Britannica Educational Publishing - The Great Depression

Published in 2013 by Britannica Educational Publishing
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First Edition

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Library of Congress Cataloging-in-Publication Data

The Great Depression/edited by Brian Duignan.1st ed.

p. cm.(Economics: taking the mystery out of money)

In association with Britannica Educational Publishing, Rosen Educational Services.

Includes bibliographical references and index.

ISBN 978-1-61530-897-2 (eBook)

1. Depressions1929History. 2. Business cycles. 3. Social history.

4. Depressions1929United States. 5. United StatesHistory1933-1945.

I. Duignan, Brian.

HB37171929 .G685 2013

330.9'043dc23

2012025635

On the cover (bottom): A detail of the fresco California Industrial Scenes, 1934, by John Langley Howard. The work is located at Coit tower in San Francisco. Collection of the City and County of San Francisco. PhotoSpencer Grant/age fotostock/SuperStock

Cover (background), pp. i, iii, 1, 32, 48, 66, 72 Shutterstock.com/zphoto

W hen the United States suffered through the Great Recession of 200709, the downturn was frequently referred to as the worst since the Great Depression. Indeed, at 18 months, the Great Recession was the longest recession the U.S. had experienced since the 1930s. Still, even that recent experience cannot give people today much of a feel for what America went through from 1929 to 1939, when the Great Depression held the nation (and much of the world) in its grip.

Spanning two recessions totalling a combined 56 months, the Great Depression was not simply a temporary economic setback but a period of severe hardship that profoundly affected both rich and poor. It changed the course of world politics and left a permanent mark on U.S. government institutions and American popular culture. In the generation that witnessed it the Great Depression instilled a profound caution about money, an ethos that was in stark contrast to the excesses that later led to the global financial crisis, which significantly worsened the Great Recession in 200809.

This book is designed to give readers a view of the Great Depression, not purely from an economic standpoint but also with respect to its personal, political, and cultural effects. This book will also give readers a sense of the diverse forces that influence economic growth. A discussion of economic cycles is a useful starting point for this examination of the Great Depression because it helps put the events of the time in perspective.

Broadly speaking, economic cycles are periods of business expansion and contraction. Though this pattern of expansion and contraction is generally described as a cycle, it is by no means regular, and some economists prefer to refer to economic fluctuations lest the term cycle suggest something more routine and regular. The phase of economic contraction in the course of a cycle is referred to as a recession or, if it is particularly severe, a depression.

A line of the unemployed outside a Salvation Army hostel, c. 1935. FPG/Archive Photos/Getty Images

No two economic cycles are alike. They have been attributed to forces as diverse as psychology, demographics, government laws and policies, technological developments, and various financial issues. Business cycles are most likely affected by all of these forces, which is part of what makes them so unpredictable. Certainly, when the Great Depression arrived, government and business leaders were faced with a crisis the likes of which none of them had seen before.

Just about any economic measure shows how deep this period of contraction was. During the first phase of the Great Depression, U.S. industrial output declined by 47 percent, wholesale prices dropped by 33 percent, and unemployment is estimated to have exceeded 20 percent. U.S. gross domestic product (GDP), which is a comprehensive measure of economic output, declined by 33 percent during the same period.

While the Great Depression was particularly severe in the United States, it was truly a global crisis. Though the length and severity of the downturn varied from country to country, its effects were felt in Europe, Asia, Africa, and South America, in addition to North America.

How did this happen? Why did the economy suffer such an extreme reversal, and how did this contagion spread around the world? There is no single answer to these questions, and indeed it makes sense that a problem of this scope should have multiple causes. Examining some of those causes helps illustrate why even the most sophisticated economies may be prone to unexpected setbacks.

The most obvious cause of the Great Depression was the stock market crash of 1929. The 1920s had been a time of moderate economic growth, but as the decade wore on stock prices rose to an extent far out of proportion with that growth. Speculation had taken hold. Then the bubble burst, and within just a couple of months in late 1929 stock prices declined by 33 percent.

It is important to remember that the stock market and the economy are two different things, but they do have an impact on one another. For example, when the stock market crashed, it reduced the wealth of many Americans, thereby reducing their spending as well. Even people who hadnt heavily invested in the market became pessimistic as a result of the crash, so they spent less, too. Also, the influence of the stock market on the economy was magnified by the Federal Reserve, which had sought to rein in speculation during the late 1920s with policies such as raising interest rates. This had the effect of slowing consumption by making loans more expensive.

By 1930, growing pessimism about the economy led to a series of banking panics. From 1930 through 1933, one out of every five banks in the United States failed. This severely limited the capital that was available for lending, which further restricted economic growth. As with pessimism over the stock market crash, the banking panics showed how a psychological reaction could have a very real economic impact.