The Great Depression: Causes, Impact, and Recovery for UGC NET

The Great Depression was the most severe global economic downturn ever experienced by the world, beginning in 1929 and generally ending around 1939, with most dire consequence in the United States itself. Commonly associated with mass unemployment and poverty, the Great Depression, possibly has its main point - economic instability of fundamental transformation of economic institutions and policies. The Great Depression was one of the most appalling depressions in the history of the modern world. It originated first in the United States, but it soon turned out to be a world catastrophe, the devastation of which was abysmal on the dimensions of economies and societies. It began with the stock market crash of October 1929, and then it caused massive unemployment and bankruptcies of many banks and poverty of the majority, and a steep fall in industrial production. Before diving deeper, let’s understand the economic depression meaning: it refers to a sustained, long-term downturn in economic activity affecting production, employment, and trade

The Great Depression is one of the new topics which is being questioned quite a bit in the commerce related exam such as the UGC NET Commerce Examination.

In this article, the readers will be able to know about the following:

• What Was the Great Depression?
• Causes of the Great Depression
• Effects of the Great Depression
• Impact of the Great Depression
• The Economic Recovery via Government Policy: The New Deal

Click Here to Download UGC NET Paper 1 Important Questions PDF

What was the Great Depression?

The Great Depression exemplifies the very definition of an economic depression, marked by widespread unemployment and industrial collapse. The Great Depression was a long, tough depression that began in 1929 in the United States of America and spread over the whole world until the late 1930s. It is considered by far the worst economic crisis of the 20th century. This period of Great Depression was marked with high stock price falls, failing banks, widespread unemployment, steep decline in industrial production, and a sharp drop in levels of international trade. The Great Depression was the disaster that changed radically the very course of world economic policy and institution. It pointed out the fragility of the market economy and gave new regulatory frameworks and safety nets to the governments in order to avoid such economic crises in the future.

Fig: great depression

The unique combination of systemic issues illustrates the deeper economic depression meaning—a complete breakdown of the financial and industrial system. Among the most acute economic crises in modern history is the Great Depression, which brought bouts of serendipity through a complex combination of factors that culminated into a devastational downturn from 1929 to the late 1930s. Here are the key causes of the Great Depression in detail:

Stock Market Crash

The stock market crash of October 1929, popularly known as Black Tuesday, is usually cited as the trigger that led to the Great Depression. The stock prices were high throughout the 1920s in the build-up to the crash. It was floated by speculative buying and excessive optimism. Panic selling set in on October 24, 1929, and the stock prices took a plunge. The loss of faith in the economy from this collapse of billions of dollars of wealth in a very short time started the chain reaction for economic distress.

Failures of Banking System

This then resulted in the banking crisis. Banks had invested extensively in the stock market apart from committing a huge amount towards loans on speculative investments. With falling stock prices and failing investors who could not service their loans, banks suffered extensive losses. Panic-stricken depositors rushed to withdraw money from banks, leading to nationwide bank runs. Many of these banks were unable to meet this withdrawal demand and collapsed. Colourfully Erik the bank failures reduced public confidence in the banking system and caused a deterioration of the depression through reduced credit availability.

Overproduction and Underconsumption

The 1920s seemed to showcase increscent amounts of industrial production in the industrialized countries of the world, especially the United States. Improved technology and more significant efficiency created a boom in manufacturing output. However, this rapid growth in production surpassed consumer demand such that inventory began accruing, prompting businesses to curb production and downsizing eventually. This followed a slide into economic activity and increased unemployment.

International Trade Decline

The Great Depression remained not only confined to the United States but spread all over the world. This was mainly because the revenues both in international trade and finance were interlinked. It was protectionism measures of imposing tariffs and trade barriers that further made the downturn worse as it diminished global trade flows. Those nations exporting goods for economic growth, like Germany and Japan, suffered the most amidst the falling demand for those respective goods.

Agricultural Crisis

All these factors came together to create the preconditions for the coming disaster towards the end of 1929: in most countries, the agricultural sector found itself already inward, suffering from overproduction, falling prices, and rising debt-a state especially intensified under the stresses of drought and inefficient farming practices, resulting in the bankruptcy of many farmers. 

Monetary Policy Mistakes

The critical errors of the central banks of monetary policy, particularly the Federal Reserve in the United States, exacerbated the Great Depression. The Fed initially hiked interest rates to rein in speculative lending and stock exchange speculation. These tight monetary policies reduced the money supply, droughted investment, and further deteriorated the banking crisis. This failure contributed to an increase in both the depth and duration of the economic downturn, events that unfolded as a consequence of insufficient liquidity provision by central banks to the banking system. 

