THE CRIPPLINGOF THE WORLDTHE GREAT DEPRESSIONOF 1929 & ITS EFFECT

SANGEETA BOSE (I.R DEPT)CONTENTS

Contraction of world trade Condition of world trade The Great Crash: “Black Thursday” Effect of the Depression Response of governments worldwide Conclusion Bibliography

Contraction of World TradeThe Great Depression of 1929-33 was the most severe economic crisis of modern times. Millions of people lost their jobs, and many farmers and businesses were bankrupted. Industrialized nations and those supplying

primary products (food and raw materials) were all affected in one-way or another. In Germany the United States industrial output fell by about 50 per cent, and between 25 and 33 per cent of the industrial labor force was unemployed.

The Depression was eventually to cause a complete turn-around in economic theory and government policy. In the 1920s governments and business people largely believed, as they had since the 19th century, that prosperity resulted from the least possible government intervention in the domestic economy, from open international relations with little trade discrimination, and from currencies that were fixed in value and readily convertible. Few people would continue to believe this inthe 1930s.

In economics, nationalism was in conflict with internationalism by 1929. The legacies of wartime collectivism, the needs of postwar recovery and stabilization, the demand for national protection of important industries all conspired to make states pursue,immediately and narrowly, national economic policies at the expense of the more long-term expansion of international trade. The Locarno period produced half a decade of apparent prosperity and stability. Normalcy, itwas felt, had practically returned along with “security”.The basis of this prosperity was the revival of world trade, resting mainly on loans from the United States to the countries of central Europe, which enabled them to invest capital in public works and business enterprises, and so to export goods in exchange for the imports they needed. The wheels of business and industry turned the wheels of international trade.

The center of this boom was the United States, where it was the roaring twenties and the age of material abundance seemed to have arrived. The Federal Reserve bank encouraged credit inflation and policy of ‘easy money’. This produced a period of speculative investment and feverish activity on stock markets. The average priceof stocks in Wall Street rose by twenty-five percent in 1928 and by another thirty-five per cent in 1929. Hordes

of amateur speculators joined the professional operators in serach of quick gains. However, these prices and theirrise corresponded in no sense to increase in supply of real goods or in world trade; industrial employment and production expanded little between 1926 and 1929. They were mere manipulations of the stock market and the credit system, likely in their responsibility to bring a disaster once the bubble of speculation should be pricked. It soon collapsed with catastrophic suddenness in October 1929 and touched off the Great Depression throughout Europe & the world.

Condition of World Trade

The United States, the supreme creditor nation of the post-war world, neither wanted nor needed the goods exported by other lands. Imports of nearly every kind were regarded as unwelcome competitors with American goods at home. Yet the United States lent lavishly abroad, and demanded the repayment of war debts, and wished to sell her own surplus products abroad. Debtors to the United states paid in gold until their own gold reserves ran dry, and the great bulk of the world’s gold lay safely buried in American vaults. The only way America could ensure the export of her won goods was o lend others the dollars with which to buy them. In a world where war debts were still a controversial issue and where large foreign debts, such as that of Russia, had been repudiated, investors were reluctant to grant the long-term loans that had been normal before 1914. Money lent by other nations, such as former European neutrals, Sweden, Switzerland and the Netherlands-tended to be equally concentrated in short-term loans. Banks andinvestment corporations in these countries as well as in the United States, finding themselves glutted with money at a time when other nations were hungry for it, readily offered their idle funds to foreign governments and municipalities. But such capital was always liable to take flight at every rumour of devaluation of exchange rates or of political instability, and there were plenty

of both in this decade. The basis of the economic expansion of the Locarno era was exceptionally fluid and prone to panic.

These conditions, linked with the controversy about reparations, set up a ridiculous cycle of indebtness which by its very nature tended towards a crash. Americanmoney flowed into Germany to help her reconstruct her social amenities and to enable her to pay her reparations. The recipient of these reparations, mainly France and Great Britain, paid their war debts to the United States partly out of such reparations. The flow ofsuch money enabled America to grant more foreign loans, and so on ad infinitum. But the whole cycle did not add to the real flow of international trade; on the contrary,it mad it more difficult for European exporters to find markets for their goods. Trade even between European countries was hampered by the need to pay interest on loans or to repay the loans themselves. It was a vicious cycle, constantly undermining the only foundation on which a healthy and reliable exchange of goods between countries in need of them could take place.

