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Weekly Current Affairs: April week-2 - Great Depression

  • Category
    Economy
  • Published
    15th Apr, 2020

Due to Coronavirus, businesses the world over are struggling. This reversal is worse than the Global Financial Crisis. It’s beginning to rival the Great Depression.

Context

Context

Due to Coronavirus, businesses the world over are struggling. This reversal is worse than the Global Financial Crisis. It’s beginning to rival the Great Depression.

Background:

  • With the novel coronavirus pandemic severely affecting the global economy, some experts have begun comparing the current crisis with the Great Depression — the devastating economic decline of the 1930s that went on to shape countless world events.
  • Italy, Spain, India, and the United Kingdom are among countries in lockdown.
  • A state of emergency declared in the United States on March 13 and major restrictions rolled out across several states since then, which are set to be widened, have sounded alarm bells louder than the ones ending volatile trading in global bourses.
  • Shuttered state and municipal governments, closed school gates, empty tills in restaurants and bars and boarded-up businesses are all part of an induced economic coma, with the hope that reanimation will occur when the brunt of the coronavirus has passed.
  • Experts have warned that unemployment levels in some countries could reach those from the 1930s era, when the unemployment rate was as high as around 25 percent in the United States.
  • Currently, unemployment levels in the US are already estimated to be at 13 per cent, highest since the Great Depression, according to a New York Times report.
  • In the pandemic-induced depression scenario, a sudden negative supply shock reduces the labor supply (in person-hours), thereby causing sharp decreases in employment, output, and income.

Analysis

What was Great Depression?

  • Great depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939.  It began on “Black Thursday," October 24, 1929. 
  • It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors.
  • Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers.
  • By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s banks had failed. In almost every country of the world, there were massive job losses, deflation, and a drastic contraction in output.

Unemployment in the US increased from 3.2 per cent to 24.9 per cent between 1929 and 1933. In the UK, it rose from 7.2 per cent to 15.4 per cent between 1929 and 1932.

Economic depression:

  • Economic depression is a time period when the economy slows down and there is widespread unemployment, lack of investments and scarce demand for consumer goods.
  • An economic depression is primarily caused by worsening consumer confidencethat leads to a decrease in demand, eventually resulting in companies going out of business.
  • When consumers stop buying products and paying for services, companies need to make budget cuts, including employing fewer workers.
  • The other major factors that lead to economic depression:
    • Stock market crash
    • Decrease in manufacturing orders
    • Control of prices and wages
    • Deflation
    • Oil price hikes
    • Loss of consumer confidence

What caused the Great Depression?

  • Throughout the 1920s, the economy of the United States expanded rapidly, and the nation’s total wealth more than doubled between 1920 and 1929, a period dubbed “the Roaring Twenties.
  • The stock market of the US was the scene of reckless speculation, where everyone from millionaire tycoons to cooks and janitors poured their savings into stocks.
  • As a result, the stock market underwent rapid expansion, reaching its peak in August 1929.
  • By then, production had already declined and unemployment had risen, leaving stock prices much higher than their actual value.
  • Additionally, wages at that time were low, consumer debt was proliferating, the agricultural sector of the economy was struggling due to drought and falling food prices and banks had an excess of large loans that could not be liquidated.
  • During the summer of 1929, the American economy entered a mild recession as consumer spending slowed and unsold goods began to pile up, which in turn slowed factory production.
  • Nonetheless, stock prices continued to rise, and by the fall of that year had reached stratospheric levels that could not be justified by expected future earnings.
  • On October 24, 1929, as nervous investors began selling overpriced shares en masse, the stock market got crash
  • A record 12.9 million shares were traded that day, known as “Black Thursday.”
  • Five days later, on October 29 or “Black Tuesday,”some 16 million shares were traded. Millions of shares ended up worthless, and those investors who had bought stocks “on margin” (with borrowed money) were wiped out completely.
  • The global adherence to the gold standard, which joined countries around the world in a fixed currency exchange, helped spread economic woes from the United States throughout the world, especially Europe.
  • In short, the Great Depression was induced by a large negative shock to aggregate demand.

Great Depression &  impact on India:

  • The Depression had an important impact on India’s freedom struggle. Due to the global crisis, there was a drastic fall in agricultural prices, the mainstay of India’s economy, and a severe credit contraction occurred as colonial policymakers refused to devalue the rupee.
  • German economic historian Dietmar Rothermund writes in a 1980 paper at the Indian History Congress-

“The decline of agricultural prices, which was aggravated by British financial policy in India, made substantial sections of the peasantry rise in protest and this protest was articulated by members of the National Congress.”

  • The effects of the Depression became visible around the harvest season in 1930, soon after Mahatma Gandhi had launched the Civil Disobedience movement in April the same year.
  • There were “No Rent” campaigns in many parts of the country, and radical Kisan Sabhas were started in Bihar and eastern UP.
  • Agrarian unrest provided a groundswell of support to the Congress, whose reach was yet to extend into rural India.
  • The endorsement by farming classes is believed to be among the reasons that enabled the party to achieve its landslide victory in the 1936-37 provincial elections held under the Government of India Act, 1935– which significantly increased the party’s political might for years to come.

What Ended the Great Depression?

  • In 1932, the country elected Franklin D. Rooseveltas president. He promised to create federal government programs to end the Great Depression.
  • Within 100 days, he signed the New Deal into law, creating 43 new agencies throughout its lifetime.
  • They were designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs still exist.
  • They help safeguard the economy and prevent another depression. 

In the last, the Great Depression reshaped America, shifting migration patterns, and spawning new styles of music, art and literature. Under President Franklin Delano Roosevelt, however, it also prompted creation of an array of programs like unemployment insurance, Social Security retirements benefits, and bank deposit insurance that make a repeat unlikely.

The difference:

  • The 1929 economic crisis was triggered by stock market speculation, while the reason underlying the current crisis is the fact that we are face to face with a freeze in the economy due to the coronavirus epidemic.
  • There was a situation in both the 1929 and 2020 coronavirus crises that had an adverse effect on workers. The further the coronavirus spreads and the further the economy shrinks, its impact on unemployment becomes deeper.
  • The two crises are not only economic, but they rather stand out as a social and, in fact, as a political matter. In the event that the coronavirus epidemic is prolonged, it appears the unemployment issue will be the most serious matter in the social and political domain.
  • The key difference today is that unlike other financial crises, health concerns trump economic ones.
  • The zero growth we now project for 2020 will mark the second-weakest year for the global economy in almost 50 years of comparable data, with only 2009, in the depths of the financial crisis, worse.

Conclusion:

The higher the toll of the virus, and the longer the outbreak lasts, the more damage to the world economy. The first order of business will be to get the spread of the virus under control and then resume economic activity.

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