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IAS Mains General Studies 1 Notes: Great Depression (1925 - 1945)

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Sep 23, 2020

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The Great Depression (1929-1945): The Great Depression of 1929 was a worldwide depression which lasted for ten years. The most important event in the U.S. economy was “Black Thursday," October 24, 1929, when 12.9 million shares of the stock were sold in one day. It was triple the usual amount that was spent. Over the next four days, stock prices fell 23% which resulted in the stock market crash of 1929. LATEST SARKARI JOBS, GOVT JOB ALERTS, SARKARI RESULT & VACANCIES 2020

The height of the Depression was 1933. By then, unemployment had risen from 3% to 25% of the nation’s workforce. Wages for those who still had jobs fell 42%. Economic output was cut in half, from $103 to $55 billion. That was partly because of deflation Prices fell 10% per year. Panicked government leaders passed the Smoot-Hawley tariff to protect domestic industries and jobs. As a result, world trade fell 65% as measured in dollars and 25% in the total number of units.

Because of depression, many farmers lost their farms. In the same time, years of erosion and drought created the “Dust Bowl” in the Midwest, where no crops could grow. Thousands of these farmers and other unemployed workers looked for work in California. Many ended up living as homeless “hobos” or in shantytowns called “Hoverville’s" named after then-President Herbert Hoover.

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What is the difference between Depression and Recession?

Depression is different from a recession.

  • During the depression, the real GDP decreases, and not just the rate of GDP growth. This means the production of goods and services in an economy (in a year) will be less than of the previous year.
  • But on the other hand, recession denotes lowering of GDP growth rate. Recession as per usual definitions is a negative GDP growth rate for two consecutive quarters.
  • There is an old joke among economists that states: A recession is when your neighbour loses his job. A depression is when you lose your job.

 What Caused It?

According to Ben Bernanke, the past Chairman of the Federal Reserve, the central bank helped create the Depression. It wrongly used monetary policies. Bernanke highlighted several key Fed mistakes:

  • The Fed began raising the Fed Funds rate in the spring of 1928. It kept raising it through a recession that began in August 1929. That's what caused the stock market crash in October 1929.
  • When the stock market crashed, investors turned to the currency markets. At that time, dollars were backed by gold held by the U.S. Government. Speculators began selling dollars for gold in September 1931. That created a run on the dollar.
  • The Fed raised interest rates again to preserve the value of the dollar. That further restricted the availability of money for businesses. More bankruptcies followed.
  • The Fed did not increase the supply of money to combat deflation.
  • As investors withdrew all their dollars from banks, the banks failed. That created more panic. The Fed ignored the banks' plight. It destroyed any remaining consumers’ confidence in banks. Most people withdrew their cash and put it under their mattresses. They further decreased the money supply.

Thanks to the Fed, there was just not enough money in circulation to get the economy going again. Instead of pumping money into the economy, and increasing the money supply, the Fed allowed the money supply to fall 30%.

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The Great Depression: Social, Psychological, and Cultural Effects

Great Depression was one of the major economic events in world history. It affected every sphere of life. The outcomes were such that they changed the face of the world economy. This article deals in detail with the economic, political, social and cultural effects of this crisis and the process of restoration

Economic Effects

As it was a major economic phenomenon it had serious and widespread economic effects.

  • Trade Collapse: The Depression became a worldwide business downturn of the 1930s that affected almost all countries. International commerce declined quickly. There was a sharp reduction in tax revenues, profits and personal incomes. It affected both countries that exported raw materials and industrialized countries. It led to a sharp decrease in world trade as each country tried to protect their own industries and products by raising tariffs on imports. World Trade collapsed with trade-in 1939 still below the 1929 level. It set the wheels rolling towards the end of international gold standards and consequently the emergence of the fixed exchange rate system.
  • Reduction in Government Spending: Governments all around the world reduced their spending, which led to decreased consumer demand. Construction came to a standstill in many nations. As a consequence of government actions, the real Gross National Product of nations like the United States and Britain fell by 30.5%, wholesale prices fell by 30.8%, and consumer prices fell by 24.4%.
  • Employee Distress: Wages were scaled down to 20 per cent, whereas 25 per cent of the workforce was left unemployed. This led to a decrease in the standard of living pushing the economy further into the depth of the Depression.
  • Breakdown of the Financial Machinery: Thousands of investors lost large sums of money and several were wiped out, losing everything. Banks, stores, and factories were closed and left millions of people jobless, penniless and homeless. In 1929, 659 public sector banks were shut and by the end of 1931, this number rose to 2294. Many people came to depend on the government or charities to provide them with food.
  • Effect on Agriculture
    Due to lack of subsidies and loans, farmers were unable to support mass-produce leading to under-capacity output. Textile farming faced a major blow. The period served as a precursor to one of the worst droughts in modern American history that struck the Great Plains in 1934. Although a few segments under agriculture - e.g. cotton - benefited from the crisis, in general, the whole agricultural sector experienced a setback.

Political Effects

The Depression had profound political effects. In countries such as Germany and Japan, reaction to the Depression brought about the rise to power of militarist governments who adopted the aggressive foreign policies that led to the Second World War. In Germany, weak economic conditions led to the rise to power of Adolf Hitler. Germany suffered greatly because of the huge debt the country was burdened by following World War I.

