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Great Depression: the story on HearLore | HearLore
Great Depression
On the 24th of October 1929, the American stock market crashed 11% at the opening bell, a day that would come to be known as Black Thursday. This was not merely a bad day for investors; it was the detonation of a financial time bomb that had been ticking since the end of World War I. The Dow Jones Industrial Average, which had stood at 381 in September, plummeted to 198 over the course of two months, and by the 28th of October, Black Monday, the market crashed another 12%. The panic peaked the next day on Black Tuesday, when the market saw another 11% drop, ruining thousands of investors and wiping out billions of dollars in value. Stocks could not be sold at any price, and the psychological damage was immediate and profound. Yet, despite the devastation, optimism persisted for some time. The stock market actually rose in early 1930, with the Dow returning to 294, which were pre-depression levels, in April 1930, before steadily declining for years to a low of 41 in 1932. From September 1929 to the 8th of July 1932, the market lost 85% of its value, a figure that would haunt the global economy for a decade. The crisis did not immediately reverberate around the world, but the seeds of the Great Depression had been sown in the Roaring Twenties, a period of industrial growth and social development that masked the growing wealth inequality and loose lending practices that would eventually bring the system to its knees. Banks were subject to minimal regulation, resulting in widespread debt and a fragile financial system that could not withstand the shock of the crash. By 1933, the U.S. unemployment rate had risen to 25%, about one-third of farmers had lost their land, and 9,000 of its 25,000 banks had gone out of business, leaving a nation in ruins.
The Gold Standard Trap
The rigidities of the gold standard not only spread the downturn worldwide but also suspended gold convertibility, which did the most to make recovery possible. Every major currency left the gold standard during the Great Depression, but the timing of that departure determined the severity of the economic collapse. Countries that abandoned the gold standard early, such as the United Kingdom in September 1931, experienced relatively mild recessions and early recoveries. In contrast, countries that remained on the gold standard, like France and Belgium, suffered prolonged slumps. The gold standard was the primary transmission mechanism of the Great Depression, forcing countries that lost gold to permit their money supply to decrease and the domestic price level to decline, a process known as deflation. Under the gold standard's price-specie flow mechanism, countries that lost gold but nevertheless wanted to maintain the gold standard had to permit their money supply to decrease and the domestic price level to decline. This deflationary policy led to a collapse in international trade, which fell by more than 50% during the crisis. The United States, which remained on the gold standard into 1933, suffered a 30% contraction in GDP, while countries that left the standard early, such as Japan and the Scandinavian countries, recovered much faster. The connection between leaving the gold standard as a strong predictor of that country's severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between regions and states around the world. The gold standard was a straitjacket that prevented governments from using monetary policy to fight the crisis, forcing them to choose between maintaining the value of their currency and saving their economies.
Common questions
When did the Great Depression begin and what event triggered it?
The Great Depression began on the 24th of October 1929 when the American stock market crashed 11% at the opening bell, an event known as Black Thursday. This financial crash triggered a global economic downturn that lasted from 1929 to 1939.
How did the gold standard affect the severity of the Great Depression?
The gold standard acted as a primary transmission mechanism that spread the downturn worldwide and forced countries to reduce their money supply and domestic price levels. Countries that abandoned the gold standard early, such as the United Kingdom in September 1931, experienced relatively mild recessions and early recoveries compared to those that remained on it.
What was the impact of the Great Depression on Germany and its political landscape?
The crisis caused unemployment in Germany to rise to nearly 30% and fueled political extremism that paved the way for Adolf Hitler's Nazi Party to rise to power in 1933. The financial crisis escalated out of control in mid-1931, starting with the collapse of the Credit Anstalt in Vienna in May.
What were the unemployment rates and bank failures in the United States during the Great Depression?
By 1933, the U.S. unemployment rate had risen to 25% and 9,000 of its 25,000 banks had gone out of business. About one-third of farmers had lost their land, leaving the nation in ruins.
How did World War II end the Great Depression?
The outbreak of World War II in 1939 ended the Depression by stimulating factory production and absorbing large numbers of unemployed men into the military. The American mobilization for World War II at the end of 1941 moved approximately 10 million people out of the civilian labor force and into the war.
