THE GREAT 1930s DEPRESSION

Some Thoughts

TWO BOOKS

1) The World in Depression 1929-1939 Charles P Kindleberger

2) The Great Depression in Europe Patricia Clavin: St. Martins Press, 2000

CAUTION

“We are in the middle of the greatest economic catastrophe----due almost entirely to economic issues, of the modern world” J M Keynes 1931

THIS IS NOT A BLOW BY BLOW ACCOUNT OF THE INS AND OUTS OF THE ECONOMIC AND FINANCIAL SHENANIGANS OF THE INTER-WAR PERIOD. (Thank Goodness)

IF YOU FEEL UP TO IT READ THE BOOK

INDEX OF INDUSTRIAL PRODUCTION (1929=100)

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20

40

60

80

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120

1929 1930 1931 1932 1933 1934 1935

France

Germany

UK

USA

Post World War One Economic Instability Russian Revolution (Trade and Ideology) Loss of Traditional Export Markets (India 10% of British

Commodity Exports) In 1913 Britain, France and Germany were the source of 60% of all manufactured goods. Countries such as USA and Japan took up this trade.

Many more small nationalistic states. Boundaries redrawn with scant regard for economic viability. These new economical weak states strove to improve their finances by forcing exports and putting import tariffs in place. Increased borders also slowed down population movement.

Europe now could not feed itself. The war had destroyed much agriculture with a shortage of labour, horsepower and fertiliser. Also the loss of Russia as the ‘granary’ of Europe. Food was having to be imported-much of it on credit. Achieved 1913 levels of production by 1925

Continued The war had altered the entire financial balance of the

world. Huge liquidation of European investments to pay for the war, consequent loss of repatriated earnings.

Pre-war USA a great importer of capital; post war a great creditor nation. American Trade Surplus (Unlike Britain it did not reciprocate trade with primary imports)

German Instability and hatred of ‘Versailles” Note: Reparations France insisted on them to weaken Germany. France would have changed this stance if the USA had agreed to stand by France inside the League of Nations. However the US Senate would not ratify the treaty.

Position of the United States after World War I: An Economic Giant but a Political Pygmy?

Dragged into a European ‘Civil War’ (114,000 dead)

Many immigrants came to the USA to get away from European conditions

Almost a self sufficient country and now a huge creditor nation.

Refused to take part in the League of Nations. Isolationism won the day

Not interested in taking Britain’s position as ‘lender of last resort’.

USA

In 1928 the USA produced 42% of the world’s output putting most producers of raw materials in danger of a slowdown.

Failure to generate enough demand to sop up its rising production. Stagnant wages and agricultural depression led to overproduction and financial speculation.

Rapidly increasing productivity added to this problem.

GNP per head grew at 0.8% 1913-1938

Inter Allied Debts at the end of First World War (It was all eventually owed to USA)

The 1920s a Problem Decade for Britain

Loss of Previous Financial and Industrial position

Problems of unbalanced industrial scene Continuation of Pre-war Labour unrest (1926

General Strike) High Unemployment Ireland Start of lack of confidence in Empire (India) Changing Franchise Break-up of Liberal party and rise of Labour

1920s Germany: Life is a Cabaret (For Some)

Still a very young and unstable country

Loss of war Loss of Eastern Lands Civil War Threat of Communist

uprising Loss of Ruling elite ‘Versailles Unemployment

INFLATION

MEMORIES OF THE GREAT 1920s INFLATION WOULD HAUNT GERMAN POLICY MAKERS.

IT HAD BANKRUPTED A CLASS IN GERMAN SOCIETY

But, 1920s Boom Led To The ‘Grapes of Wrath’ in the USA Hugely prosperous 1920s

1930s a Deepening Depression

Agricultural depression

Now can make much more than can be consumed. Era of Mass Production

Huge emphasis on raising demand for goods and consumption

Some Points Longest and most

severe depression ever experienced by the western world.

New York Stock Exchange crashed October 1929

By 1933 11,000 of the USA’s 25,000 Banks had failed.

A crisis of Demand

AND

1932 US Manufacturing output had fallen to 54% of its 1929 level

By 1932 US unemployment had risen to between 12 to 15 millions (20-25% 0f the workforce)

Serious Overproduction in agriculture – falling prices – rising debt

IN CANADA Hard by the Depression. Between

1929 and 1933, the gross national product dropped 40% (compared to 37% in the US).

Unemployment reached 27% at the depth of the Depression in 1933. Many businesses closed, as fat corporate profits of $396 million in 1929 turned into losses of $98 million in 1933.

