30 January 2009
The Great Depression
What was it?
In the early/mid 1920s America's economy was in a state of boom.
The end of the First World War marked a period of industrialization and urbanisation; people had a lot more disposable income, which allowed them to buy luxury goods and invest in the economy. Unfortunately, this boom was followed by what became known as The Great Depression. Many people see Tuesday 29 October 1929, Black Tuesday, as synonymous with The Great Depression. However, whilst this day did mark the point where there stock market began to severely decline, it is thought that, had the government been more proactive, a depression could have been avoided. Following Black Tuesday stock prices continued to fall for the next 3 or 4 years, with devastating consequences.
In the years between 1929 and 1933 as many as half of the US banks failed, this failure was primarily a result of the fact that individual investors were struggling, which meant that the banks were finding it increasingly difficult to obtain assets. Even people who did have money were becoming weary of leaving their money under the control of banks and, in many cities, there were bank runs (whereby a large proportion of customers take their savings out at the same time). These bank runs resulted from fears that the banks would become insolvent. The problem was that, as word of mouth spread, more and more people began to follow suit until eventually many banks did go bankrupt.
Not only were the banks having difficulty, but the manufacturing and farming communities were also bearing the brunt of the problems. Once people became concerned about the general state of the economy they began to save, save, save. The lack of public spending only perpetuated the downward spiral of depression, as it resulted in a reduction in demand and, therefore, a reduction in supply. In turn the reduction in the amount of supply needed meant that employers were forced to downscale their work force in order to make ends meet. Unemployment levels had risen to 25% of the 'workforce' in the US by 1932.
Despite the fact that the real trouble began in America, the repercussions of this economic failure were felt worldwide. Britain's industrial, farming and export sectors were put under a lot of strain. The decrease in demand meant that farmers had surplus goods and as a result of this they were forced to reduce the cost of their produce meaning they were unable to make a profit. Inevitably farmers began defaulting on bank payments and repossessions followed. The First World War had caused much instability within many countries economies, as there was a lot of debt to be repaid. England's Merchant Navy lost about 40% of its fleet during U-boat attacks and this resulted in the loss of much overseas custom. By the end of the 1930's levels of unemployment rose to 2.5 million in Britain (roughly 20% of the British workforce).
Countries attempted to improve their own economies by reducing the amount of imported goods, in the hope that they would be able to 'shift' the local produce. However, this lead to many countries inflicting high tariffs upon imported goods and international trade began to slow.
What largely disrupted the European economies was the fact that American credit dried-up. When America began experiencing problems they recalled their European investments in an attempt to save their own economy. Unfortunately, even this measure did not have a great impact on the American economy and merely increased the problems for other economies worldwide.
Effects of the Depression:
As stated above, the effects of the depression were widespread and extremely devastating. However, they were not evenly distributed in terms of locality. The north of Britain, in particular, bore the brunt of the economic down turn, as it relied heavily on income from industrial sectors and export- these areas all but collapsed throughout the 1930s. Millions of people were left destitute and forced to rely on a diet of soup and other low-nutrient food, which caused malnutrition.
The south, on the other hand, benefited from the development in electrical industries and the increase in suburban house building. As people began to modernise their homes with electrical goods public spending enhanced the industrial sector. London was home to over 50% of the new factories that were opened in the mid 1930s, therefore unemployment was not such a problem in the south.
Unfortunately, the welfare system during the 1920s and 1930s was based on levels of contributions made, rather than on a need basis, which meant that the extremely poor people were given nothing. It also only paid out for a discrete period of time. Perhaps the most positive actions that came about as a result of the problems caused by The Great Depression were the reworking of the benefit scheme (in 1931) to pay out on a means-tested basis and later the creation of the tax funded National Health Service.
What caused the Great Depression?
- Most notoriously, the onset of the problems was Black Tuesday and following this date people began to loose more and more money. By 1930 America was in a depression and much of the world was in a recession.
