Great Depression/Addendum

The data on this page are mainly taken from Bernanke (2000) , in addition to the sources indicated. The unemployment rates quoted depend upon then current definitions that varied among countries, and which differ from those now in use.

Developments outside the United States

( for further details of developments within the United States see Great Depression in the United States)

A remarkable feature of the great depression was the unprecedented extent and severity of its incidence outside what appeared to be its country of origin. The more apparent means by which it is believed to have been transmitted have been chronicled by political historians such as Duroselle , who notes that the first countries to be affected were America's overseas suppliers, including Argentina, Australia, Brazil and Uruguay; and that European countries, especially Germany, were affected by the repatriation of American capital and by America's "America-first" trade policies, including the major tariff increases introduced by the Smoot-Hawley Act. Less obvious channels of transmission have been described by economic historians including Eichengreen and Sachs who have emphasised the importance of the gold standard, noting that the depression was most prolonged in those countries that remained longest on the gold standard, including France, the Netherlands and Poland.

A possible alternative explanation is that domestic recessions outside America were domestically generated, and were merely amplified by influences from America. That thesis has been advanced in respect of Germany by Peter Temin, who argues that "the two economies interacted with each other and with other countries" .

(In view of possible comparisons with the recession of 2008, it is worth noting that, although banking crises occurred widely in the course of the international development of the recession, they were not generally associated with the way it was transmitted. There were banking crises, first in Austria, and then in most other European countries, but none in Britain or Scandinavia .}

Europe

Britain

(with supplementary material from Eichengreen (2002) )

The United Kingdom economy had been severely damaged by World War 1 by serious human losses, to which were added the losses of many of its overseas markets and many of its overseas assets. Recovery was hampered by a severe post-war depression and - after rejoining the gold standard in 1925 at its pe-war parity with the dollar - by an overvalued currency and a struggle to resist massive gold outflows to the United States. (It was in an attempt to stem those outflows that the Bank of England persuaded the Federal Reserve Bank to engineer a monetary expansion in 1927.) The economy suffered a sharp "slump" (the term used in Britain to denote its share of the great depression) between 1929 and 1931, and the government was then forced by further ouflows, to leave the gold standard - after which the economy showed a steady export-led recovery. There was considerable labour unrest but no banking crisis.

In numerical terms, the relevant policy actions and economic trends were as follows.

The Bank of England raised its discount rate in steps from 4.5% in 1928 to a peak of 6% in 1929, reduced it in steps to 2.5% in early 1931, raised it again to 6% in late 1931 and then reduced it to 2% in 1932. There was a budgetary swing from a surplus of 0.4 per cent of GNP in 1929/30 to a deficit of 1.3 per cent of GDP in 1932/3. The "General Tariff" of 1932 imposed a 10% tax on all imports except raw materials - with later relaxations for imports from the British Commonwealth.

On an index of 1928 = 100, wholesale prices fell to 65 in 1931; and industrial production rose to 117 in 1929, fell to 81 in 1931 and then began to recover. The volume of exports - which had risen by over 50% between 1921 and 1920, fell by over 10% in the early 1930s and recovered to near is 1929 level by 1938. The unemployment rate rose from 10% in 1929 to 22% in 1932 and was back to 10% by 1937.

France

(with supplementary material from Eichengreen and Wyplosz (89) and Mauré )

France was the last European country to be affected by the depression. It did not suffer deflation or a downturn in economic activity until 1932, but once its depression got started, it lasted longer than in Britain, and it did not start to recover until 1936 by which time, Britain's recovery was virtually complete. There were major bank failures and runs on several provincial banks in 1930 and 1931, and a riot that brought down the government in 1934 .

France had rejoined the gold standard in 1926, and its central bank had resisted pressures to devalue the Franc until 1936, and it experienced large gold inflows (and according to Bernanke and Mihov kept to the "rules of the game" and did not sterilise gold inflows, and maintained a monetary policy that was generally contracyclical). Discount rates were maintained in the range 2% to 3.5% throughout the period 1928 - 34 and were raised briefly to 5% in 1935. Fiscal policies were generally expansionary, with a succession of budget deficits.

On an index of 1928 = 100, wholesale prices fell to 48 in 1935; and industrial production rose to 112 in 1929, and remained at that level through 1930, but fell to 71 in 1932 and did not began a recovery until 1935. According to Eichengreen and Hatton , French Industrial Unemployment averaged 10% in the period 1930 to 1938, compared with 15% in the UK and 26% in the US.

Germany

(with supplementary material from Hans-Joachim Braun (1990) ).

The severe depression faced by the German economy in the 1930s was partly due to the problems of recovery from the war. War expenditure had been almost completely financed by loans and the money supply had been quadrupled in the period from 1914 to 1918. Inflationary pressures that had started during the war, intensified year by year and culminated in the disastrous German hyperinflation of 1922-233 . By the time that prices were stabilised by Hjalmar Schacht's establishment of the "rentenmark" , extensive damage had been done and the banking system had been seriously weakened. In 1923, shortfalls in Germany's payments of reparations had prompted French, Italian and Belgian governments to attempt to seize resources by occupying the Ruhr. The dispute was eventually settled by acceptance of the Dawes Plan of 1924, under which payments would be rescheduled and Germany would be provided with massive loans, mainly from the United States. Subsequent recovery had been heavily dependent on imported capital.

