The global economic decline that continued for ten years beginning from 1929, starting in the United States is named the Great Depression. There are various reasons leading to it.
In the 1920s, there was a higher scale consumption that was fueled for the most part by credit.
The Agricultural sector also faced losses during the same period due to the extensive mechanization of the agricultural instruments by the farmers. They went into debt to finance their mechanization.
By 1925, the expansion of several manufacturing industries along with construction industries slowed down.
According to a renewed historian David Kennedy, by 1929, commercial banks started loaning cash mostly for stock market investments and real-estate sector instead of the business ventures.
There was an increase in unemployment by twenty per cent and an escalation of debts besides the lowering of wages. All this lead to the stock market crash. The U.S. stocks were just twenty per cent of the pre-crisis market stocks.
The stock market crash reflected on the companies in the U.S. A lot of companies as well as the stockholders lost money. Millions of workers suffered laying off, causing the Great Depression.
One of the major reasons for it was the American weak banking system. The depositors wanted to take back their money before the banks ran out of their reserves. The banks had to call in the loans and sell assets to give money back to the depositors. Ultimately it resulted in the frozen credit system, i.e., less money in circulation and deflation.
Due to the deflation (reduction of prices), bankruptcy showed up in more businesses. Hence, leaving more and more workers unable to purchase the goods and services which they needed to keep the companies open.
Due to the “Dust Bowl”, which were the dust storms in the1930s, the Great Depression was intensified as the livestock, agricultural lands and farmers were greatly affected. Many people dependent on farming, then started migrating for better work and living conditions.
America signed the Hawley Smoot Tariff Act to increase taxes on imported goods in the country. Other countries also increased their import taxes for the products from America. This collapse of world trade further led to great losses.
The Great Depression resulted in a dip in total demand. Global Gross Domestic Product (GDP) reduced by thirty per cent and the stock market lost two-thirds of its value in just ten years. Forty per cent of the banks failed.
Trade across the world suffered greatly because countries established trade restrictions and increased import tariffs to safeguard the local industries. World wide trade reduced by half and also the trade wars later emerged into armed wars. The United States stopped the flow of investment capital to other countries. Austria and Germany were the two greatly affected countries that suffered due to the Depression.
To overcome the Great Depression, Herbert Hoover, the then president of the U.S. hiked federal spending by 42% and started programs like Reconstruction Finance Corporation(RFC) by raising taxes to pay for them. He encouraged raise in wages, inflation and tried to decrease unemployment. The measures taken were unable to solve the problem. The Relief, recovery and reform programs as a part of the New Deal formulated by the next president Roosevelt, were intended to fix the economy after the Great Depression. Other programs under the New Deal also included Social Securities, Federal Deposit Insurance Corporation. According to Keynes Theory, the U.S. government started making war weapons, during the second world war which provided a chance for employment and resulted in demand and supply chain, thereby paving a way out of the depression. Both the New Deal and the second world war helped overcome the economic crisis, according to experts.
The Social Impact
There were other social and psychological effects of the Great Depression. There was a significant increase in alcoholism and suicide rates. Females earners started earning money as opposed to the traditional male breadwinners of the house. Family disputes about food, finance, and basic needs were common. The homeless families took shelter in houses made of cardboard or tin. Pessimistic outlook towards the world and life increased as a result of economic chaos. Anxiety and psychological depression increased due to the lack of job and homelessness. Escapist attitudes grew among the people, which caused a profit to the Hollywood industry as people turned towards cinema to escape reality. According to a historian Robert McElvaine, several communities unitedly tried to feed each other, mainly by forming soup kitchens to offer free food or for lesser rates to the hungry.
The Current Scenario
Due to the recent COVID-19 pandemic, most of the countries might be on the worst economic trajectory in history. Many economists are predicting an economic depression like the Great Economic depression. Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), warned that the year 2020 might see at the worst international economic distress since the Great Depression in the 1930s, as more than 170 nations were likely to experience negative per capita income as an impact of lockdowns, travel bans and temporarily factory shutdowns.
We can observe a supply chain slowdown and a slow down in revenue and sales. There is a cut in salaries of employees in several sectors. This unemployment of daily wage workers can lead to recession, layoffs and bankruptcy.
Consumer debt seems to have increased even more than the recession period of 2008. The stock market seems to be at the same level as of 2008. Gita Gopinath, the chief economist of the IMF, said that both advanced and developing countries were probably to fall worst into recession since the Great Depression. World Trade Organization (WTO) warns that the COVID-19 situation might put the world on a path to the Great Depression. And that would be due to the trade restrictions now. A better association and collaboration of the government and the industries would help to prevent the present crisis from turning into a global economic depression. Governments of most countries are taking steps to revive a part of the economy. These are enabling the trade of essential goods, opening of industries manufacturing essential items and by taking several other actions.