The term Great Depression refers to the great economic slump, which started in 1929 but the crisis timeline extended to the 1930s.The whole world slouched under the burden but the worst affected centers were North America and Europe. The backbones of heavy industry based cities drooped under the Great Depression. The industrial countries like United States, Canada, Britain, Germany, France, and Australia were the worst sufferers.
Causes of Great Depression
There is a debate among the scholars regarding the causes of Great Depression. The search for the cause is deeply related to evade any future depression. The causes may be classified as
The Wall Street Crash:
The Stock Market crash of 1929 triggered the Great Depression. It reversed the positivism in economic outlook to sheer negativism. Though the Stock Market recovered for a short while in 1930 but for the next two years continuously spiraled downwards. This downturn turned out to be the greatest long-term market decline of the decade.
Arthur Pigou and Irving Fisher originated the macroeconomic Debt-Deflation view. In the 1920s there was a boom in home mortgages, loans and credit purchases. When price deflation occurred their income fell but the debts remained same with the same dollar amount. With the pressure from creditors the spending amount fell thus flagging the economy. The investment ratio plummeted with poor expectation of profits. In the face of deflation the banks started to pile up reserves thus deepening the deflation.
The hunch of the Great Depression were deepened by the sharp downfall in the International trade in 1930. The ever-widening interventions in the economy made the market vulnerable to the abrupt changes and a high percentage of unemployed persons were gnawing. Many scholars point their accusing fingers at the American Smoot Hawley Tariff Act for reduction in the international trade and thus inviting retaliation.
Federal Reserve And Money Supply:
Federal Reserve tried to improve the crisis and cut the money supply by 1/3 from 1930 to 1931. Thus businessmen were denied loans deteriorating the investment scenario and speeding up the economic depression.
The left saw the Great Depression as the initiation of the end of capitalism’s life .The free market economy was viewed as inherently unstable. However, during the Hoover government interference and regulations increased including high spending price controls and interventions in labor troubles.
American president Roosevelt and many ‘New Dealers’ laid the blame on glut of big businesses for the instability in economy. They wanted to establish a ‘New Deal’, which would empower the laborers. They also wanted to curb evils of big corporate by increasing taxes on corporate profits. The best solution to them was Economic regulation.
The Paradox of Thrift:
Keynes coined the term “paradox of thrift” indicating the cut in the spending ratio to save money after the stock market crash in 1929. The reduced spending aggravated the saturation of market deepening the Great Depression.
Some Historical Causes:
According to many economists the decision of Britain to revert to Gold Standard of pre WWI life parities is an important cause of economic depression. The cost of World war was enormous and the life of European economy was maimed. The fact of war reparations played a major role in the economic upheaval but Germany paid the largest slice. So Europe couldn’t face the economic crisis with life and vigor and thus moved into the sphere of economic depression.
Effects And Some Facts
Effects on Britain
Britain had hardly recovered from the damage inflicted by World War I when the Great Depression hit the nation. This depression undermined the process of rebuilding the economy.
Effects on Canada
Canada was probably the second worse hit by the Great depression after America. Canada suffered long but there were no bank failures like the US.
Effects on France
France was hit later during the 1931 when it was trying to rebuild its economic life following the aftermath of the First World War. Great Depression battered the local economy and initiated the riots of 1934. The economic downturn is the partial cause of the formation of the Popular Front led by SFIO socialist leader Leon Blum winning the elections in 1936.
Effects on Germany
Germany suffered tremendously due to the Great Depression. Wall Street crash led the American banks to cancel new loans thus stopping the repayments under Dawes Plan and Young Plan. In 1932, 90% of German Reparations got cancelled. The Government didn’t increase spending fearing hyperinflation and unemployment reached the peak of 25%. The People lost faith in the Weimer Government. The rest of the story is the rise of Hitler and the rule of the Nazi party practicing an Autarky economy with economic alliances in Latin America and central Europe.
United States – The Effects Of Depression And the Facts Of Revival
The worst victim of the Great Depression is the US. President Hoover’s Treasury Secretary Andrew Mellon advocated a shock treatment to deal with the crisis. His motto was “Liquidate labor, liquidate stocks, liquidate real estate…” He opined that this measure will bring about a moral fervor to life and people will move out from this system to work hard and live a moral life. Hoover didn’t believe in direct aid but vouched for ‘Voluntary Cooperation’ between business and the government. Initially everything was okay but no business came forward to take the risk.
Roosevelt with the New Deal wanted to ‘reform’ the economy to better the life of the impoverished. New Dealers wanted to transform the economy through regulations.
The Keynesians believed that the war economy emphasized on the huge stimulus required to end the downturn and predicted that as soon as America demobilized another depression would occur. But the forecast was proved false.