Psychological Factors

Another set of factors that turned the recession into the Great Depression was psychological. Confidence among both consumers and investors got a inherent crunch from the stock market collapse and mass bank failures. With waves of fear and uncertainty, consumption spending and investment fell steeply by both consumers and investors, further cripplingly continuing economic activity and hence prolonging the depression.

Effects of the Great Depression

In the social and economic environment, the Great Depression wreaked havoc and gave birth to multitude of horrors, mass unemployment, poverty, and ultimate destruction of financial economy. Not only economic, but also sociopolitical in nature, its effects changed the world regime for decades. The Great Depression caused five major effects

Unemployment and Economic Hardship

The Great Depression entailed massive unemployment from failed or downscaled businesses. The rate of unemployment rose to an all-time high, with an estimated number of Menschen losing their jobs running into millions. Many families had to fall back on financial hardship, struggle through financial crises, and sharply lower their standard of living.

Bank Failures and Financial Instability

A very terrible consequence of the economic crisis was the meltdown in the banking system; there were widespread bank failures and runs on banks as panicked depositors rushed to withdraw their savings. Its toll on confidence in banks led to a contraction in credit availability, further exacerbating economic conditions and hindering recovery efforts.

Global Economic Contraction

The Great Depression had repercussions across the global economy. International trade declined considerably as countries began adopting protectionist policies by raising tariffs and import quotas to safeguard their economies. This reduction in trade made the recession worse in several countries and led to a global recession.

Social Dislocation and Poverty

The Great Depression led to economic suffering, consequently leading to the impoverishing of people and social dislocation. Many people who lost their homes had to resolve to camping in shantytowns, otherwise called "Hoovervilles." Soup kitchens and bread lines became common owing to the fact that charitable organizations could not meet up with the surging number of unemployed and homeless people.

Political Instability and Rise of Extremism

The Great Depression thus became the driving force behind political instability and social upheaval in most countries. The disillusionment of people with the existing political systems and economic policies thus paved the way for extremist ideologies and political movements. It gave birth to an authoritarian regime and populist leaders who promised relief from the economic crisis at times in lieu of democratic norms and institutions.

Impact of the Great Depression

It is widely believed that the Great Depression brought cataclysmic changes in the economies, societies, and politics of many nations, forcing all to change within themselves in permanent ways. The far-reaching and transcending effects of the Great Depression are immense. However, not only immediate economic losses involved but also important policy issues linking it to governance and international relations for many years to come. The contribution of such effects was surely enormous and widespread across the globe. Below are some key aspects of its impact:

Economic Impact

These three indicators of failure during the Great Depression are the decline in GDP, unemployment, and the colossal failures of banks throughout the industrial economies. The description has been stated below.

• The Great Depression ushered in a rapid decline in economic function, the development of which entered industrial production recession, widespread business failures, and unemployment. Between 1929 and 1933, GDP declined by almost 30% in the US.
• Bank Failures and Financial Crisis: The banking system sustained heavy injuries; widespread bank failure and bank runs made it impossible to take seriously anything that the banking system might proclaim to reassure public confidence. Such an attitude intensified instability in the financial system, already distressed in its efforts at recovery, and consequently fed the economic downturn.
• Decline in trade: International trade was severely curtailed as nations went ahead with all manner of protectionism - tariffs and trade barriers. This curtailment in global trade merely worsened the economic condition internationally, thereby contributing to a global recession.

Social Impact

Millions saw their everyday life transformed while the economic crisis of the globe began in the 1930s, which created tremendous poverty, displacement from homes, and social dislocation. The details are below.

• Soaring unemployment: Unemployment rates peaked and went to unparalleled levels in many countries. Families faced extreme financial crises, which culminated in poverty and the risk of homelessness, depending on charity for physical sustenance and shelter. Unemployment in the United States stood at an apex of about 25%.

Social Dislocation: With homes and means of sustenance gone, the Great Depression caused extreme social dislocation. Eyewitnesses of the time, shantytowns (Hoovervilles) and breadlines became an unfortunate testimony to human suffering.

Political Impact

The Great Depression brought about political unrest both in Europe and abroad, leading to the emergence of authoritarian regimes as well as extremist movements. The details are provided below.