In Germany, which depended heavily on U.S. loans, the crisis caused unemployment to rise to nearly 30% and fueled political extremism, paving the way for Adolf Hitler's Nazi Party to rise to power in 1933. The financial crisis escalated out of control in mid-1931, starting with the collapse of the Credit Anstalt in Vienna in May, which put heavy pressure on Germany, which was already in political turmoil with the rise in violence of national socialist and communist movements. The Reichsbank lost 150 million marks in the first week of June, 540 million in the second, and 150 million in two days, 19 to the 20th of June, and collapse was at hand. U.S. President Herbert Hoover called for a moratorium on payment of war reparations, which angered Paris, which depended on a steady flow of German payments, but it slowed the crisis down, and the moratorium was agreed to in July 1931. An international conference in London later in July produced no agreements, but on the 19th of August, a standstill agreement froze Germany's foreign liabilities for six months. Germany received emergency funding from private banks in New York as well as the Bank of International Settlements and the Bank of England, but the funding only slowed the process. Industrial failures began in Germany, a major bank closed in July, and a two-day holiday for all German banks was declared. Business failures became more frequent in July, and spread to Romania and Hungary. In 1932, 90% of German reparation payments were cancelled, and widespread unemployment reached 25%, as every sector was hurt. The government did not increase government spending to deal with Germany's growing crisis, as they were afraid that a high-spending policy could lead to a return of the hyperinflation that had affected Germany in 1923. The Great Depression hit Germany hard, and the impact of the Wall Street crash forced American banks to end the new loans that had been funding the repayments under the Dawes Plan and the Young Plan. The crisis in Germany was a catalyst for the rise of the Nazi Party, which promised to restore order and prosperity to a nation in chaos.
The Human Cost Of Unemployment
By 1933, the U.S. unemployment rate had risen to 25%, about one-third of farmers had lost their land, and 9,000 of its 25,000 banks had gone out of business, leaving a nation in ruins. The Great Depression was a severe global economic downturn from 1929 to 1939, characterized by high rates of unemployment and poverty, drastic reductions in industrial production and international trade, and widespread bank and business failures around the world. The economic contagion began in 1929 in the United States, the largest economy in the world, with the devastating Wall Street crash of 1929 often considered the beginning of the Depression. Among the countries with the most unemployed were the U.S., the United Kingdom, and Germany. The Depression was preceded by a period of industrial growth and social development known as the Roaring Twenties, but much of the profit generated by the boom was invested in speculation, such as on the stock market, contributing to growing wealth inequality. Banks were subject to minimal regulation, resulting in loose lending and widespread debt. By 1929, declining spending had led to reductions in manufacturing output and rising unemployment. Share values continued to rise until the October 1929 crash, after which the slide continued until July 1932, accompanied by a loss of confidence in the financial system. The Great Depression had devastating economic effects on both wealthy and poor countries: all experienced drops in personal income, prices, tax revenues, and profits. International trade fell by more than 50%, and unemployment in some countries rose as high as 33%. Cities around the world, especially those dependent on heavy industry, were heavily affected. Construction virtually halted in many countries, and farming communities and rural areas suffered as crop prices fell by up to 60%. Faced with plummeting demand and few job alternatives, areas dependent on primary sector industries suffered the most. The human cost of the Great Depression was measured in lost livelihoods, broken families, and a generation of children who grew up in poverty and uncertainty.
The New Deal And Recovery
In the 1932 presidential election, Hoover was defeated by Franklin D. Roosevelt, who from 1933 pursued a set of expansive New Deal programs in order to provide relief and create jobs. In the U.S., recovery began in early 1933, but 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 most economists is that Roosevelt's 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 Roosevelt's words and actions portended. It was the rollback of those same reflationary policies that led to the interruption of a recession beginning in late 1937. One contributing policy that reversed reflation was the Banking Act of 1935, which effectively raised reserve requirements, causing a monetary contraction that helped to thwart the recovery. GDP returned to its upward trend in 1938. A revisionist view among some economists holds that the New Deal prolonged the Great Depression, as they argue that National Industrial Recovery Act of 1933 and National Labor Relations Act of 1935 restricted competition and established price fixing. John Maynard Keynes did not think that the New Deal under Roosevelt single-handedly ended the Great Depression, stating that it was politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove his case except in war conditions. According to Christina Romer, the money supply growth caused by huge international gold inflows was a crucial source of the recovery of the United States economy, and that the economy 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.
The War That Ended The Depression
The outbreak of World War II in 1939 ended the Depression, as it stimulated factory production, providing jobs for women as militaries absorbed large numbers of young, unemployed men. The 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, though some consider that it did not play a very large role in the recovery, though it did help in reducing unemployment. The rearmament policies leading up to World War II helped stimulate the economies of Europe in 1937 to 1939. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of manpower following the outbreak of war in 1939 ended unemployment. The American mobilization for World War II at the end of 1941 moved approximately 10 million people out of the civilian labor force and into the war. This finally eliminated the last effects from the Great Depression and brought the U.S. unemployment rate down below 10%. World War II had a dramatic effect on many parts of the American economy. Government-financed capital spending accounted for only 5% of the annual U.S. investment in industrial capital in 1940; by 1943, the government accounted for 67% of U.S. capital investment. The 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. The war effort created jobs for millions of Americans, including women who entered the workforce in unprecedented numbers, and it ended the Great Depression by stimulating factory production and absorbing the unemployed into the military.