GREAT DEPRESSION

GREAT DEPRESSION

The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States. The timing of the Great Depression varied across the world, in most countries, it started in 1929 and lasted until the late 19302. 

Reasons for the Great Depression

• Stock Market Crash of 1929: Two months after the crash in October 1929, stockholders had lost more than $40 billion. Although the stock market began to recover by the end of 1930, the damage was already done, and the U.S. entered what is known as the Great Depression.
• Bank Failures: Throughout the 1930s, over 9,000 banks failed. Since deposits were uninsured, people lost their savings. Surviving banks were reluctant to issue new loans due to the uncertain economic environment.
• Poor Consumption: Fears of further economic decline and the stock market crash caused individuals to stop purchasing goods. This led to a decrease in production and, subsequently, a reduction in the workforce.
• American Economic Policy with Europe: The Smoot-Hawley Tariff Act (1930) imposed high tariffs on imports to protect American companies. This resulted in decreased trade with foreign nations and retaliatory tariffs, exacerbating economic problems globally.
• Drought Conditions: A severe drought in the Mississippi Valley (1930), though not a direct cause of the Great Depression, worsened the economic situation, making it difficult for farmers to pay taxes or sustain their farms.
• Non-Debt Deflation: There was a combination of debt and productivity deflation that had been occurring since the Great Deflation of the late 19th century. Some of the economic contraction might have been a correction from the post-World War I inflation.
• Gold Standard System: The return to the gold standard by most nations after World War I is seen as a contributing factor to the Great Depression. The adherence to the gold standard at pre-war levels limited countries’ flexibility in managing their economies.
• Protectionism: Policies like the Smoot-Hawley Tariff Act increased protectionism, leading to a “beggar-thy-neighbor” approach where countries enacted tariffs, harming international trade and deepening the economic crisis.

Remedies/Actions Taken

1. Deficit Financing: The U.S. borrowed against natural resources and financial institutions to stimulate the economy. This method proved helpful in addressing economic stagnation.
2. Promotion of Public Works: Investment in public infrastructure and the creation of capital assets boosted public expenditure and helped to revive the economy by creating jobs.
3. Welfarism: The depression exposed the flaws of capitalism and led to the development of a welfare state. The goal was to strengthen the social safety net and address the needs of the most vulnerable.
4. Cooperation: Cooperation between large industries was seen as crucial to economic recovery. Collaboration was necessary to envision a better future and avoid the pitfalls of isolationism that worsened the depression.

Global Impact of the Great Depression

• Non-Payment of German War Debt: Germany announced that it could no longer meet the debt payments imposed by the Treaty of Versailles after World War I. This led to economic crises in other European nations and the United States, which had relied on these payments to support their own economies.
• Unemployment: By 1933, unemployment rates in Europe were extremely high. For instance, in Germany, 26.3% of the workforce was unemployed, contributing to economic instability and social unrest.
• Destabilizing Politics: The economic crisis led to political destabilization in Europe. Many countries, including the United States and Britain, turned inward, focusing on national solutions and moving away from international cooperation. This inward shift created isolationist policies.
• Ultranationalism: The Great Depression led to the rise of ultranationalism, as economic hardships pushed nations to prioritize their own needs over international cooperation. This set the stage for political extremism and the rise of fascism in countries like Germany and Italy.

Impact on India

• Prices Crashed: The collapse of international commodity prices during the Great Depression also affected agricultural prices in India. For example, wheat prices in India dropped by 50%, drastically reducing farmers’ income and agricultural export revenues.
• Farmer Issues: Indian peasants and farmers were disproportionately affected. Their income plummeted, yet the colonial government refused to lower revenue demands, worsening their plight.
• Burden of Taxation: The colonial government did not reduce taxes, and as a result, many farmers and landlords became indebted to moneylenders and corrupt officials, further deepening rural poverty.

Conclusion

The Great Depression not only paved the way for World War II by fostering resentment and extremism (particularly in Europe), but it also emphasized the need for welfare policies and social safety nets. The crisis demonstrated the flaws of capitalism in its unregulated form, highlighting that markets do not always correct themselves without government intervention.