The Japanese invaded China and developed mines and industries in Manchuria. Japan thought that this economic growth would relieve the Depression.

In countries such as the United States and Britain, the government intervened which ultimately resulted in the creation of welfare systems. Franklin D. Roosevelt became the United States President in 1933.

He promised a "New Deal" under which the government would intervene to reduce unemployment by work-creation schemes such as the painting of the post offices and street cleaning. Both agriculture and industry were supported by policies to limit output and increase prices.

Social and Cultural Effects

This economic catastrophe hit humans in the worst way possible. They were surrounded by miseries from all sides.

  • Due to the failure of the financial machinery, the masses' faith over the economic system shattered. This resulted in a sudden rise in the crime rate. Theft, burglary and felony became common occurrences. With no income and several mouths to feed, workers were pushed to commit suicides. Malnutrition was one of the severe outcomes of the Depression.
  • Higher education was beyond anyone's reach which resulted in the contraction of the student bodies in all the universities. Due to the lack of public spending, many schools were closed down or understaffed. Professional education was no longer a priority.
  • One of the key features of this phase was the mass migration. It reshaped the whole American scenario, people relocated to other countries in search of better employment opportunities and an increased standard of living. Many shifted to California and Arizona to save themselves from the adversities of the Great Plains. This movement paved the way for various cultural changes resulting in the diversities we witness today.
  • A positive outcome of the whole Depression was the emergence of labour unions and the concept of the welfare state. It brought the trend of collective bargaining used during that phase to voice the concerns of the labour distress, which is a well-defined form of communication in companies today. In the United States, union membership doubled in its size from 1930 to 1940.

Rehabilitation Process

The Great Depression ended as nations augmented their production of war materials at the beginning of World War II. This increased production provided jobs and put considerable amounts of money back into circulation. In an attempt to revive the economy, governments all over the world actively participated in the regulation process especially of the financial markets. The United States constituted the Social Security Act (1935) as a response to the hardships of 1930s. It included unemployment compensation and old age and survivors' insurance scheme. With this, several other acts like the Security Exchange Act of 1933, the Glass-Steagall Act, Emergency Relief and Construction Act, etc., were introduced as corrective measures.

In Germany, Hitler developed a massive work-creation scheme that had largely removed unemployment by 1936. Rearmament, paid for by government borrowing, started in a major way. In order to control inflation, consumption was restricted by rationing and trade controls. By 1939 the Germans' Gross National Product was 51% higher than in 1929 which were mainly due to the manufacture of machinery and armaments.


In 1932, Franklin D. Roosevelt was elected President.

He promised to create federal government programs to end the Great Depression. Within 100 days, the New Deal was signed into law. It created 42 new agencies designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs, such as Social Security, the Securities and Exchange Commission (SEC), and the Federal Deposit Insurance Corporation (FDIC) are still here today.

They help safeguard the economy and prevent another depression

Many argue that World War II, not the New Deal, ended the Depression. However, if FDR had spent as much on the New Deal as he did during the War, it would have ended the Depression. From 1932, when the New Deal was launched, to 1941, when Japan attacked Pearl Harbor, spending only increased the debt by $3 billion. In 1942, defence spending added $23 billion to the debt and $64 billion in 1943.

If that much had been spent on the New Deal, it would have been enough to end the Depression. In fact, WWII had its roots in the Depression. Financial stress made people desperate enough to elect Hitler as Chancellor in 1933. If FDR had spent enough on the New Deal to end the Depression before Hitler consolidated his power, World War II might never have happened. 

After effects Measures

What was the New Deal?

There were some important points in the New Deal and they are as follows:

  • Relief, Recovery, Reforms.
  • Tennessee Valley Authority: for construction works.
  • Federal Emergency Relief Administration (FERA): funds for states and local governments.
  • Federal Reserve Bank: for providing loans.
  • Security Exchange Act 1934: license to the stock exchange.
  • National Industrial Recovery Act (NIRA: Raise worker wages, lower working hours.
  • Agricultural Adjustment Act (AAA): compensation to farmers raise agriculture prices.
  • Collective bargaining between employer and workers.
  • Restriction of work hours.
  • Federal Deposit Insurance Corporation (FDIC): to protect depositors’ accounts.
  • Securities and Exchange Commission (SEC): to regulate the U.S. stock markets.

Effects of New Deal: Combating Great Depression

Certain effects of the New Deal are as follows:

  • Strengthened the American Economy.
  • Restored Confidence among people.
  • Increased production and thus industrial prosperity.

By 1940, there was normal economic activity in the USA.

The New Deal expanded the regulatory power of the federal government and the government’s role in the economy. It focused new attention on the plight of workers, women, racial minorities, children, and other groups.

However, many Keynesian economists believe that it was actually the big government spending during World War II which ended the Great Depression. The military guns, tanks, ships, and planes were mass-produced. Unemployment started to decline at the start of World War II.

Though the Allies and the Axis Powers had been at war since 1939, the United States remained neutral until the Japanese attacked Pearl Harbor on December 7, 1941.

World War II ushered in numerous social changes, including more civil liberties and the movement of women into previously male-only jobs.

The country emerged from World War II a very different nation – it solidified America’s role as a global power.

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