The Great Depression was an economic slump in North America, Europe, and other industrialized areas of the world that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world.
Though the U.S. economy had gone into depression six months earlier, the Great Depression may be said to have begun with a catastrophic collapse of stock-market prices on the New York Stock Exchange in October 1929. During the next three years stock prices in the United States continued to fall, until by late 1932 they had dropped to only about 20 percent of their value in 1929.
Besides ruining many thousands of individual investors, this precipitous decline in the value of assets greatly strained banks and other financial institutions, particularly those holding stocks in their portfolios. Many banks were consequently forced into insolvency; by 1933, 11,000 of the United States' 25,000 banks had failed. The failure of so many banks, combined with a general and nationwide loss of confidence in the economy, led to much-reduced levels of spending and demand and hence of production, thus aggravating the downward spiral.
The result was drastically falling output and drastically rising unemployment; by 1932, U.S. manufacturing output had fallen to 54 percent of its 1929 level, and unemployment had risen to between 12 and 15 million workers, or 25-30 percent of the work force.
Starting in October through November of 1929 the American stock market lost 33% and by 1932 the stock market had dropped a staggering 80%.And while the Great Depression lasted 10 years it took the stock market 25 years (1954) until it returned to 1929 levels.
The Great Depression began in the United States but quickly turned into a worldwide economic slump owing to the special and intimate relationships that had been forged between the United States and European economies after World War I. The United States had emerged from the war as the major creditor and financier of postwar Europe, whose national economies had been greatly weakened by the war itself, by war debts, and, in the case of Germany and other defeated nations, by the need to pay war reparations.
So once the American economy slumped and the flow of American investment credits to Europe dried up, prosperity tended to collapse there as well.
The Depression hit hardest those nations that were most deeply indebted to the United States, i.e., Germany and Great Britain. In Germany, unemployment rose sharply beginning in late 1929, and by early 1932 it had reached 6 million workers, or 25 percent of the work force. Britain was less severely affected, but its industrial and export sectors remained seriously depressed until World War II. Many other countries had been affected by the slump by 1931.
Almost all nations sought to protect their domestic production by imposing tariffs, raising existing ones, and setting quotas on foreign imports. The effect of these restrictive measures was to greatly reduce the volume of international trade: by 1932 the total value of world trade had fallen by more than half as country after country took measures against the importation of foreign goods.
The Great Depression had important consequences in the political sphere. In the United States, economic distress led to the election of the Democrat Franklin D. Roosevelt to the presidency in late 1932. Roosevelt introduced a number of major changes in the structure of the American economy, using increased government regulation and massive public-works projects to promote a recovery. But despite this active intervention, mass unemployment and economic stagnation continued, though on a somewhat reduced scale, with about 15 percent of the work force still unemployed in 1939 at the outbreak of World War II. After that, unemployment dropped rapidly as American factories were flooded with orders from overseas for armaments and munitions.
The depression ended completely soon after the United States' entry into World War II in 1941. In Europe, the Great Depression strengthened extremist forces and lowered the prestige of liberal democracy. In Germany, economic distress directly contributed to Adolf Hitler's rise to power in 1933. The Nazis' public-works projects and their rapid expansion of munitions production ended the Depression there by 1936.
At least in part, the Great Depression was caused by underlying weaknesses and imbalances within the U.S. economy that had been obscured by the boom psychology and speculative euphoria of the 1920s. The Depression exposed those weaknesses, as it did the inability of the nation's political and financial institutions to cope with the vicious downward economic cycle that had set in by 1930.
Prior to the Great Depression, governments traditionally took little or no action in times of business downturn, relying instead on impersonal market forces to achieve the necessary economic correction. But market forces alone proved unable to achieve the desired recovery in the early years of the Great Depression, and this painful discovery eventually inspired some fundamental changes in the United States' economic structure. After the Great Depression, government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services, or deficit spending, came to assume a principal role in ensuring economic stability in most industrial nations with market economies.
The International DepressionChanged Economic Thinking
The Great Depression of 1929-33 was the most severe economic crisis of modern times. Millions of people lost their jobs, and many farmers and businesses were bankrupted. Industrialized nations and those supplying primary products (food and raw materials) were all affected in one way or another. In Germany the United States industrial output fell by about 50 per cent, and between 25 and 33 per cent of the industrial labour force was unemployed.
