Lecture 15 – The Great Depression
For Europeans the experience was not new. The difference in the 1930’s was that the depression
was on a much larger scale. This created long term unemployment, and a long term decline in
the business cycle.
Conventionally the cycle recovered in about a year, or maybe two. Once prices were lowered
there was more buying and recovery happened.
In this depression, the world economy got worse, even after two years and theories about how to
correct the economy were blown up.
• Marked by bank failures
• After WWI and a decade of government intervention and gradual prosperity people were
expecting more from the government.
What is a depression? - A prolonged slow down in buying and selling of goods and
commodities, which creates an excess in stock piles because there is no demand for stock.
• The suffering is unevenly distributed – people with cash lose it and those with reserves
and investments come out alright. • People become unable to support their families
How bad was it? -
German 1932 – 40% unemployment (had been 6.3 % in 1928)
44% unemployment in industrial production
US there are 12 million unemployed
Excluding the USSR the world sees a 32% drop in industrial output.
 Why did the Depression arise?
Before the Crash
• Domestic economies were hurting and slowing
• World prices of agricultural goods and coal were going down
• Buying and selling slowing down and supply was outstripping demand
• More competition between US and Asia
• Overproduction happening because of mechanization and faster production
• There is so much supply that prices are going down for European producers
• Electricity is threatening coal and demand for that falls, especially in Britain
Many states, like the Czech Republic, respond with protectionist tariffs. Individual nations flee
from Liberal and capitalist economic ideas to stop the threat of international trade
Global Financial Crisis
• There were structural issues
• After the war the pound was the rate of exchange but Britain, but Britain was no longer
the economic power
• Reparations were being paid and distorted normal commerce – reparations were being
paid by borrowing from the States (Dawes Plan) and states were becoming dependent on
• American investors were taking money out of Germany because it was not profitable and
putting it into the US stock market instead.
In essence Europe was financially dependent on the US and the situation was made worse
because the US was not buying any European goods.
Wall Street Crash
• This was the result of the first two reasons for the depression
• Happened in 1929 and created a panic
• Everything was pulled out of Germany and Europe to cover losses in US withdrawals • Banks fail all over Europe
• Traders sell off pounds and European currency to convert to gold
• Britain is the only free gold market until 1931 when they go off the gold standard
• Shortage of capital
• World trade goes down
• International consumption goes down
• Factories close – production goes down
• Fewer goods = less need for shipping
• Mass long term unemployment, which is new
 Why did liberal responses and remedies fail?
The Response to the new depression, initially, was to fall back on previous remedies. These
Deflation: The pre-WWI liberal approach
• Cut government spending to stabilize the national currency and restore investor
• Idea that the market should correct itself.
• The problem is that deflation must be short term because regular workers get hurt by it.
• To enact long term deflation you must have authoritarian power.
• Create stimulus by borrowing and printing more money to stimulate production.
• Creates jobs and wages to create more consumer demand and thus more revenue
• Concept of spending your way out of debt by creating demand.
• Create new industry and public works