Families saw most or all of their assets disappear, and their debts become heavier as prices fell. Canadian exports shrank by 50% from 1929 to 1933. Worst hit were areas dependent on primary industries such as farming, mining and logging, as prices fell and there were few alternative jobs.

REAL GROSS NATIONAL PRODUCT

Can USA Can/USA

1929 100 100 100

1930 91.6 87.7 104

1931 77 79.7 97

1932 66.5 65.9 101

1933 59.6 62 96

1934 64.5 65.3 97

1935 67.1 71.5 94

1936 67.5 76.4 88

1937 71.8 80 90

1938 69.7 73.2 95

1939 72.4 76.1 95

Financial Crises Are Not New: They are Part of Capitalism

In some shape or form, prior to the Second World War, they occurred in:

1816, 1825, 1836, 1847, 1857, 1866, 1873, 1890, 1907, 1921, 1929, 1937.1980s and today

So why was this one a disaster?

AND WAS THE DEPRESSION THE FAULT OF WALL STREET?

A Stock Market Bubble BUT:

Less than 8% of USA population owned stock

Stock market financed only 6% of investment

Stock Markets Fall and Recessions come and go: But!

This one effected the “real” economy

It lasted so long and could not be beaten

It spread outside of national boundaries

It effected political systems

Charles P Kindleberger THE WORLD IN DEPRESSION

“The depression was so steep and so long because the world economic system was rendered unstable by British inability and US unwillingness to assume responsibility for stabilizing it.”

What was needed was Leadership

Attitude of American Government

Saw depression as a necessary adjustment

It was the private sector’s job to adjust – not the government’s

Expansion by government would hinder re-adjustment.

Enterprises are gambles which sometimes fail

‘Rottenness should be purged out of the system

And it was all Going so well. In the mid 1920s there

was no visible sign of strain on the US Economy. Wages were stable, savings ample and there was excess capacity in industry. Note: growing problem of

demand. By March the economy looked like it was going into a typical ‘soft spot’ with vehicle production declining.

Also: huge productivity improvements meant that demand must accelerate to mop up unemployment.

Money Supply We will return to this at the end

From 1928 a reduction in the rate of growth of the money supply.

Interest rates raised to curb high stock prices ‘bubble’. Note: short recessions in 1924 and 1929 followed money restraint.

Why did the stock market collapse? The sage Ronald Reagan on a later incident – “I guess they were just too high”

But: Even the 1929 low was about as high as 1928. It was government inaction that would drive them down later.

Nature of a Financial Crisis Unwillingness to lend

money – prefer to hold cash – withdraw money from banks

Banks have to withdraw loans to cover shortfall. Note ratio of loans to deposits

Credit creation collapses 1931 European banks

indebted to American banks. Kreditanstalt bank in Austria declared bankrupt.

Banks 1929-1930 over 9,000 US

Banks Failed. It is all a ‘confidence

trick’. Banks do not have

money-they create credit.

However if there is a ‘run on the bank’ by depositors banks cannot cover their loans.

They certainly will not make new loans

It is the role of Government to protect depositors.

In the USA a Vicious Downward Employment Cycle Set In

Dust Bowl Under-consumption at this time. 1) Turn down in producing industry 2) Mass Lay-offs 3) No social security so a complete loss of

spending power. 4)Furthet loss of demand as the

unemployed now cannot purchase and consume.

5) Further factory closures 6) Further lay-offs etc.

Complete Loss of Financial Leadership in the USA from an Administration Fighting Past Battles.

Between August 1929 – August 1933 the stock of money in the US economy fell by one third.

Recession was turned into a catastrophe by the Federal Reserve Board who failed to flood the market with liquidity.

It could and should have been halted with leadership.

For Papers: Brunner, Meltzer, Friedman.

THE SMOOT-HAWLEY TARIFF Act of 1930 raised U.S. tariffs to historically high levels to increase the protection afforded farmers against agricultural imports. Another Disaster for the World Economy.

NOTE President Wilson vetoed tariff legislation in March 1921, saying in part: "If ever there was a time when Americans had anything to fear from foreign competition, that time has passed. If we wish to have Europe settle her debts, governmental or commercial, we must be prepared to buy from her."

The history of commerce in America was always one of high tariffs. BUT THE USA WAS NOW THE WORLD FINANCIAL SUPER-POWER

The tariff provoked a storm of foreign retaliatory measures and stood as

a symbol of the ‘beggar-thy-neighbor’ policies of the 1930s. Such policies contributed to a drastic decline in international trade. U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.

THE DEPRESSION SPREADS

Capital flows dry up and investment crashes

As US loans are withdrawn or not replaced weak European economies cannot cope.

Exports to the US slump Primary Producer prices collapse as US

imports slump. They produce more to keep up income.

