Great Depression 1920s

8/8/2019 Great Depression 1920s

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Report On

Submitted To: Submitted By:

Prof. Nimesh Khandelwal Group No. 5

(Sen Hall)


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Table of Continent

Topic Page No.

Introduction .. 1.

Brief History.. 1.

Economic Implications on the world. 2.

Causes..3.

Theory for causes..4-6

1. Keynesian models2. Monetarist explanations3. Inequality of wealth and income

4. Debt deflation

5. Breakdown of international trade

Effect Countries.8-10

Lessons from the Great Depression.12-13


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Introduction

The Great Depression was a worldwide economic downturn starting inmost places in 1929 and ending at different times in the 1930s or early1940s for different countries. It was the largest economic depression inthe 20th century, and is used in the 21st century as an example of howfar the world's economy can fall. The Great Depression originated in theUnited States; historians most often use as a starting date the stockmarket crash on October 29, 1929, known as Black Tuesday.

Brief History

The Great Depression was triggered by a sudden, total collapse in thestock market. The stock market turned upward in early 1930, returningto early 1929 levels by April, though still almost 30 percent below the

peak of September 1929. Together, government and business actuallyspent more in the first half of 1930 than in the corresponding period ofthe previous year. But consumers, many of whom had suffered severelosses in the stock market the previous year, cut back their expenditures

by ten percent, and a severe drought ravaged the agricultural heartlandof the USA beginning in the summer of 1930.

In early 1930, credit was ample and available at low rates, but people

were reluctant to add new debt by borrowing. By May 1930, auto sales

had declined to below the levels of 1928. Prices in general began to

decline, but wages held steady in 1930, then began to drop in 1931.

Conditions were worse in farming areas, where commodity prices

plunged, and in mining and logging areas, where unemployment was

high and there were few other jobs. The decline in the US economy was

the factor that pulled down most other countries at first, and then internal

weaknesses or strengths in each country made conditions worse or


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better. Frantic attempts to shore up the economies of individual nations

through protectionist policies, such as the 1930 U.S. Smoot-Hawley

Tariff Act and retaliatory tariffs in other countries, exacerbated the

collapse in global trade. By late in 1930, a steady decline set in whichreached bottom by March 1933.

Economic implication on world

The depression had devastating effects in virtually every country, rich orpoor. International trade plunged by half to two-thirds, as did personalincome, tax revenue, prices and profits. Cities all around the world werehit hard, especially those dependent on heavy industry. Construction was

virtually halted in many countries. Farming and rural areas suffered ascrop prices fell by roughly 60 percent. Facing plummeting demand withfew alternate sources of jobs, areas dependent on primary sectorindustries such as farming, mining and logging suffered the most.However, even shortly after the Wall Street Crash of 1929, optimism

persisted; John D. Rockefeller said that "These are days when many arediscouraged. In the 93 years of my life, depressions have come andgone. Prosperity has always returned and will again."

The Great Depression ended at different times in different countries; forsubsequent history see Home front during World War II. The majority ofcountries set up relief programs, and most underwent some sort of

political upheaval, pushing them to the left or right. In some states, thedesperate citizens turned toward nationalist demagoguesthe mostinfamous being Adolf Hitlersetting the stage for World War II in1939.


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Causes

There were multiple causes for the first downturn in 1929, including thestructural weaknesses and specific events that turned it into a major

depression and the way in which the downturn spread from country tocountry. In relation to the 1929 downturn, historians emphasizestructural factors like massive bank failures and the stock market crash,while economists (such as Peter Temin and Barry Eichengreen) point toBritain's decision to return to the Gold Standard at pre-World War I

parities (US$4.86:1).

Theories for causes

Keynesian models

In Keynes's theory, some micro-level of individuals and firms can leadto aggregate macroeconomic outcomes in which the economy operates

below its potential and growth. Some classical economists had believed

in Says Law that supply creates its own demand, so that a "general glut"would therefore be impossible. Keynes contended that a aggregatedemand for goods might be insufficient during economic downturns,leading to unnecessarily high Unemployment and losses of potentialoutput. Keynes argued that government policies could be used toincrease aggregate demand, thus increasing economic activity andreducing unemployment and deflation. A central conclusion ofKeynesian economics is that, in some situations, no strong automatic

mechanism moves output and employment towards full employmentlevels. This conclusion conflicts with economic approaches that assumea general tendency towards equilibrium. In the neoclassical synthesis',which combines Keynesian macro concepts with a micro foundation, theconditions of general equilibrium allow for price adjustment to achievethis goal.


