Great Depression

We explain what the great depression of the thirties was. In addition, its causes, characteristics and final.

What was the great depression?

Great depression was a severe economic crisis which began in the United States in 1929 and extended to most of the world throughout the 1930s. Its initial cause was the fall of the New York Stock Exchange in October 1929, followed by the bankruptcy of many banks.

Great depression caused the decrease in industrial production and pricesthe fall in international trade, increased unemployment and increased poverty rates. Some countries began to recover from the crisis in 1933, while others had to wait at the end of the decade.

Among the reasons that explain the overcoming of the crisis are the implementation of the New Deal In the United States (a program of interventionist policies of the US government), the general abandonment of the gold pattern, the use of protectionist measures in Europe and import substitution in Latin America, and the economic impulse that caused the arms race due to the imminent burst of World War II (1939-1945).

THE CRACK OF 29

The great depression He started with the “Black Thursday” of the New York Stock Exchangeon October 24, 1929. That day there was the first sinking of the world's main stock market. Then came other falls, especially that of “Black Tuesday”, on October 29, 1929.

A short time ago, on September 3, the price of negotiated values ​​had reached its historical maximum After years of financial speculation. The quotes reached its minimum in 1932, reduced by almost 90 %. The level before 1929 was not recovered until 1954.

The stock market collapse had serious consequences for the United States economy:

• He created pessimistic expectations regarding the future, which limited consumption and investment.
• He destroyed the savings of many families and impoverished them.
• Interrupted the financing of companies that also faced a decreasing demand.
• It deteriorated the viability of financial institutions that had granted loans to institutional and private investors to buy values.

Characteristics of the Great Depression

A crisis of such intensity and duration as the great depression had no precedents. Mainly affected the most economically advanced countries and, in particular, to its industrial, commercial and financial sectors. Although not all countries were affected to the same extent, none escaped it.

The least developed countries, with a greater weight of the agricultural sector in their economies, They were also affected but were less harmed.

The high levels of unemployment in the industrial and export sectors constituted one of the most striking manifestations of the great depression. Unemployment in general reached record figures, especially in the United States and Germany. In the United States, 3 % went from 1929 to 25 % in 1933. In Germany, 4.3 % in 1929 to 30.1 % in 1932.

The industrial production of the world fell So much that, in 1932, it did not reach two thirds of that of 1929. Food production almost did not experience changes, but that of raw materials contracted a lot. In 1934, the value of world trade was just over a third of the corresponding to 1929. In 1937 it did not yet reached 50 % of what had been before the outbreak of the crisis.

The contraction of the per capita product was also significant, although not all countries were affected to the identical measure or managed to get out of the crisis at the same time. In the United States the crisis was especially intense and lasting. In Germany, something less. Sweden and Japan barely experienced a soft recession. In France it was not especially deep, but very lasting.

Countries like Argentina, whose level of economic activity was very dependent on the international situation, were also affected and took out of the crisis. When World War II broke out, neither Argentina nor the United States had recovered fully, and France just recovered.

Factors that explain the magnitude of the great depression

While the Crack of 29 was the initial cause of the great depression of the international economy during the thirties, there were other factors that contributed to the crisis reaching such extraordinary dimensions:

• The succession of bankruptcy bankruptcies due to bank panicwhich reduced loans and the availability of money.
• The existence of the gold patternwhich forced Europe's central banks to take action (such as uploading interest rates) that discouraged investment.
• The approval by the United States Government of the Tariff Law (1930)which increased tariffs to imported products and caused a reduction in world trade.
• He Dust Bowl In the United Statesa period of dust storms and drought in rural areas that aggravated the US crisis.

Banking panic

After the stock market fall in October 1929, Various episodes of banking panic followed during the early years of the thirtiesespecially in the United States.

The depositors lost confidence in the solvency of the banking entities and claimed their cash deposits, which caused difficulties to fulfill the obligations. Between 1930 and 1933, 20 % of US banks broke as a consequence of bank panic.

The tariff law

In 1930, the United States authorities, the world's largest economy, They approved an extremely protectionist tariff lawknown as Smoot-Hawley law. This law sought to defend the national interests of the United States against the outside.

This example of protectionist policy was quickly imitated by the remaining important economies, which avoided the possibility of a negotiated collective exit of the crisis. The result was a reduction in world trade, which intensified depression.

The gold standard

The gold standard was another intensification factor of the problems derived from the stock market. The political and economic conditions that had made the gold pattern effective during the period 1870-1914 had disappeared or changed. In this new context, became a mechanism for the extension of monetary problems from one country to another. In addition, the gold standard left a little capacity to act to governments to counteract the crisis.

The abandonment of the gold pattern was a necessary condition to get out of the great depression. In 1931, the United Kingdom suspended convertibility into gold from the sterling pound. His example was imitated by the United States in 1933 and by other countries shortly after, with the aim of improving the competitiveness of each economy. By 1936, when France also abandoned the gold pattern, it had practically stopped existing.

The Dust Bowl in the United States

In the United States, a drought accompanied by dust storms in large areas Of the great plains during the thirties, the crisis aggravated. Thousands of people had to abandon their farms in full depression, usually west.

The famine combined with the migrations from the countryside to the city That, in general, they caused the fall in wages and the decrease in simultaneous consumption with high levels of unemployment.

The change of economic paradigm

Economic policy errors committed by governments in the early years of the great depression were due not only to the search for uncoordinated national exits but also to The absence of a new set of economic ideas that allowed to interpret the new political and economic circumstances behind the great depression.

