The Great Depression of 1929 was a worldwide economic depression that lasted approximately 10 years. On October 24, 1929, known as “Black Thursday” when 12.9 million shares of stock were sold in one day, triple the normal amount prices fell 15 - 20%, causing a stock market crash. By 1933, unemployment had risen from 3% to 25% of the nation’s workforce. Wages for those who still had jobs fell 42%. GDP was cut in half, from $103 to $55 billion. This was partly because of deflation, where prices fell 10% per year. By 1933, world trade plummeted 65% as measured in dollars and 25% in total number of units. Depression caused many farmers to lose their farms. At the same time, years of erosion and a drought created the “Dust Bowl” in the Midwest, where no crops could grow. Thousands of these farmers and other unemployed workers traveled to California to find work. Many ended up living as homeless or “hobos” in shantytowns called “Hoover villas”, named after then-President Herbert Hoover. The Great Depression had devastating effects in virtually every country, rich and poor. Personal , tax revenue, profits and prices dropped, and international trade plunged by half to two-thirds. Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60 percent. Facing plummeting demand with few alternate sources of jobs, areas dependent on Primary Sector industries such as cash cropping, mining and logging suffered the most. Recession is inherently an unpleasant and unacceptable face of capitalism. One step ahead, recession is a period in which you tighten up your belt. In a depression you have no belt to tighten up. And when you have no pants to hold up, it’s a panic.Story of Great Depression:
After the end of World War I in 1918, American Economy was still bubbling with buoyancy. A large number of factories established during war for the purpose of ensuring supplies to defense forces now stopped getting fresh government contracts for U.S. military. In order to survive, these factories started to re-engineer and prepare themselves for full-scale commercialization.
Though having huge installed capacities at their disposal, they were in dire shortage of money for undertaking production of variety of consumer goods. On the other hand, common people also required enough money to purchase these goods. Production cannot increase unless there is a demand and demand cannot be driven without purchasing power. In view of these, American Government started printing more and more currency notes and spending three times more money than the actual tax revenues. Federal Reserve Bank began liberally giving funds to commercial banks at quite a cheaper rate and correspondingly these banks started lending money to companies at equally cheaper rates of interest. This brought unprecedented 50% increase in Production and therefore stimulated employment generation very fast. In order to push the sales of these productions, banks lent ample money to the people in the form of home loans because they were getting bags of money from Federal Reserve. People having employment at the helm were highly confident to dare availing loans. Thus, the process of accelerating both demand and supply rallied faster than ever before. Time witnessed unbelievable boost in economy and resulting prosperity.
Here, companies started bagging huge profits and handful of their directors started accumulating immense wealth. Capitalism grew in its ugliest form. Stock market index constantly went on scaling newer heights. With the treasures of money on hand, rich people were inclined to book maximum profits by speculative practices of buying stocks at low level and selling the same at upper level. In order to manipulate the movement of stock market in their favour, taking a step ahead, these people formed a syndicate. The Syndicate maliciously started cornering the shares of specific companies and thereafter, pronouncing sharp rises in the prices of these shares. This influenced even common people like taxi drivers, employees of municipal corporations, bus conductors, office clerks, hotel waiters and even sweepers to invest money in these stocks and earn profits. On an average, prices of shares had risen by 40% and shares of some companies went up by 250 to 300 percent. This was attributable to the huge money lent by banks to the share brokers.
However, limit is a limit ….. Ultimately, during 1929 Federal Reserve also got tired of lending money and therefore commercial banks too had to take a halt. They opted to increase Interest rates to control the further outflow of money. As a result, share brokers increased their margin from 10% to 20% and forced their share holders to pay the deficient money. In order to fulfill commitment, share holders started selling their shares for paying margin money. Bullish cycle thus started moving back in rear gears and what happened their after was, a Great Depression, ghastly cry of which was heard in every corner of the world.