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Keynes sought to develop a theory that would explain determinants ofsaving, consumption, investment and production. In that theory, theinteraction of aggregate demand and aggregate supply determines thelevel of output and employment in the economy.

Because of what he considered the failure of the Classical Theory inthe 1930s, Keynes firmly objects to its main theory--adjustments in

prices would automatically make demand tend to the full employmentlevel.

Neo-classical theory supports that the two main costs that shift demandand supply are labor and money. Through the distribution of themonetary policy, demand and supply can be adjusted. If there were more

labor than demand for it, wages would fall until hiring began again. Ifthere was too much saving, and not enough consumption, then interestrates would fall until people either cut their savings rate or started

borrowing.

He also argued that to boost employment, real wages had to go down:nominal wages would have to fall more than prices. However, doing sowould reduce consumer demand, so that the aggregate demand for goods

would drop. This would in turn reduce business sales revenues andexpected profits. Investment in new plants and equipmentperhapsalready discouraged by previous excesseswould then become morerisky, less likely. Instead of raising business expectations, wage cutscould make matters much worse.

2. Monetarist explanations

3. Inequality of wealth and income

4. Debt deflation

5. Breakdown of international trade


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US industrial

production

US Farm Prices, (1928-35).


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Effected countries


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Hard effected countries

1.The Depression in the United StatesIn October 1929 the stock market crashed, wiping out 40 percent of the

paper values of common stock. Even after the stock market collapse,however, politicians and industry leaders continued to issue optimistic

predictions for the nation's economy. But the Depression deepened,confidence evaporated and many lost their life savings. By 1933 thevalue of stock on the New York Stock Exchange was less than a fifth ofwhat it had been at its peak in 1929. Business houses closed their doors,factories shut down and banks failed. Farm income fell some 50 percent.By 1932 approximately one out of every four Americans wasunemployed.

Causes:

In October 1929 the stock market crashed, wiping out 40 percent of thepaper values of common stock. Even after the stock market

collapse, however, politicians and industry leaders continued to issueoptimistic predictions for the nation's economy. But the Depressiondeepened, confidence evaporated and many lost their life savings. By1933 the value of stock on the New York Stock Exchange was less thana fifth of what it had been at its peak in 1929. Business houses closedtheir doors, factories shut down and banks failed. Farm income fell some50 percent. By 1932 approximately one out of every four Americans wasunemployed.


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Roosevelt and the New Deal:

In 1933 the new president, Franklin Roosevelt, brought an air ofconfidence and optimism that quickly rallied the people to the banner ofhis program, known as the New Deal. When Roosevelt took the

presidential oath, the banking and credit system of the nation was in astate of paralysis.The administration adopted a policy of moderate currency inflation tostart an upward movement in commodity prices and to afford some reliefto debtors. New governmental agencies brought generous credit facilities

to industry and agriculture. The Federal Deposit Insurance Corporation(FDIC) insured savings-bank deposits up to $5,000, and severeregulations were imposed upon the sale of securities on the stockexchange.

Unemployment

By 1933 millions of Americans were out of work. Bread lines were a

common sight in most cities. Hundreds of thousands roamed the countryin search of food, work and shelter. An early step for the unemployedcame in the form of the Civilian Conservation Corps (CCC), a programenacted by Congress to bring relief to young men between 18 and 25years of age. Run in semi-military style, the CCC enrolled jobless youngmen in work camps across the country for about $30 per month. About 2million young men took part during the decade. They participated in avariety of conservation projects: planting trees to combat soil erosion

and maintain national forests; eliminating stream pollution; creating fish,game and bird sanctuaries; and conserving coal, petroleum, shale, gas,sodium and helium deposits.


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Agriculture

The New Deal years were characterized by a belief that greaterregulation would solve many of the country's problems. In 1933, forexample, Congress passed the Agricultural Adjustment Act (AAA) to

provide economic relief to farmers. The AAA had at its core a plan toraise crop prices by paying farmers a subsidy to compensate forvoluntary cutbacks in production. Funds for the payments would begenerated by a tax levied on industries that processed crops. By the time

the act had become law, however, the growing season was wellunderway, and the AAA encouraged farmers to plow under theirabundant crops. Secretary of Agriculture Henry A. Wallace called thisactivity a "shocking commentary on our civilization." Nevertheless,through the AAA and the Commodity Credit Corporation, a programwhich extended loans for crops kept in storage and off the market,output dropped.

