Economics: The Great Depression

by: Alexandra Blume

After the Wall Street Crash of ‘29, economy dropped in almost every country in the world except the USSR, bringing the world into the Great Depression. This along with the Crash made “the worst financial crisis of the 20^th century.”

The Depression started officially in the United States on November 23, 1929, only a month after the Crash. The ensuing period ranked as the longest and worst period of high unemployment and low business activity in modern times. Banks, stores, and factories were closed and left millions of Americans jobless, homeless, and penniless. Many people came to depend on the government or charity to provide them with food and shelter.

Around the world, crisis broke out. Out of all Europe, Germany was impacted the most by the Depression, since they were already in trouble before it started. Germany’s money was all American money from loans after WWI in which both governments depended on. Germany was trying to prosper with a new parliament and government plan, but it was not working out for the people. Hitler took advantage of this social crisis and used it to gain followers and the support of the people. Nazism was becoming more and more popular.

Countries that were dependent on the export of primary products, such as those in Latin America, were already suffering a depression in the late 1920s. More efficient farming methods and technological changes meant that the supply of agricultural products was rising faster than demand, and prices were falling as a consequence. Initially, the governments of the producer countries stockpiled their products, but this depended on loans from the USA and Europe. When these were recalled, the stockpiles were released onto the market, causing prices to collapse and the income of the primary-producing countries to fall drastically. In most foreign countries, production was going down about 20% in the years 1930-1933, this included harvests, metals, machinery and textiles. In Australia, the prices fell on wool and other materials, in Canada the grains also became cheap and not as good quality as before, and the Latin American Countries could no longer count on the U.S. to purchase from them.

The Depression spread rapidly around the world because the responses made by governments were flawed. When faced with falling export earnings they overreacted and severely increased tariffs on imports, trade was reduced. Since deflation was the only policy supported by economic theory at the time, the initial response of every government was to cut their spending. As a result, consumer demand fell even further. Deflationary policies were critically linked to exchange rates. Under the Gold Standard, which linked currencies to the value of gold, governments were committed to maintaining fixed exchange rates. However, during the Depression they were forced to keep interest rates high to persuade banks to buy and hold their currency. Since prices were falling, interest-rate repayments rose in real terms, making it too expensive for both businesses and individuals to borrow.

The First World War had led to such political mistrust that international action to halt the Depression was impossible to achieve. In 1931 when the banks in the United States started to withdraw funds from Europe, the selling of European currencies dropped and caused the collapse of many European banks. At this point governments either introduced exchange control (as in Germany) or devalued the currency (as in Britain) to stop further runs. As a consequence of this action the gold standard collapsed. 

In the United States, President Herbert Hoover held office when the Great Depression began. The economy continued to slump almost every month. Franklin D. Roosevelt was elected President in 1932. Roosevelt's 'new deal' reforms gave the government more power and helped ease the depression. The Great Depression ended as nations increased their production of war materials at the start of World War II. This increased production provided jobs and put large amounts of money back into circulation.