Q1. What is the background of Great Depression?

Great Depression, worldwide economic downturn that began in 1929 and lasted until
about 1939. It was the longest and most severe depression ever experienced by the
industrialized Western world, sparking fundamental changes in economic
institutions, macroeconomic policy, and economic theory. Although it originated in
the United States, the Great Depression caused drastic declines in output,
severe unemployment, and acute deflation in almost every country of the world.
America's "Great Depression" began with the dramatic crash of the stock market on
"Black Thursday", October 24, 1929 when 16 million shares of stock were quickly sold
by panicking investors who had lost faith in the American economy. At the height of
the Depression in 1933, nearly 25% of the Nation's total work force were
unemployed.
Wage income for workers who were lucky enough to have kept their jobs fell almost
43% between 1929 and 1933. It was the worst economic disaster in American
history. Farm prices fell so drastically that many farmers lost their homes and land.
Many went hungry. Industry was badly shaken by the Depression. Factories closed;
mills and mines were abandoned; fortunes were lost.
Q2. What were the Causes of Great Depression?
the worst depression ever experienced by the world economy stemmed from a
multitude of causes. Declines in consumer demand, financial panics, and misguided
government policies caused economic output to fall in the United States, while
the gold standard, which linked nearly all the countries of the world in a network of
fixed currency exchange rates, played a key role in transmitting the American
downturn to other countries. The recovery from the Great Depression was spurred
largely by the abandonment of the gold standard and the
ensuing monetary expansion.
Imbalances:
1. Wage Imbalance:
Although the 1920s appeared on the surface to be a prosperous time as
manufacturing grew by 32%, but in reality the income was unevenly distributed.
wages were growing only by 8% even with the extraordinary manufacturing sector
growth.
The income of top 0.1% equaled to bottom 42% of the population. The wealthy made
large profits, but large number of Americans were spending more than they earned.
In order to ensure consumption power, the consumers started crediting from banks
which led to huge increases in banks consumer credit. The consumers also started
investing in stock market to be able to earn more.
Due to the manufacturing expansion and margin lending by banks at 10%, Stock
Market shot up far more than ever, the consequences of which led to Great
Depression.
2. Over production in industry and agriculture
Agricultural income in US eroded sharply as over-production led to price crash;
Agricultural incomes fell to 1/3rd per capita income. Farmers faced low prices and
heavy debt.
3. High Debts of Europe after World War 1:
The lingering effects of World War I (1914-1918) caused economic problems in many
countries. Europe struggled to pay war debts and reparations. It was trying to rebuild
after WW1 but it was heavily indebted to US ($10.3bn). The high US tariffs prevented
generation of Trade surpluses to repay debt. As a result, demand for U.S. exports
slowed.
Protectionism through High Tariffs:
US raised tariff barriers twice within decade, 1922 and 1930 taking advantage of post-
world war 1 repercussions. As European exports to US fell, Europe decided cut back
on Imports from primary producing/ low cost supplying countries which somehow
affected Asia and Latin America.
Gold standard:
The gold standard is a monetary system in which a nation’s currency is pegged to the
value of gold. In a gold standard system, a given amount of paper money can be
converted into a fixed amount of gold. Countries on the gold standard can’t increase
the amount of paper money in circulation without also increasing their reserves of
gold.
Gold standard meant countries could not restore competitively though devaluation;
Gold hoarding by US and France raised interest rates elsewhere and sharply reduced
global money supply, worsening Depression.
Bias for “Market” vs. State role as economic agent:
One of the cause was free market capitalism which was a prevailing conviction at that
time. A free market or a Laissez Faire economy believes that the less the government
is involved in the economy, the better off business will be. According to this principal,
Business itself was responsible for economic growth and if State interferes, that
would distort natural order.
Q3. What were the Effects of Great Depression?
Increasing Unemployment
By 1933, unemployment was 24.9%. Almost 15 million people were out of work due
to increased industrialization. Manufacturing fell by 40%; and GDP by30%
Falling Demand
Since the people affordability of goods have fallen due to increasing unemployment,
the demand has fallen. The companies were over producing goods to minimize cost
however demand supply equilibrium was broken which led to companies going
bankrupt.
Stock Market Crash and Financial Panic
The stock market lost 90% of its value between 1929 and 1932 as companies, banks
as well as consumers started taking out their shares due to the financial panic. It
didn't recover for 25 years. People lost all confidence in Wall
Street markets. Businesses, banks, and individual investors were wiped out. Even
people who hadn't invested lost money. Their banks invested the money from their
savings accounts. Share prices fell sharply which accelerated credit losses at banks
and ignited banking crisis.
Banks Running Out of Business
People were stunned to find out that banks had used their deposits to invest in the
stock market. They rushed to take their money out before it was too late. These “runs”
forced even good banks out of business. Bank Credit losses increased, even before
Stock Market crash. 11,000 out 25,000 US Banks collapsed.
International economic repercussions
As countries' economies worsened, they erected trade barriers to protect local
industries, World Trade fell to 33%;
Credit Anstalt crash
The collapse of the Credit-Anstalt affected the largest bank of Austria and at that time
also the largest bank east of Germany. The collapse in May 1931 set off a chain
reaction that led from the run on German banks to withdrawals in London and the
devaluation of the pound to large-scale withdrawals from New York and another
series of bank failures in the United States. So in brief the news of the crisis of the
Credit-Anstalt, the most important bank in Central Europe, shook the whole economic
structure of Europe and sent shock waves through the rest of the world.
The collapse of the Credit-Anstalt in Vienna started the spread of the crisis in Europe
and forced most countries off the Gold Standard within a few months
Socio/political effects
 The arrival of Social-welfare State in the UK, France and Scandinavia.
 The rise of new political ideologies like Fascist to replace Capitalist democracies in
Germany/Italy;
 The rise of Military or Military allied Govt. in Latin America and Japan;
 The strong surge of Leftist/Communist parties, given that the USSR was
industrializing rapidly through this period by showing high growth and
employment levels

Q4. What were Roosevelts Initiatives for Great Depression?

 Roosevelt became President in 1932 with mandate to provide relief and
employment. Immediate “Rescue” steps – within 100 Days- included:
 Banking recovery: shut Banks with assurance only ‘solvent’ Banks would be
allowed to open – confidence returned;
 Passed Glass-Steagall law – created FDIC and separated Commercial and
Investment banking; Set up Security Exchange Commission (SEC).
 Created Civil Conservation Corps: environment development, employed 2.5mn;
and Passed Agricultural Adjustment Act: restricted Agricultural production, to raise
prices; invested in farming modernization.
 US left Gold standard
 Set up Tennessee Valley Authority: massive building of Dam and irrigation
infrastructure covering 7 States.
 Established National Industrial Recovery Act: Public Works Administration –
constructions of schools, roads, civil amenities, employed 4 mn people.
 National Recovery Administration: involved Businesses in recovery strategy.
 National Housing Agency: lent for home mortgages.
 Foreign Exchange Regulation Act -FERA: direct cash relief to the poorest;
 Second term: Reinforcement and more funding for programs initiated; in addition,
worked on qualitative changes.
 National Labor Relations Act: empowered labor Unions.
 Fair Labor standards: ensured minimum wage.
 Social Security Act: provided for provision of Pensions.
 Unemployment insurance: child welfare support