The Great Depression of the 1930s was perhaps one of the most depressing economic downturns in American and industrialised world history (Rittenberg and Tregarthen 689). It had an undeniable impact on the worldwide economic situation at the time. Despite the causes of the Great Depression are still being contested among academics, it is largely assumed that it was caused in part by events in the United States and financial policy (Meese 283). Banking, jobs, economic policies, and agriculture are among the important sectors of the global economy that have been impacted (Shi and Tindall 1105). Even though the great depression changed almost every aspect of the international economy, its timing and effects varied across countries. Nevertheless, the effects were devastating across the globe. Therefore, it is important to understand the impacts and occurrences of the economic slump of the 1930s from a macroeconomics perspective.
The contraction that was witnessed between 1929 and 1933 can be considered as one of the most devastating business-cycle shrinkages in the whole of American history and the world as a whole. As far as it was more severe and prolonged in the US as compared to other nations, its effects were felt internationally at it was ranked the most extreme and broadly spread global recession of modern times, as that the United States were connected to the rest of the globe through international trade (Crafts and Fearon 289). At the time when the great depression started, America was the leading exporter, and second to Britain as the world’s foremost importer (Crafts and Fearon 289). Therefore, as the U.S. was experiencing a decline in its net national product in current prices by approximately more than one-half from the time the depression started to 1933, the effects were also being felt across the globe.
Keynesian economics provides a good lens in which one could examine the occurrences of the great depression. A decline in total demand took the world economy from above its expected output to below its potential production (Rittenberg and Tregarthen 690). The drop in the aggregate demand began with the failure of the US banking sector. The US stock market crash of 1929 led to panic among the population with effects spreading across the globe. For instance, a good number of citizens started to withdraw their money from the banks and the stock market (Shi and Tindall 1115). The crash in the stock market also affected business buoyancy, further reducing investment, which led to the decline in gross private domestic investment in many industrialised economies. By 1933, the world economy hit bottom of the real GDP for individual countries significantly declined (Crafts and Fearon 291). Real per capita in countries such as the US dropped nearly 40% (Crafts and Fearon 291). Also, between 1929 and 1933, the stock prices in the US lost around three-quarters of their value. The crisis had significant consequences for the financial system, subsequently affecting the US and the global economy.
During the time of the banking crisis, there was a considerable decline in the industrial production. For instance, between 1932 and 1933, the industrial output fell by almost 12% (Crafts and Fearon 49). There was also a significant fall in consumer price index as a well a drop in the nominal supply of money during the combined years of 1932 and 1933 (Crafts and Fearon 49). Although there was an increase in the amount of high-powered money for the duration of the crisis, currency and reserve deposits increased their upward slope. As a result, the money multiplier continued to decline considerably until 1933. The effect of such occurrences was not only felt in the US, but also in other industrialised economies across the globe. Comparable behaviors for money supplies, Real GDP, prices, and other important macroeconomic variables occurred in several European economies such as the UK, France, Germany, Australia, and others (Crafts and Fearon 28).
Other factors also contributed to the sharp decline in aggregate demand during the great depression of the 1930s (Rittenberg and Tregarthen 690). For instance, in the US, the crash in the stock market led to a reduction in the wealth of a small proportion of the population (Rittenberg and Tregarthen 690). Nevertheless, it reduced the rate of consumption of the general population. Moreover, there was a drop in consumer confidence in the whole economy. The decline in wealth and a plunge in consumer confidence significantly reduced customer spending in most economies, for instance, in the US, shifting the demand curve to the left (Rittenberg and Tregarthen 690). The reduction in aggregate demand was also a consequence of the fiscal policy that was enacted by some governments. For instance, in a bid to balance the budget, the US government responded by increasing tax rates, leading to a rise in government tax revenues between 1930 to 1933 and a reduction in consumption and aggregate demand. The effect was not only felt in the US, but also in other countries, such as Australia, that were dependent on the export of agricultural and industrial goods.
The rate of unemployment is also one of the macroeconomic tools that can be used to explain the great depression of the 1930s. During the economic slump, the decline in consumption rate and aggregate demand in the US and the industrialised world led to a drop in production and an increase in unemployment. For instance, in the US, the gross expenditure of new private residential constructions fell to a measly $290 in 1933 from $4,920 million in 1926 (Crafts and Fearon 291). Consumer expenditure at constant prices also dropped from around $79 billion in 1926 to nearly 65 billion in 1933 (Crafts and Fearon 291). Such a decline in output necessitated the need for massive layoffs with one out of every four individuals unemployed by 1932 (Shi and Tindall 1106). Nearly half of the adult citizens in many cities across the US were out of work. Furthermore, working hours and wages were significantly reduced for those who managed to remain employed (Shi and Tindall 1106). It meant that an increased number of the population was out of money, and, therefore, were not able to afford basic needs such as housing. The record rate of unemployment in the US further slowed down the economy regardless of the efforts made by the government to normalise economic activities. Meanwhile, the United States’ output plunged by nearly half as the average annual income of families dropped considerably.