THE CRASH OF 1929: “Black Thursday”

Issue of San Francisco Chronicle on October 27,1929

Although the United States had experienced several depressions before the stock market crash on October 27, 1929, none had been as severe nor as long lasting before "Black Thursday" struck Wall Street. At first, economistsand leaders thought this was a mild bump, perhaps merely a correction of the market, or in any case, no worse thanthe recession the nation suffered after the First World War.

The first sector of the world economy to feel the significance of the coming storm was , significantly, American and Canadian agriculture. The recovery of agriculture in Europe, and in many places a positive increase in agricultural production, made the vast outputof North America largely superfluous to Europe’s needs. The American farmer, faring badly, cut down his own expenditures, and American industry also began to feel the pinch. But the bubble of speculation caused the real crash, and it burst on Wall Street in October 1929. Late on 23rd and 24th October-“Black Thursday” – there was a panic rush of stockholders to unload. On the twenty-fourth alone nearly thirteen million shares were sold, and on Tuesday the twenty-ninth another sixteen and a half million changed hands. By the end of the month American investors had lost 40,000 million dollars. This collapse of the New York stock market brought with it thefinal collapse of agricultural prices in America and senta shudder of apprehension round the world. After a temporary recovery early in November, prices began to fall again, and continues to fall thereafter, undeterred by the belated efforts of bankers and government to checkthem.

Numbers soon proved the optimists incorrect. The depression steadily worsened. By spring of 1933, when Roosevelt took the oath of office, unemployment had risen from 8 to 15 million (roughly 1/3 of the non-farmerworkforce) and the gross national product had decreased from $103.8 billion to $55.7 billion. Forty percent of the farms in Mississippi were on the auction block on FDR's inauguration day. Although the depression was world

wide, no other country except Germany reached so high a percentage of unemployed. The poor were hit the hardest. By 1932, Harlem had an unemployment rate of 50 percent and property owned or managed by blacks fell from 30 percent to 5 percent in 1935. Farmers in the Midwest weredoubly hit by economic downturns and the Dust Bowl. Schools, with budgets shrinking, shortened both the school day and the school year. The breadth and depth of the crisis made it the Great Depression.

The repercussion of the collapse on governmental financesand on industry ran parallel to the devastating blow given to producers of food and raw materials. The demand for agricultural products in the more industrialized countries was inelastic, and the underfed masses of Asia and Africa who needed them the most could not afford to pay even very low prices. After the crash of 1929 fallingprices spelt ruin for the growers of wheat and cotton, coffee and cocoa, sugar and meat. General prices dropped further, and the crisis spread from one sector of the world’s economy to another. Trade between countries shrank rapidly from the end of 1929 until 1934, in an ever-contracting spiral. As bankruptcies occurred, and factories slowed down production or went out of business,millions of workers were thrown out of work. The decline in their purchasing power lowered still more the effective demand for goods. Thus arose, throughout the world, the haunting paradox of “poverty amidst plenty”- the strange grievance of ‘overproduction’ when millions went hungry and homeless – the destruction of stocks of food because too many were too poor to eat it.

Effect of the Depression

A protest march organized against the lack of jobs. Marches became a common occurrence during the Depression days.

Many sank into despair and shame after they could not find jobs. The suicide rates increased from 14 to 17 per 100,000. Protest that did occur was local, not national: "farm holidays," neighbors of foreclosed farmers refusingto bid on farms at auction, neighbors moving evicted tenants' furniture back in, and local hunger marches.

Resistance to protest often turned violent. In 1932, fourmembers of the Dearborn hunger march were shot and killedwhen 1,000 soldiers accompanied by tanks and machine gunsevicted veterans living in the Bonus Army camp in Washington, D.C.

In its shattering effect upon European prosperity and stability, the Great Depression was comparable with the Great War itself. In three years, five thousand American