Confidence Quickly Leached Out of the Unstable German Financial System

Large American loans being recalled Nothing to replace these loans as USA

Govt. delayed action. (Only ones that could help)

Victory of Nazis in Sept. 1930 alarmed foreign investors

Run on the banks Bank failures Crisis of liquidity and demand

GERMANY REACTS TO PROTECT THE VALUE OF THE CURRENCY BY USING ‘CLASSIC METHODS”

From 1930 to 1932 the Great Depression reached its low point. Chancellor Brüning, in line with liberal economic theory that less public spending would spur economic growth, drastically cut state expenditures, including in the social sector. He expected and accepted that the economic crisis would, for a while, deteriorate before things would improve. Among others, the Reich completely halted all public grants to the obligatory unemployment insurance (which had been introduced only in 1927), which resulted in higher contributions by the workers and fewer benefits for the unemployed. This was understandably an unpopular move on his part.

The economic downturn lasted until the second half of 1932. By this time though, the Weimar Republic had lost all credibility with the majority of Germans. While scholars greatly disagree about how Brüning's policy should be evaluated, it can safely be said that it contributed to the decline of the Republic. Whether there were alternatives at the time remains the subject of much debate.

UNEMPLOYMENT SOARS (30% at the Peak)

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1925 1927 1929 1931 1933 1935 1937 1939

Thousands

Percentage of Industrial Workers Unemployed in 1933

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USA UK Germany France Canada Australia

Did the 1930s Depression Indirectly Cause World War Two?

Mass unemployment in Germany and Japan hastened in right wing nationalist governments. 25 countries became dictatorships 1929-39.

American loans to Germany called in causing collapse of German industry.

Problems at home can lead to a more nationalistic foreign policy.

FOR THE NAZI PARTY AN ECONOMIC BONANZA In 1928 the Nazis were an

unimportant part of the political fringe

Project the economic growth of Germany from 1920 or 1924 to 1928 out through the 1930s, and it would have been a different world

But after 1928, German unemployment began to rise.

And as unemployment rose, the Nazi Party vote rose as well. The party that had won 2.9 percent of the national vote in 1924 and 2.6 percent in 1928 won 19.2 percent in the election of 1930, and 38.4 percent in the election of 1932

To Germans the Nazi Party and its Policies Cured the Economy and Staved off Disaster

To Many in Industrial Countries Fascism did Appear to Work

Deficit Financing

But did the unemployed vote Nazi?

And we now know that Hitler intended others to “pay the piper”.

Secure Trade and Markets by Empire Building?

Japan (Manchuria) Italy (Africa) Germany (Eastern Europe)

Self interest prevents other countries preventing these actions

BRITAIN IN THE 1920s/1930s

(The Mirror Image)

“The Rule of the Pygmies” (Mowat)

OR

“—it is difficult to see a feasible policy which could have achieved appreciably better results” (Andrew Thorpe)

J B Priestley (1934)

“ An England of arterial and by-pass roads, filling stations and factories that look like exhibition buildings, giant cinemas and dance halls, ----- bungalows with tiny garages, Woolworth’s, motor coaches, wireless, factory girls looking like actresses, greyhound racing and dirt tracks, swimming pools”

TRADITIONAL VIEW OF 1930s DEPRESSION

Chances of Long-Term Unemployment in Britain

High in old Staple Export Industries

High in old industrial regions

High if unskilled or with non transferable skill

Higher the older the worker

Regional Disaster

Out of 1,717,000 unemployed in July 1936 – two thirds were to be found in Scotland, Wales, Northern Ireland and Northern England.

Long Term unemployed situated mainly in these areas

Juvenile unemployment situated mainly in depressed areas

BECOMING A DIVIDED COUNTRY AS FASCISM STALKS EUROPE Even a fear of

revolution. First Industrial

revolution unwinding Health and Infant

Mortality Parts of the South in

boom conditions Rise of Middle Class

and suburban England

Reflecting Selected Regional Unemployment Rates

Place % Place %

Cumberland

28.7

Buckingham

6.2

BishopAuckland

53.5

Surrey 6.7

Airdrie 42 Bletchley 3.1

Durham 34 Norfolk 15

Glamorgan 37 Halifax*

But Also: The Rise of the New Consumer Society and The Modern World

The 1930s House with ‘mod cons’

The Automobile (USA v GB)

Rayon (artificial silk) The Electric Iron of all

things Electric Lighting Aviation Ready to Wear (The

man’s suit) Cinema and mass

entertainment

BUT THE MOST IMPORTANT ‘NEW INDUSTRY’

Two Views of Interwar Britain

The ‘Feminisation’ of Employment (Nothing to do with Mrs. Pankhurst)

Move from old ‘muscle industries’ and Domestic Service

Cotton was the Industrial Revolution !!