The unemployment impacts of the great depression were not only felt in the US, but also in other industrialised countries such as the UK, Germany, Australia, and others. For instance, in Australia, the falling demand for exports and commodity prices placed immense pressures on wages. The rate of unemployment in Australia doubled after the crash of the US stock market to around 21% in the mid-1930s (Australia.gov.au). Unemployment further declined and reached its peak two years later as 32% of the Australian population were jobless (Australia.gov.au). Agriculture, a key component of the Australian economy at that time was negatively affected by the crisis as many businesses failed, leaving many people without work. Other industrialised countries were also affected by the declining incomes as well. For instance, the real level of exports reduced significantly as demand for foreign goods and services fell. In other words, the great depression of the 1930s slowed down the world's economy as a whole, the unemployment rate increased, and the demand for goods and services declined.
The unusually high unemployment rate of the economy’s labor resources was reflected by underutilization of its financial assets. There was a decrease in industrial production by approximately half between 1929 and 1933 resulting in the closure of many plants, mines and shops across the globe (Reed College). Furthermore, other factories were running way lower than their intended capacity. There was a vicious turn in the economy, the overall demand for products and services declined such that companies were in no position to market a similar amount of goods as they used to under full consumption of resources (Reed College). Furthermore, family income also reduced substantially following the low employment and production rate, a situation that led to the inability to afford products adding to the decline in the aggregate demand for produce.
The other factor that advanced the economic crisis is the state policy enacted by various governments. For instance, in the US, President Roosevelt felt that the declining remunerations and prices were to a greater extent, a consequence of the Depression (Rittenberg and Tregarthen 691). On that note, the plans implemented by his government in 1993 were targeted towards preventing further decrease in wages and prices. The programs were effective in blocking the decline in minimum fees in 1993, resulting in a consequent halt in the shifts experienced in the total supply of goods and services (Rittenberg and Tregarthen 691). However, with recovery blocked from the supply side and the lack of initiatives of increasing aggregate demand, the reasons behind the economy remaining locked in a declining gap is rather evident. Furthermore, in other nations, for instance, Australia, unemployment rates doubled following the Depression. For example, the rate of unemployment in Australia was approximately 20% in the mid-1930 and increased to around 32% two years later (Australia.gov.au). Sir Otto Niemeyer's visit to Australia in 1930 may have exuberated the situation. Niemeyer was an executive at the Bank of England. He visited to offer advice to the administration to adopt a deflationary policy (Australia.gov.au). He argued that salaries had to be cut if the country was to make exports more competitive and realise increased profits. A section of economists believed that the policy delayed the recovery process.
The Relevance of the Great Depression of the 1930s for Modern Policy Makers
Largely, the great depression of the 1930s is relevant for modern policy makers given that there are important lessons to be learned (Meese 326). For instance, the great recession showed that monetary policy played a major role in the economic slump that was experienced (Crafts and Fearon 300). Another relevant lesson that current policymakers can learn from the crisis is that premature tightening of policy advanced the economic decline. Also, the failure to come up with greater monetary inducements enabled the slump to develop into a depression. There is no doubt that current policymakers have learned from events of the 1930s (Crafts and Fearon 300). The UK and American central banks avoided needless monetary constriction. Instead, interest rates were reduced. Furthermore, they used unconventional fiscal inducement, for instance, quantitative facilitation in a bid to fend off depression. Therefore, there is no doubt that the present policymakers have learned relevant lessons.
The other lesson that policymakers can draw from the Depression is that global expansionary policy stakes the losses and the profits associated with the economic recovery (Crafts and Fearon 310). Abandoning the gold standard and increasing the local supply of capital played a major role in generating recovery and growth in different nations during the Great Depression. Of more importance, however, is that these initiatives worked to reduce the global interest rates and benefit other states as opposed to merely shifting expansion from a region to the other. The implication of the downturn on policymakers is obvious. The more nations can adopt aggressive expansionary policies; the more protected the globe will do against another depression.
Conclusion
The paper has used various macroeconomic tools to create a clear understanding of the impacts and occurrences of the great depression of the 1930s. The financial crisis is considered one of the most upsetting economic downturns in the history of the United States and the industrialised world as a whole given the level of its impacts. According to the paper, a decline in aggregate demand took the world economy from above its expected output to below its potential production. There was a considerable decline in the industrial production. For instance, between 1932 and 1933, the industrial output in the US fell by around 12%. Moreover, the crash in the US stock market led to a reduction in the wealth of a small proportion of the population. Nevertheless, it reduced the rate of consumption of the general population leading to a drop in production and an increase in unemployment.
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