banks closed their doors. Americans not only stopped lending money abroad, but withdrew their short-term loans. They pulled away the very foundations of European recovery, especially in Germany and Austria, where the sequence of bankruptcies spread in 1931. First to collapse was the Kreditanstalt of Vienna, the largest and most reputable bank holding two-thirds of Austria’s assets and liabilities. In May 1931, it found itself insolvent. Despite governmental support and a loan from the Bank of England , its failure rocked the finances of Central Europe. Foreign investors withdrew much of their capital from Germany, and by the end of the month the German government faced similar difficulties. On 20th June, President Hoover of the United States issued his famous ‘moratorium’ , postponing for a year all payments on debts owed to the United States by other governments. He had first consulted Britain but not France. By July even British credit began to suffer. It was expected thatthe next budget would show a deficit. Whereas French budgetary deficits were normal, to orthodox finance in Britain an unbalanced budget was a heresy. With the Bank of England losing gold by withdrawals at the rate of two and a half million pounds a day, some check had to be imposed. The labour government resigned and a handful of its leaders, led by Ramsay Macdonald, joined in a National Government including the Conservatives and some Liberals. A special supplementary budget imposed further stringent economies, including pay cuts in the armed forces, but these led to mutinous rumblings in the Navy at Invergordon, and this in turn shook foreign confidenceand led to further drains on gold. On 2nd September, the National Government, formed to preserve the gold standardand save the pound, took Britain off gold and allowed thevalue of the pound to settle about thirty per cent below par. A year later the only powers remaining on it were France, Italy, the Low Countries, Switzerland, Poland, Romania, and the United States. The gold standard, indeed, made little sense in a continent almost devoid ofgold.

After the stock market crash of 1929 and the collapse of more than 40% of American banks by 1933, strict trading

and banking regulations were put in place, as well as financial protections, enforced by the newly formed Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC).Roosevelt won the office of President of the United States of America in November 1932, by a landslide over incumbent Herbert Hoover. When he took office in March 1933, he wasted no time in following through on his campaign promises.FDR’s “First Hundred Days” saw a whirlwind of activity asRoosevelt worked tirelessly, then and throughout his three terms, to pull America out of the Great Depression.

President Roosevelt’s New Deal programs were designed to tackle the economic crisis on many levels:

•federal assistance for people who had lost their jobs, houses, savings, and livelihoods•job creation for the unemployed through massive public works projects•agricultural assistance for troubled farmers•manufacturing assistance for troubled industries•stricter banking regulations to prevent bank failures•creation of the FDIC to protect bank customers’ deposits•investment in the banking system to free up credit

While FDR’s New Deal efforts might have helped keep the Great Depression from becoming even worse than it was, only World War II finally healed the economy. War-related exports, as well as America’s own preparation with munitions and ammunition, fired up the factories again and effectively ended the Great Depression, almost twelve years after it began in 1929.

Franklin D. Roosevelt introduced programs between 1933 and 1938, designed to help America pull out of the Great Depression by addressing high rates of unemployment and poverty. An array of services, regulations, and subsidieswere introduced by FDR and Congress, including widespreadwork creation programs. The cornerstones of the New Deal

were the Public Works Administration and the National Recovery Administration.

When the Dust Bowl conditions in the 1930s led to farmersabandoning their fields, mass migration patterns emerged during the Great Depression, with populations shifting from rural areas to urban centers.

Social and Cultural effects No nation could emerge from the cauldron of national crisis without profound social and cultural changes. While many undesirable vices associated with hopelessnesswere on the rise, many family units were also strengthened through the crisis. Mass migrations reshapedthe American mosaic. While many businesses perished during the Great Depression, others actually emerged stronger. And new forms of expression flourished in the culture of despair.

The Great Depression brought a rapid rise in the crime rate as many unemployed workers resorted to petty theft to put food on the table. Suicide rates rose, as did reported cases of malnutrition. Prostitution was on the rise as desperate women sought ways to pay the bills. Health care in general was not a priority for many Americans, as visiting the doctor was reserved for only the direst of circumstances. Alcoholism increased with Americans seeking outlets for escape, compounded by the repeal of prohibition in 1933. Cigar smoking became too expensive, so many Americans switched to cheaper cigarettes.Higher education remained out of reach for most Americansas the nation's universities saw their student bodies shrink during the first half of the decade. High school attendance increased among males, however. Because the prospects of a young male getting a job were so incredibly dim, many decided to stay in school longer. However, public spending on education declined sharply, causing many schools to open understaffed or close due tolack of funds.

Demographic trends also changed sharply. Marriages were delayed as many males waited until they could provide fora family before proposing to a prospective spouse. Divorce rates dropped steadily in the 1930s. Rates of abandonment increased as many husbands chose the "poor man's divorce" option — they just ran away from their marriages. Birth rates fell sharply, especially during the lowest points of the Depression. More and more Americans learned about birth control to avoid the added expenses of unexpected children.Mass migrations continued throughout the 1930s. Rural NewEngland and upstate New York lost many citizens seeking opportunity elsewhere. The Great Plains lost population to states such as California and Arizona. The Dust Bowl sent thousands of "Okies" and "Arkies" looking to make a better life. Many of the migrants were adolescents seeking opportunity away from a family that had younger mouths to feed. Over 600,000 people were caught hitching rides on trains during the Great Depression. Many times offenders went unpunished.The more people that were homeless, the more competitive the job market became.  Discrimination increased during this time because Americans were in competition for a shrinking amount of jobs.  The ones that suffered the most were the minorities (African Americans, Hispanics, and in the west, and Asian Americans).  The white laborers began demanding the low paying jobs that were normally filled with these minorities.