Move to new lighter industry

That Typing Pool Move to Service and Retail

work Move to London and the

south

Brainwork rather than Brawn-work

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100

PE

RC

EN

TA

GE

For the unmarried young woman the world was changing fast.

Courtaulds Rayon Spinning 1929

Bobbed hair Short Skirt Silk Stockings Eye brows trimmed

A new woman with some money

A SOCIAL REVOLUTION Changing Attitudes of these

working girls

In Britain between 1861 – 1911 numbers of female clerks increased X 4.

Huge rise of working women in ‘white collar’ trades.

In the 1930s looking at age group 18-34, the numbers of single women in the 1930s were double that of the 1950s.

Huge rise in disposable income

Fall of Staple Trades of the First Industrial Revolution COTTON The Industry of the Industrial Revolution.

WW1 allowed new countries into export markets with lower costs. Also allowed import substitution. (1938 world trade only 66% of Lancashire exports in 1913) Huge impact on Empire.

COAL 1.1 million miners in 1919. Industry under invested and dispersed geographically

A huge social problem SHIPBUILDING Clyde-side build one third of world’s

ships in 1913 Inevitable decline in face of cheaper competitors

Socially disruptive locations (Jarrow!)

RISE OF NEW INDUSTRIES?

Automobiles (1931 Ford Dagenham) Civil Aviation (Heathrow Mid 1930s) Electrical (Grid, Domestic, Industrial) Chemicals (ICI, Plastics, Artificial Fibres) Pharmaceutical (Boots 1931,) Leisure (Cinema, Mass Sports, Hiking) Retailing (Woolworth, Restaurants etc)

NEW HOUSING Same 3 Bedroom House

1928 1936 1990 Cost £600 £450

£100m Interest 6% 4.5%

11%

Percentage of a male teacher’s salary needed to pay the mortgage

1928 = 10% 1936 = 8% 1990 = 43%

Why was the depression mild in Britain? Imported food prices fell – people in work

actually better off which helped purchasing power. Consumption held up. (Terms of Trade)

No financial or bank collapse. Britain came off the Gold Standard Cheap Money Re-armament from 1938 AND MAINLY Increase benefits to allow old

staple areas to survive.

SOME PARTS OF THE WORLD UNDER A

DIFFERENT SYSTEM LOOKED VERY ATTRACTIVE INDEX OF INDUSTRIAL

PRODUCTION – USSR (1929 = 100)

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100

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1929 1930 1931 1932 1933 1934 1935

USSR

UK

No Flight to Extremes in Britain Communist Party Average % Vote = 5.1% Party Membership

approx: 15,000 Labour Party anti

Communist Fascists NOTE Mosley in favour of

‘Keynesian policies’ Party Membership at

peak 40,000 Govt. always in control

THE ARCHITECT OF THE NEW BRITAIN NEVILLE CHAMBERLAIN

Later to be PM and involved in the Munich agreement with Hitler.

Chamberlain decided ‘appeasement’ was better than another World War and ruination of his economic recovery of the 1930s.

(Britain had just completed repaying her WW2 Debts)

Some Results of the Slump Huge demand for state action by a newly enfranchised

citizenship. Welfare in World War compared badly with the 1930s A re-writing of history (Political and Economic) A re-assessment of how governments should treat

economic down-turns. Election of ‘New Deal’ Governments

Strength and Mythology of the Labour Party

Realisation of Importance of Free Trade

Did WW2 spoil all the good work?

MONEY SUPPLY REVISITED

Monetarists, including Milton Friedman and Benjamin Bernanke, stress the passive role taken by the American Federal Reserve System in failing to reverse the cascading bank failures. They do not argue the Federal Reserve caused the recession, but rather that different policies might have stopped the downward slide into recession. By not acting, the Federal Reserve allowed the money supply to shrink by one-third from 1930 to 1931. In A Monetary History of the United States, Friedman argued that the downward turn in the economy starting with the stock market crash would have been just another recession. The problem was that some large, public bank failures, particularly the Bank of the United States, produced panic and widespread runs on local banks, and that the Federal Reserve sat idly by while banks fell. He claimed that if it had provided emergency lending to these key banks or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, the money supply would not have fallen to the extent and at the speed that it did. With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve, especially the New York branch, which was owned and controlled by Wall Street bankers for inaction. The Federal Reserve, by design, was not controlled by the President or the Congress

MIGRANT MOTHER REVISITED

THE GREAT 1930s DEPRESSION

Some Thoughts