The Depression was eventually to cause a complete turn-around in economic theory and government policy. In the 1920s governments and business people largely believed, as they had since the 19th century, that prosperity resulted from the least possible government intervention in the domestic economy, from open international relations with little trade discrimination, and from currencies that were fixed in value and readily convertible. Few people would continue to believe this in the 1930s.
John Maynard Keynes: Capitalism's Savior
Keynesian fiscal theories altered forever government's role in the economy
by Christopher Farrell
John Maynard Keynes is endlessly fascinating. A product of Eton, Cambridge, and the British Treasury, he was also a member of the Bloomsbury group, that influential collection of writers, artists, and intellectuals in London that included Virginia Woolf and E.M. Forster. A top academic and public policy polemicist, he also ran an insurance company and made a fortune in the markets. The philosopher Bertrand Russell considered Keynes's mind the "sharpest and clearest" he had ever encountered. "When I argued with him," Russell said, "I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool."
But it is as an economic innovator that Keynes is best remembered. Keynes changed how economists study business cycles, price levels, labor markets, and economic growth. His insights have largely kept downturns in the business cycle over the past half century from turning into depressions. "Keynes's lasting achievement is the invention of macroeconomics," says Deidre McCloskey, an economic historian at the University of Illinois at Chicago.
Indeed, Keynes can lay claim to playing a crucial role in saving capitalism and, perhaps, civilization during the Great Depression. Despite millions of unemployed workers in the industrial nations, economic orthodoxy demanded that government do nothing or, worse yet, tighten the purse strings. Little wonder that the totalitarian solutions of fascism and communism exerted such pull. U.S. Treasury Secretary Andrew W. Mellon expressed a widespread sentiment among elites when he said in 1930 that the Depression would "purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."
Keynes battled against such harsh counsel. With his landmark 1936 book, The General Theory of Employment, Interest, and Money, he persuaded a generation of thinkers and leaders to abandon a near-theological belief in balanced budgets. He showed how economies could get trapped in recession
or depression -- and argued that government could break the spiral by borrowing to finance public spending that stimulated consumer activity and restored business confidence. His ideas helped create the golden era of postwar growth, and two institutions he championed in the 1940s still operate on a global scale, the International Monetary Fund and the World Bank.
Keynes is the philosopher-king of the modern mixed economy. It's a sign of his influence that there are no true believers in laissez-faire left. We are all Keynesians now. Governments routinely run deficits during downturns to increase the overall level of demand and, hence, employment. And many economists believe Japan's long stagnation in the 1990s largely reflected timid policymakers unwilling to boldly use the levers of fiscal and monetary policy.
Like Adam Smith and Karl Marx before him, Keynes believed economics wasn't merely about studying the efficient allocation of resources. For him, the good life meant beauty, art, love, morality -- the passions that define civilization -- and the value of economics lay in its pursuit of the stability and wealth that would allow our passions
John Maynard Keynes
By William M Wright BBA MBA
John Maynard Keynes is one of the most important figures in the entire history of economics. He revolutionized economics with his classic book, The General Theory of Employment, Interest and Money (1936).
This Book is regarded as one of the most influential social science treatise of the 20th Century, in that it quickly and permanently changed the way the world looked at the economy and the role of government in society. No other single book, before or since, has had quite such an impact.
His economic theory became known as Keynesian Economics.
Keynes' progressive economic theory were not the norm in the 1930's. Quite the opposite, most economist of the day believed government should play little role in business. Most believed government should tighten monetary policy and reduce spending to preserve the nations economy.
Today the rich worry about a Democratic lead tax increase. But not even todays most liberial Democrate would support what Republican President Herbert Hoover did in 1932 when he raised the top tax bracket from 25% to 63% to increase federal revenue.
Early into the Great Depression John Maynard Keynes was asked if any thing similar in history had ever happen. “Yes”, he replied, “It was called the Dark Ages and it lasted 400 years.”
History writers often over simply the Great Depression, due to time and space constraints, byconcluding it was Keynesian economics and Democratic President Franklin D Roosevelt’s New Deal (government spending) that brought America out of the depression. But conservatives and old school economist point out, as does Washington Post writer George Will, that America’s biggest industrial collapse occurred in 1937 eight years after the 1929 stock market crash and over four years into Keynesian economics.
Many feel it was WWII (not the New Deal) that got America out of the depression as we increased production to supply materials and arms for the war. And when America entered the war, plenty of jobs were available in the military.
Federal Reserve Chairman says: the current financial crisis is not as bad as great depression