The unemployment rate increased a lot during the great depression.  People who lost their jobs could not feed themselves, pay their rent, and support their family.  This forced families together in crowded houses or apartments.  People couldn't afford to separate or get divorced because they needed the income of everyone to pay the rent.  Men who lost their jobs often felt ashamedof themselves.  And if their children or wives were working, the men felt that their status had fallen.  If the man of the house was unemployed, women went and triedto find work.  They often got fired if the employer foundout that she was married.  Women were often accused of taking jobs away from the men. 

The people who were hit the hardest by this depression were on the bottom of the economic ladder.  People who couldn't pay their rent moved in with their relatives.  The homeless built shacks out of tar paper, cardboard, and/or scrap material.  These towns of shacks became known as Hoovervilles because the homeless believed it was the Presidents fault for the crisis.  Not only were these people living in bad conditions, but it was demoralizing not owning a house because you couldn't pay your rent.  More so for the men because they were supposed to be the providers for the family.  Living in "Hoovervilles" was very hard and stressful.

  The Dust Bowl was created by a drought, over plowing ofthe soil, and the techniques of farmers.  When the farmers plowed the soil, they stripped the soils natural defense against bad weather, a thick layer of prairie grasses.  When the winds picked up, it also picked up thedark soil.  This effected the living conditions on the plains.  The dust would living conditions very dirty.  Some people would get caught in the dust storms and were killed because they could not breathe.   

Starvation and illness hurt a lot of the country.  Everyone who did not have a job was having a hard time feeding themselves and paying the rent.  If they could not eat, it made them more prone to get an illness.  If someone was unemployed, it is likely that they are livingin a "Hooverville" or tight quarters where it is easier to get sick.  And living somewhere without a bathroom or running water, things were not very clean.  Children alsosuffered most from the long-term effects of  a poor diet and no medical care. 

Reaction of GovernmentsGovernments reacted to the new world economic situation in three different ways. First, they tended to assume

more drastic powers to control currency and exchange rates; they raised tariffs; they imposed stiffer quotas on imports; they took, in short, sterner, separate measures to shield their countries against the depression. Secondly, they sought regional or sectional arrangements, as did the Scandinavian countries of the ‘Oslo Group’, or the agricultural lands of Eastern Europe, or the British Commonwealth in the Ottawa agreements of 1932. Thirdly, they attempted more comprehensive collective action, as in the ending of the reparations by the Lausanne Convention of July 1932, and as in the World Economic Conference, which representatives of sixty-six states attended in London inJune 1933. In the United States, the situation was transformed by the election of Franklin D. Roosevelt as President in the autumn of 1932, and by even America’s abandonment of the gold standard in March 1933. The new President brought to American politics a new spirit of courage, vigor and determination.

ConclusionThe dislocation caused by the collapse, was indeed, as great as that of a war. In the United States the steel industry was working only at one-tenth of its capacity. World prices of raw materials were half of what they werefive years ago. Yet the World Economic Conference found that it could achieve little, and neither do not separatenor group action by governments achieved much. What the world needed, as a tonic, was recovery of faith in itself. People and governments found themselves in a nightmare world where civilization was choked with its own power to produce abundance, where plenty had actuallyproduced poverty, and where men starved because there wastoo much wealth. To a commercial crisis, the shrinkage ofinternational trade, had been added a financial crisis – the loss of confidence in all the existing mechanism for getting goods made and distributed, sold and bought, throughout the world. The slump was more than what financiers and economists had at first believed it to be

– a particularly severe example of cyclical trade depressions. It was the breakdown of capitalism itself, acrisis in the whole of the economic structure, which had developed during the previous two centuries.

BIBLIOGRAPHY

This piece of work has been compiled with references from following sources-

“Europe Since Napoleon” by David Thomson www.english.illinois.edu www.britannica.com www.eleanorrooseveltpapers.edu www.ushistory.org Class lectures

Thank you for reading.