There is a difference of opinion among the economists about the causes of the said Depression. There are many Theories to assess the causes. First Theory considers excessive savings as the reason for Depression. Excess Saving means Less Purchasing. This means declined sales and therefore, production which ultimately results into loss of employment and/or wage cuts, hence further damage to the demand. This ends up into manufacturers facing financial scarcity due to slashed sales which in turn, hampers purchase of raw material for production, payment of bank borrowings, renewal of transport contacts and so on…. downfall becomes intense. Suggested solution: Impose Extra Taxes on affluent class having higher saving capacity and distribute these revenues among needy people. This will again ignite the growth process.
Another theory believes the Lack of Proper Investment Opportunities which invades the Savings of common people reach the industrial sector. As a result, investments in Plant & Machinery, factory buildings etc. stops and again the above described cycle of economic downfall starts. Suggested Solution: Government should introduce more and more new investment schemes that guarantee higher interest to investors. And it should spend this borrowing for infrastructure development as well as for rehabilitation projects.
Third Theory looks at the recession as an integral part of business cycle comprising of both boom and recession. Hence, recession cannot be avoided like boom. Suggested Solution: Measures can be taken only to ensure that the situation does not skip out of control and further deteriorates. Regulation should be reviewed and redesigned.
In 1932, the then American President Roosevelt introduced an Action Plan to redevelop the U.S economy which later became popular as New Deal. From the worst ever experiences, he could infer that the first job to charge up the Demand-Driven economy is to create real, effective demand. Demand without Purchasing Power was of no use. So, in order to increase the purchasing power, he concentrated on putting more money in the hands of people by spending almost US$ 9 Billion for constructing new bridges, roads, dams and other infrastructure. Within 100 days the “New Deal” was signed into law, 42 new agencies were formed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs, such as Social Security, the SEC, and FDIC (Federal Deposit Insurance Corporation) are still in practice today, helping to safeguard the economy.
As a result, Purchasing Power of the people gradually increased, warranting the need of production of various commodities which they were longing to purchase. But, the manufacturers needed money to undertake the production and the only source to borrow the funds was the Bank. Hence, in order ensure more liquidity in the system, Mr. President doubled the security undertaking amount in an attempt to rebuild the confidence of depositors and inclined them to deposit their savings in Banks. Thus, economy received a support. New Deal campaign brought the Great Depression to an end by 1939.. However, the extent of the Great Depression was so great that government programs alone could not end it. Unemployment remained in the double-digits until 1941, when the U.S. entry into World War II created defense-related jobs. Truly, Emergence of World War II had addressed the remaining shortfalls and provided a major fillip to U.S. Economy leading it to become a Super- power of the world.
Again by end of 2008, the Super Power has been engulfed into severe recession; the period for which this recession may last will also again depend on the Business Cycle. Rampant money printing and gigantic bailouts may seem to be working as a first-aid plaster, but actual repercussions…. Inflation, deflation, stagflation, mass inflation or hyperinflation…… is yet to follow. And as usual, Economists…NBER, IMF, World Bank etc…. do make predictions without accountability. Almost all economies of the world, especially those largely thriving on export-led growth models, have been severely affected due to globalization of world economies. Senator Chris Dodd notes that the proposal of bail-out of US$ 700 billion looks stunning in terms of volume. Unfortunately, US government will use it for purchasing toxic assets of same value, hold on these assets for years and pay millions of dollars more to hand-picked firms to manage them. It would do nothing to help a single family save a home. Trillions of government monies ($700 billion to begin with) will be infused directly into the coffers of corporations and wealthy individuals via hedge funds. The national debt will likely grow 20-30% in a single year, with obligations extended to many trillions more in guarantees. What we know about the global financial crisis is that we don't know very much.” Paul A. Samuelson.
Quote:
The first panacea for a mismanaged nation is inflation of the currency (printing money); the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.
Franklin D. Roosevelt (1882-1945) Thirty-second President of the USA.
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