Between 1932 and 1935, farm income increased by more than 50percent, but only partly because of federal programs. During the sameyears that farmers were being encouraged to take land out of production-- displacing tenants and sharecroppers -- a severe drought hit the GreatPlains states, significantly reducing farm production. Violent wind anddust storms ravaged the southern Great Plains in what became known asthe "Dust Bowl," throughout the 1930s, but particularly from 1935 to1938. Crops were destroyed, cars and machinery were ruined, peopleand animals were harmed.

The government provided aid in the form of the Soil ConservationService, established in 1935. Farm practices that had damaged the soilhad intensified the severity of the storms, and the Service taught farmersmeasures to reduce erosion. In addition, almost 30,000 kilometers oftrees were planted to break the force of winds.


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2.Canada3.Germany4.Britain5.

Australia

Mild effected Countries:

1.South Africa2.Japan3.France

Lessons from the Great Depression:

With its plunging stock prices, failing banks, currency crises and risingunemployment, he warned, "the issues raised by the Depression, and itslessons, are still relevant today.": Ben Bernanke.

Writing as a Princeton economics professor eight years ago, he wasfascinated by the human drama behind the bread lines and bank runs thatushered in the worst period of economic collapse in U.S. history.

Averting a 21st century Depression is no longer an academic concern.

"Financial meltdown,"

"the worst financial crisis in almost a century."

Since then, stock prices have plunged 26 percent on the Dow JonesIndustrial Average, which fell 18 percent in a week. The dive promptingTreasury Secretary Henry Paulson to announce Friday that thegovernment would buy bank stocks to try to halt the slide, a measure last

taken during the Great Depression

"I think everybody knows now," he said last week, "we're in the worstfinancial crisis since the Great Depression."

Panic on Wall Street, urgent pleadings from the White House andpolitical admonitions from the campaign trail aside, the present crisis is


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at once similar to and very different from those that presaged the GreatDepression.

Americans can take heart in a few statistics that make clear the countryis nowhere near the dire straits it faced from 1929 until 1934, when theeconomy began to claw its way out of the depths of despair.

In the Great Depression, unemployment rose to 25 percent nationally; insome cities it was twice that. Since relatively few women worked at thetime, that meant that one out of every four American families waswithout a breadwinner.

September 2008 unemployment rate was 6.1 percent, historically high,to be sure, but a far cry from catastrophic - except, of course, for the 9.5

million Americans who are out of work.

Between 1929 and 1933, the U.S. economy actually contracted fouryears in a row. Output fell from $104.4 billion in 1929 to $56.7 billion in1933 - a 46 percent decrease. It was 1940 before economic outputtopped $100 billion again, and then only barely.

This year, the economy grew at an annual rate of 2.8 percent during thethree months that ended June 30, after growing 2 percent, adjusted for

inflation, in 2007.In 1929, there were nearly 26,000 state and national banks in thecountry. By 1934, a third had failed. Depositors lost a staggering $1.3

billion - equal to about $21 billion today.

In 2008, 13 banks have failed, according to the Federal DepositInsurance Corporation, the watchdog and oversight agency, which lists117 others at risk of failing.

Roosevelt said after enduring cushions against hard times: SocialSecurity, for instance, and unemployment benefits - as well as regulatoryagencies, like the Securities and Exchange Commission, meant to

protect the economy against reckless or corrupt practices.

And policy makers like Bernanke, mindful of the lessons of history, areworking in concert with their global counterparts to cut interest rates and


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flood global financial institutions with hundreds of billions of dollars incash, to try to avoid the worldwide credit crisis that contributed to theDepression.

And yet, if there are important differences between 1929 and 2008, thereare also troubling parallels.

The Depression, after all, followed a decade of rampant speculativeinvestment on Wall Street that led to a debilitating crash.

At the end of 1928, the Dow Jones Industrial Average closed at 300, upa dizzying 48 percent for the year. By the next September, it peaked at381, a 27 percent gain in ten months.

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Great Depression 1920s