Causes and effects of Great Economic Depression of 1929

The Great Economic Depression of the 1930s was a severe economic problem that had affected the whole world and the United States of America in particular and this can be regarded as a significant event between the two world wars. The Great Economic Depression had started in the year 1929 and it lasted until the 1940s.

Economic Depression means a severe and prolonged downturn in economic activity that would last for several years. Fortunately, the world has only experienced only one economic depression and it was the Great Economic Depression of 1929. In the state of an economic depression, the GDP of the country falls more than 5% and the unemployment rate would be in the double digits.

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CAUSES:

a. Stock market crash—there was huge speculation amongst investors in the American market that prices of stocks will rise. But most of the investors did the investment by borrowing. However, huge rush in-stock purchase reduced profit from it

b. Recurrent loan defaults—with no profit from the stock market, the loans were not repaid and it caused the collapse of financial structure. This led to a great depression—lack of bank credit to industries > recession > unemployment

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c. Chain of sovereign borrowings—After WWI, the Treaty of Versailles imposed heavy reparations on Germany. Germany owed reparations to the UK and France, but war-torn politically unstable Germany was not able to pay it and so it borrowed from the USA. Germany was unable to pay the loans from the USA back. Also, the war-torn UK and France borrowed from the USA to build their economies. This made their economies dependent on the USA and crash in the USA led to economic crisis worldwide—thus converted the US crisis into a world financial crisis.

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d. Post-war deflation—WWI led to a boost in the manufacturing of defense goods and food products and associated industries, but post-war the excess goods need to be sold at low prices. This caused deflation > less profit to industries > low wages or laying off employees > unemployment.

EFFECTS:

a. Economically:

i. Overall the Great Economic Depression of 1929 had caused unemployment and mass poverty even to the middle class and there was deep economic insecurity coupled with a fear of another war.

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ii. By 1920s, USA becomes the lynchpin of world trade and to recover its domestic economy it imposed heavy import duties affecting trade revenue of other nations

b. Politically:

i. Growth of fascism—fascist ideologies breed in an environment of insecurity. The massive unemployment was attributed by Germany and Italy to actions by France and the UK and that again led to the division of countries into two camps and made the nation warmongering.

ii. World War II—using the economic crisis as a trump card, axis powers were able to give legitimacy to their wars and conquests in Ethiopia, Poland, etc., thus, giving rise to World War II between the axis and allied powers.

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c. Effect on colonies:

The Great Economic Depression of 1929 led to the fall of international prices, so even in India which got integrated with the global economy, faced a price crash. Hence, peasants and artisans were unable to pay their revenue to the British colonial government. This caused resentment among people in colonies, for instance, the Civil Disobedience Movement in the 1930s. This weakened the colonial hold over colonies and prepared them for independence. Hence, the Great Economic Depression of1929 was not just an economic phenomenon. This was largely a political event. Both World War II and fierce freedom struggles were triggered by it. Fascism is the worst consequence that led to the holocaust of Jews Similar causes led to the Global Financial Crisis 2008 and the post-2008 politics in the first world is nothing but the rise of right-wing governments in the USA, UK, and Italy. Hence, the Great Economic Depression of 1929 gives lessons about linkages between economic depression and political authoritarianism.