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The Great Depression: Causes, Impacts, and Recovery
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Briefing Document: The Great Depression (1929-1939)
1. Overview and Scope
The Great Depression was a severe global economic downturn that lasted throughout the 1930s (roughly 1929-1939).It had devastating effects on both wealthy and poor countries, impacting personal income, prices, tax revenues, profits, and employment.Worldwide GDP fell by an estimated 15% between 1929 and 1932. The US saw a 30% contraction.International trade fell by over 50% during the period.Unemployment soared, reaching as high as 33% in some countries.Cities, especially those reliant on heavy industry, and farming communities were heavily impacted. Construction projects ground to a halt.The Depression is recognized as "the worst economic disaster in American history" in its length, depth, and consequences (Bernanke, 2002).The outbreak of World War II in 1939 is generally considered to have ended the Depression due to the surge in industrial production.
2. Origins and the Stock Market Crash
The economic boom of the "Roaring Twenties" in the US and Western Europe preceded the crash.The stock market crash of 1929 is seen as the key initial event.
Black Thursday (October 24, 1929): A record 12.9 million shares traded as investors panicked, market dropped 11% at opening.
Black Monday (October 28, 1929): The market crashed another 12%.
Black Tuesday (October 29, 1929): The panic peaked as about 16 million shares were traded, leading to another 11% drop."Millions of shares ended up worthless, and those investors who had bought stocks 'on margin' (with borrowed money) were wiped out completely."The market saw a partial recovery, but the situation was a "prolonged slump," losing 89% of its value between April 1930 to July 1932.Consumer spending dropped by 10% following the crash, while governments initially spent more.A severe drought in the agricultural heartland of the US further compounded the problems.
3. Key Economic Impacts
Deflationary Spiral: Prices began to decline in 1930 and wages eventually followed, triggering a deflationary spiral that worsened the economic situation.
Bank Failures: Bank runs became widespread. "After the panic of 1929 and during the first 10 months of 1930, 744 U.S. banks failed. (In all, 9,000 banks failed during the 1930s.)"
Credit Crunch: "Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated."
Protectionism: Governments worldwide attempted to protect their domestic economies through protectionist policies.
The US Smoot-Hawley Tariff Act of 1930 and retaliatory tariffs from other countries greatly exacerbated the collapse in global trade.
Countries imposed "tariffs, im
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