- Unlike today, people's bank deposits were not secure and there was no guarantee that if a bank went bust that people would receive any of their savings back. Therefore, when thousands of banks become insolvent, some people lost everything they had worked hard for. Many people no longer wanted to use banks to store their savings and, as a result of this, banks began to be reluctant to create new loans.
- The fact that people's fear of loosing their money caused them to stop buying things, as stated above, had a direct effect on the economy. Whilst these individuals were merely protecting their own finances in actual fact this action resulted in far more economic problems than perhaps would have been the case had mass panic not ensued. The cut in demand was the primary cause of the high unemployment figures throughout The Great Depression. High taxation on imports aggravated the problem further, as there was far less trade between countries.
What aided the economic recovery?
Withdrawal from the Gold Standard:
Withdrawal from the Gold Standard (whereby economies exchange their currencies for gold) aided Britain's economic recovery. Britain was the first country to take this step of withdrawal and one of the first to start to climb out of the depression. Countries, such as France and Belgium, on the other hand, were amongst the last to leave the Gold Standard and as a result of this (and other factors) they experienced a lengthier depression.
The New Deal:
In the early 1930s America's president at the time, Franklin Roosevelt, began to try to aid the economic recovery. The 'New Deal', as it was called, was a series of schemes implemented with the aim of providing more work for the unemployed. There was a reformation of the agricultural and industrial sectors and Roosevelt also addressed many other social, economical and financial issues. This was a large step towards helping rebuild public confidence in the government and the economy.
World War 11:The 2 years preceding the Second World War marked a dramatic fall in unemployment levels. Rumours of the Nazi rearmament led to a massive effort, particularly in the US and Britain, to rearm the nation. More manpower was needed in order to produce new tanks, battleships and planes. This rearming created thousands of new jobs and helped lower Britain's unemployment figure to 1.5 million, as opposed to the 2.5 million seen previously. By 1939, when war broke-out, unemployment was no longer a problem and the depression was finally over.
Will there be another Great Depression?
Obviously the recent economic problems have lead to many people asking the question 'will there be another Great Depression?' Whilst this is, in some respects, an understandable initial response, it seems to be increasingly fuelled by all the negative hyperbole that the media is contributing to the situation.
There are figures that suggest that the current recession will continue to get worse for some months or even years to come, but to say that this will be the next Great Depression seems to be a little on the presumptuous side, at least for the time being.
At present, unemployment levels are not even close to those recorded during the 1930s. In America, recent figures have shown that unemployment has reached 7.2% of the working population. At the end of November 2008 the United Kingdom's unemployment percentage rose to 6.1 and although it is still climbing (it is estimated that it may reach 9% by the end of next year) there's a long way to go before it is level with the 25% recorded during the Great Depression.
There is no denying that manufacturing sectors are suffering- car manufacturers and retailers, in particular, seem to be struggling to make ends meet. Like in the 1930s people have dramatically reduced their spending and this is, again, resulting in a reduction in demand and, therefore, supply.
However, there are now precautions in place to help prevent a recession from escalating to the same extent that it did during The Great Depression. We have the welfare system, whereby unemployed people are entitled to claim regardless of how much they have contributed, therefore even jobless individuals should be able to avoid destitution.
Not only this but unlike back in the 1920/30s peoples' bank deposits are a lot more secure. In America, the Federal Deposit Insurance Company ensures that members of a bank are guaranteed to receive up to $250,000 back if a bank were to experience problems and in the UK deposit insurance covers savers for up to £50,000. It is clear that the government now play a much more active roll in managing the economy and are more willing to invest in trying to stabilize the economy.
What we have to be weary of is that we do not end up talking ourselves into a depression. The least beneficial thing for people to be doing during a time of recession is to be rein-acting the steps that helped lead to the Great Depression back in the 1930s. Mass bank runs and lack of public spending will only aggravate the problem. Whilst nobody expects people to be rushing out and spending large sums of money, it is important that, as a nation, we do not harm our economy further by making it impossible for businesses to survive.
