The Great Depression 1929 – Definition, Causes, Effects and Measures

We all know that the Covid–19 pandemic 2020, shut down all activities. The countries had only one option, i.e., to announce a lockdown to slow down the spread of the virus.

This sudden lockdown affected all major sectors in a very bad way, especially the economy. Millions of people had lost their lives all around the world. ‘The Great Depression 1929’ also affected the society similarly.

The IMF (International Monetary Fund) Report mentioned some points which are;

1. Almost all major economies were in recession, such as the USA, the UK, Australia, India, Russia, Canada, and so on.

2. However, some economies of countries like China, Vietnam, Laos, and Myanmar grew in 2020.

3. The global economy shrunk by 4.4%

But now the global economy is recovering from the Covid–19 effects. It is not the first time that countries have faced a depression like situation. Before Covid–19, there was a situation like Great Depression 1929.

Definition of Depression in Economics:

Economic Depression refers to a situation in which all economic activities face a downward trend, whether it is

• GDP growth
• Prices of Products
• Employment
• Wages
• Demand of goods by consumers
• Investment
• Savings

What were the causes of the ‘Great Depression 1929′?

The period of ‘Great Depression 1929′ was from 1929-1939. It originated in the US, but with time it spread all over the world as countries were interdependent on each other for the supply of products. The ‘Great Depression 1929′ is still considered the longest and worst ever depression in the global economy.

1. More production of Agricultural Products–

After the end of World War I, all sectors of the economy were growing at a very fast pace whether it was construction, agriculture, manufacturing, automobiles or electricity. The period from 1919–1928 was called the Roaring Twenties.

The production of agricultural products increased in North America, Western Europe, Asia, and in Australia. According to the Law of Demand, as the supply of products increases more than the demand, prices of products start to fall. So, the wages of farmers started to decrease.

2. Import duties on agricultural products–

In order to protect domestic farmers from international competition, the US imposed tariffs on imports of agricultural products. Other countries also imposed import tariffs on agricultural products of the USA to retaliate. As a result, exports decreased for all the countries.

3. Unregulated stock market in the USA–

One of the major causes of the Great Depression was the unregulated stock market in the US. In the roaring twenties, people were buying stocks as a time–pass. Even people were buying stocks with the help of bank loans.

But as mentioned above, there was overproduction and oversupply of the agricultural products. This overproduction also happened in the steel and iron industries. So, the companies were forced to dump their production in other countries at a cheaper rate, which in return reduced their profit. Profit on shares also reduced and people started to sell their stocks. On October 29, 1929, over 12.9 million  stocks were sold. This day is called as the ‘Black Tuesday’.

4. Monetary policy of the Banks of the US–

The banks of the US followed the expansionary monetary policy. They were giving high loans to people without checking their financial background to buy houses, cars, and electric equipment. After the crash of the stock market, people were in panic, so they gathered outside the banks and demanded their deposits.

Banks also started to demand loans from customers. As mentioned above, the wages of people and farmers decreased because of overproduction. They failed to give back loans to the banks and became loan defaulters. Over 4000 banks went bankrupt by 1933 and the whole banking system collapsed.

What were the after effects of the Great Depression 1929? 

• One of the major effects of the Great Depression 1929 was that countries started to hate capitalist economies and were influenced by the socialist economy. 
• Till 1929 Classical economists like Adam Smith, Thomas Malthus, David Ricardo and many more who advocated Laissez faire policy were popular.

‘Laissez faire policy means an invisible hand works in the market’.

In other words, demand and supply forces themselves balance the economy. No need for government interference in the market.

But after 1929’s Great Depression, New economic theory propounded by John Maynard Keynes in his book ‘The General Theory of Employment, Interest and Money’ criticized classical economists. According to Keynesian theory, there is a need for government intervention in the market to regulate it.

• The unemployment rate rose to 25% in the US. Over 15 million of the US people lost their jobs. However, the participation of women in the economy during this depression period was increased to 24% from 10% as they were ready to do a job at a lesser wage rate.
• International trade was reduced by 66% because of tariff. 

How was the Depression problem solved?

➢In 1933, Franklin Roosevelt was elected as the new President of the USA. He started to follow the policy of regulation of the financial system.

1. The Securities and Exchange Commission was formed in 1934 to regulate the Stock Market.
2. Federal Deposit Insurance Corporation was established in 1933 to provide insurance to the banks ofK9 the USA and to protect the deposits of citizens and to reestablish the confidence of depositors in the banking system.

➢ In 1939, World War II started. Initially, the USA was not in the war, but the attack by Japan on Pearl Harbor of America forced the USA to take part in the war. As a result, the defense industry developed at a rapid pace. People again got employment in this sector. The economy found a way to develop.

In this world of globalization, where the countries are interrelated socially, politically, culturally, and economically, the chances of another Great Depression are higher but at the same time the countries and the central banks also learned great lessons from the Depression of 1929.