It was in late 1926 that the German authorities decided to restrain the subsequent expansion of economic activity. According to Peter Temin the President of the Reichsbank, Hjalmar Schacht, became worried about stock market speculation and took action that was more severe than that undertaken by the United States' Federal Reserve Bank in 1928, by withdrawing tax exemption from foreign holders of German bonds and forcing banks to reduce discounting. The German stock exchange crashed in 1927, and when the the downturn of economic activity in the United States started in 1929, economic activity in Germany was already declining.

In 1930 the wartime allies agreed to the Young Plan , that rescheduled Germany's reparation payments, but gave priority to the repayment of debts to the United States. Hjalmar Schacht resigned in protest and, in an article in a London magazines, John Maynard Keynes commented that it would " weigh on Germany much more heavily than the Dawes Plan, which it was agreed she could not support".

In order to stay on the gold standard action was taken in 1930 to stem the outflow of gold and correct a persistent balance of payments deficit. The Reichsbank raised its discount rate to well above British and American rates and there was a sharp reduction in the money supply, and for the next two years (according to Temin (1989) page 31 ), Chancellor Brüning pursued a relentless policy of highly restrictive budgets.

From April to June 1931, as a result of three years of deflation and the withdrawal of American funds many banks found themselves with insufficient reserves to pay depositors. In June, President Herbert Hoover announced a one year moratorium on international payments-reparations and war debts-and also provided a $150 million credit to the Reichsbank, but withdrawals continued.

The Reichsbank's discount rate was raised to 15% in July to little effect and there was a run on the German banks and savings banks followed. After a few hours the banks paid out only 20 per cent of the sums demanded by customers; and the government announced a two day bank holiday. A "credit crunch intensified the depression which continued until the Nazi party came to power in 1933

Lausanne Conference

On an index of 1928 = 100,consumer prices fell to 77 in 1933; and industrial production rose to 110 in 1929, fell to 59 in 1932. Unemployment rose from about 5% in 1929 to 30% in 1932 and did not return to 1929 levels until 1936, and industrial unemployment averaged about 22% compared with France's 10% and The United States' 26% .

Italy

rejoined the gold standard in 1927 and left it in 1931

The Great Depression hit Italy very hard. As industries came close to failure they were bought out by the banks in a largely illusionary bail-out - the assets used to fund the purchases were largely worthless. This lead to a financial crisis peaking in 1932 and major government intervention. The Industrial Reconstruction Institute (IRI) was formed in January 1933 and took control of the bank-owned companies, suddenly giving Italy the largest state-owned industrial sector in Europe (excluding the USSR). IRI did rather well with its new responsibilities - restructuring, modernising and rationalising as much as it could. It was a significant factor in post-1945 development. But it took the Italian economy until 1935 to recover the manufacturing levels of 1930 - a position that was only 60% better than that of 1913.

Spain

Spain had a relatively isolated economy, with high protective tariffs and was experiencing other economic problems with the need for land reform, overall development, and better education levels. It was not one of the main countries affected by the Depression. However, because the country was destroyed by civil war and suffered from isolation because of Francisco Franco's fascist regime, GDP levels of 1939 were not recovered until 1953.

Sweden

rejoined the gold standard in 1924 and left it and devalued its currency in 1931

On an index of 1928 = 100, wholesale prices fell to 71 in 1931; and and industrial production rose to 129 in 1929, fell to 64 in 1932 and then began to recover

Asia

Australia

rejoined the gold standard in 1925, left it in 1929 and devalued its currency in 1930 Australia, with its extreme dependence on exports, particularly primary products such as wool and wheat, is thought to have been one of the hardest-hit countries in the Western world Unemployment reached a record high of 29% in 1932, one of the highest rates in the world. There were also incidents of civil unrest, particularly in Australia's largest city, Sydney.

Japan

rejoined the gold standard in 1930 and left it and devalued its currency in 1931 Japan, with a growing industrial base, was hurt slightly, with GDP falling 8% 1929-30. The economy recovered by 1932.

China

China was the only country on the silver standard in an international monetary system dominated by the gold standard. Fluctuations in international silver prices undermined China’s monetary system and destabilized its economy. In response to severe deflation, the state shifted its position toward the market from laissez faire to committed intervention. Establishing a new monetary system, with a different foreign-exchange standard, required deliberate government management; ultimately the process of economic recovery and monetary change politicized the entire Chinese economy.

The Americas

Canada

rejoined the gold standard in 1926 and left it and devalued its currency in 1931

On an index of 1928 = 100, wholesale prices fell to 66 in 1933; and industrial production rose to 119 in 1929, fell to 51 in 1933 and did not return to 1928 levels until 1936

Canada was the country hardest hit by the Great Depression. By 1933 its industrial production had fallen to 51 per cent of its 1928 value, and wholesale prices to 66 per cent. Output did not return to its 1928 level until 1936

Latin America

Before the 1929 crisis, links between the world economy and Latin American economies had been established through American and British investment in Latin American exports to the world. As a result, Latin Americans export industries felt the depression quickly. World prices for commodities such as wheat, coffee and copper plunged. Exports from all of Latin America to the US fell in value from $1.2 billion in 1929 to $335 million in 1933, rising to $660 million in 1940.

But on the other hand, the depression led the area governments to develop new local industries and expand consumption and production. Following the example of the New Deal, governments in the area approved regulations and created or improved welfare institutions that helped millions of new industrial workers to achieve a better standard of living.

South Africa

The Great Depression had a pronounced economic and political effect on South Africa, as it did to most nations at the time. As world trade slumped, demand for South African agricultural and mineral exports fell drastically. Many historians think that the social discomfort caused by the depression was a contributing factor in the defeat of Barry Hertzog and his National Party (South Africa)|National Party in the 1933 general election.