 Hoover ur ged the major banks in the country to form a consortium known as the National Credit Corporation (NCC). By 1932, unemployment had reached 23.6%, and it peaked in early 1933 at 25%, a drought persisted in the agricultural heartland, businesses and families defaulted on record numbers pool of loans, and more than 5,000 banks had failed. Hundreds of thousands of Americans found themselves homeless and they began congregating in the numerous Hoovervilles that had begun to appear across the country. In response, President Hoover and Congress approved the Federal fellowship 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 simpleness 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 RFCs initial remnant was to provide government-secured loans to fin ancial institutions, railroads and farmers. 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.Shortly after President 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. The Securities Act of 1933 comprehensively regulated the securities industry. This was followed by the Securities Exchange Act of 1934 which created the Securities and Exchange Commission. Though amended, key nutrition of both Acts are sti ll in force.Early changes by the Roosevelt administration includedInstituting regulations to fight deflationary cut-throat competition through the NRA.Setting minimum prices and wages, labor standards, and competitive conditions in all industries through the NRA.Encouraging unions that would raise wages, to increase the purchasing power of the working class.Cutting farm production to raise prices th