• The extremist political ideologies and movements were the consequences of an economic crisis accompanied by social disorders. In fact, authoritarian regimes gained forces among the public with increasing disappointment among citizens from Democratic governments, while leaders emerged by promising radical cures for the economic crisis, often leading to erosion of democratic institutions.
• Indeed, the policy initiatives undertaken to government implement in response to crisis included public works projects of all types and monetary reforms complemented by social welfare measures designed to provide minimum relief to innumerable unemployed people. All such measures prompted renewed vigor in tackling the postponed recovery of the economy. The transformation into increased state intervention in the economy became vital in such situations.

Enduring Effects

The Keynesian answer to the Great Depression molded modern economic thought, which rests on government intervention and reforms for the long term. Details are stated below.

• Legacy of Economic Policy: It is evident that the Great Depression has left a long-lasting legacy for successive generations in terms of economic thought and policy. The importance of economic stability as well as ways in which downturns are to be prevented and mitigated has been discovered. The experience of the Great Depression more than provided Keynesian economics and later shaped policies that would henceforth be concerned with the smooth maintenance of economic growth and employment-at least under normal circumstances.
• International Relations: The global impact of the Great Depression reshaped international relations and cooperation. Countries sought to address economic challenges through multilateral initiatives and agreements, laying the groundwork for institutions like the International Monetary Fund (IMF) and World Bank.

The Economic Recovery Via Government Policy: The New Deal

The Great Depression and its far-reaching effects-demanding unemployment, widespread poverty, and disastrous financial institutions-required a bold and immediate intervention by governments. In the United States, this intervention was called the New Deal, which was a series of economic reforms and public programs that President Franklin D. Roosevelt initiated in 1933. The policies were aimed at restoring economic stability, providing jobs, and rebuilding public confidence in the capitalist system. Widely known for its strategies of Relief, Recovery, and Reform, the New Deal formed an important moment in transforming American economic policy and bringing similar endeavors into action across the globe.

The Three Rs: Relief, Recovery, and Reform

The New Deal stood on three basic principles. First were relief programs, which were concerned with the direct assistance given to unemployed citizens and those in need. The second was the recovery programs, which dealt with the rebuilding of the economy and the creation of jobs, while the last measures were meant to reform the standard structure the banking and financial sectors had through which the crisis ensued. These principles therefore became an important ingredient in the coordination of the U.S. government intervention with specific programs and policies intended to address the many facets of the Depression in a systematic fashion.

New Deal Programs

Several landmark programs announced under the New Deal had far-reaching implications for:

• Civilian Conservation Corps (CCC): Young and unmarried men were engaged in environmental projects, including afforestation and soil conservation. It alleviated urban unemployment and improved public lands.
• Public Works Administration (PWA): It financed infrastructure such as schools, roads, and hospitals. By pumping cash into the economy and creating jobs, it created demand and further fueled industrial growth.
• Federal Deposit Insurance Corporation (FDIC): The FDIC insured personal bank deposits to a certain amount to restore trust in banks, ensuring that individuals would not lose their savings if a bank failed.
• Agricultural Adjustment Act (AAA): This act paid farmers to lower production in order to increase farm prices. It tried to cure the malady of overproduction and falling farm income.
• Securities and Exchange Commission (SEC): An SEC was organized to regulate the stock market and stop the insider trading-and-speculator abuses that led to the crash of 1929. 

Each of these programs was aimed at targeting select economic vulnerabilities that had become exposed during the Great Depression and, thus, to lay the basis of a better economic governance. With the emerging global economic crisis of the 1930s, the countries began to rethink the role of the state in stabilizing markets and in protecting communities.

Effectiveness and Economic Impact of the New Deal

The New Deal had a mixed but overall positive impact on the U.S. economy:While it didn't fully end the Great Depression (WWII industrial mobilization did that), it significantly mitigated the suffering and laid the foundation for modern American economic policy.

Global Influence of the New Deal

The success of the New Deal inspired other countries to explore government intervention in the economy, marking a shift away from classical laissez-faire economics. It also gave rise to Keynesian economics, which advocated for deficit spending during economic downturns.

Conclusion

The Great Depression marked a turning point in world economic history, from which new policies and perspectives regarding the maintenance of stability and resilience began to emerge. The global economic crisis of the 1930s serves as a reminder of how interconnected financial systems are and the importance of international economic cooperation. Everlasting bequests from it are the establishment of the institutional framework in social safety nets, financial regulation, and macroeconomic policies that are valuable for the prevention of catastrophic downturns today. The lessons learnt affected a rethinking of economic theories and policies with stay-ing power, underpinning the need for proactive government intervention and international cooperation during times of intensive crisis.

The Great Depression is a vital topic per several competitive exams. It would help if you learned other similar topics with the Testbook App.