In this context, the role of British economist John Maynard Keynes, who published in 1936 his book was important General Theory of Employment, Interest and Money. Keynes's influence on Change of the dominant economic paradigm He had begun before and reached three fundamental aspects:

• The abandonment of the gold patterninitiated by the United Kingdom in 1931.
• The creation of an international payment system that replaced the Gold Patron, whose materialization had to wait until the Bretton Woods conference in 1944, which led to the creation of organizations such as the World Bank and the International Monetary Fund.
• The use of the fiscal deficit (The temporary excess of expenses over public income) as a policy instrument Anticííclica (in this case, to get out of the crisis), a principle behind the New Deal American launched in 1933.

The exit of the Great Depression

The International Economic Conference of 1933

Between June 12 and July 27, 1933, an international economic conference organized by the Society of Nations met in London that, given the serious economic depression, He tried in vain to promote cooperation and economic agreements between states.

Mutual misunderstanding was widespread, although the American position was decisive to cause its failure. France and the United Kingdom proposed to build a stable relationship between the dollar, the sterling pound and the Francés Franco. This monetary stability was expected to help the recovery of trade and world economy.

However, US President Franklin D. Roosevelt, who began at that time to apply his economic program (the New Deal), He refused to commit to maintaining the dollar parity. In fact, he already decided his imminent devaluation. From now on, each country applied on their own its own economic measures.

United States and New Deal

The overcoming of the crisis was slowdifficult and, in some cases, incomplete before the start of World War II. On the other hand, it was very different in one and other countries and had important political consequences.

In the United States, Franklin D. Roosevelt, the winning Democratic candidate in the 1932 presidential elections, promoted from the presidency the New Deal (1933-1938), an economic recovery program. He New Deal It meant a deep transformation in the economic and social policy of the United Statescharacterized until then by the low intervention of the State in economic and social matters.

State interventionism of the New Deal pursued the recovery of the decayed industrial and agricultural prices and the elevation of wages through market regulations. For this, two laws approved in 1933 were promoted: the Agricultural Adjustment Law (Agricultural adjustment act) and the National Industry Recovery Law (National Industrial Recovery Act), which were declared unconstitutional in 1935.

In addition, the Banking Emergency Law (Emergency Banking Act) of 1933 implemented insurance for bank deposits that reduced the distrust of the public to a crisis financial system. Also unemployment was reduced through an expansive program of public spending (Federal Emergency Relief Act) which included important infrastructure works (mainly highways and reservoirs).

The Social Security Law (Social Security Act) of 1935 established unemployment insuranceas well as other forms of social spending (old age insurance, accidents and disease, pensions, etc.). However, It was the war expenses that finally managed to reduce persistent unemployment which remained until 1940 above 15% (except in 1937).

Sweden and social democratic modality

In Sweden, the Social Democratic party, which arrived at the Government in 1932, promoted an alliance with a moderate agrarian base party.

In addition, it promoted an economic policy based on the abandonment of the gold standard and the devaluation of the crown (Swedish currency), an anti -cyclical policy through the expansion of public spending, the redistribution of income and the expansion of social spending (income taxes and wealth, general unemployment insurance, maternity subsidies, among others).

Germany and rearme

Germany sought the exit of the great depression in a very different way: just like Japan, it implemented a variant of the Keynesianism in which played a decisive role in 1933. The arms policy promoted by Nazism was complemented with a public works program. The public deficit was financed with the collaboration of the bank.

German state intervention extended to the whole economy: from the currency control to the Price and salary control. The latter was facilitated by the elimination of unions that were not subordinated to the government. It was an inseparable economic solution of the expansionist political objectives of the Nazi regime.

The United Kingdom and the early abandonment of the gold standard

The United Kingdom, despite being the homeland of Keynes, was the country that adopted policies farthest from the ideas of the British economist, except in terms of early ABANDONMENT OF THE GOLD PATTERN.

In addition to the appeal protectionism, its early economic recovery seemed to be due to internal factors, especially a decrease in interest rates, which favored investment of companies and the consumption of durable goods for family economies. This encouraged the virtuous circle of interaction between the behaviors of one and other areas of the economy.

The German rearme also influenced British politics, which promoted his own rearma and this contributed to The exit of the crisis by means of the increase in military spending.

France and the measures of the socialist government

Protectionism was one of the first measures taken by the French government To face the crisis. However, when the United Kingdom and other nations began to abandon the Gold Patron, France maintained a policy of high interest rates and low wages that was accompanied by the lack of investment and social discontent.

In 1936, The socialist government decided to leave the gold employer, devalued the currency and implemented a public works planbut inflation increased social tension. The imminence of World War II favored military spending, which promoted economic recovery in 1939, but this was interrupted by the outbreak of war and the subsequent German occupation.

1933: International Economic Conference
Organized by the Society of Nations, an international economic conference that, in the face of serious economic depression, tried in vain to promote cooperation and economic agreements between the States, met in London on June 12, 1933.

Mutual misunderstanding was widespread, although the American position was decisive to cause its failure. France and Great Britain proposed to build a stable relationship between the dollar, the sterling pound and the Francés Francés. This monetary stability would have been a great help for the recovery of trade and world economy.

However, President Roosevelt, who began at that time to apply his economic program, the New DealHe refused to commit to maintaining the parity of the dollar. In fact, he already decided his imminent devaluation.

From now on, each country applied on its own its own economic measures in an environment of general insolidarity.

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References

• Aldcroft, DH (2003). History of the European economy 1914-2000. Criticism.
• Britannica, Encyclopaedia (2023). Stock Market Crash of 1929. Britannica Encyclopedia. https://www.britannica.com/
• Espasa de la Fuente, A. (2020). New Deal History. Conflict and reform during the great depression. Cataract.
• Romer, CD & Pells, RH (2023). Great Depression. Britannica Encyclopedia. https://www.britannica.com/
• Sevillano Calero, F. (2020). The Europe of award. The disrupted order. Synthesis.