Happy Reading !
“History does not repeat itself, but it rhymes” said Mark Twain. This maxim throws up two truths: firstly, time moves only in one direction – forward and secondly, sometimes the current reminds you of the past events gone by giving a sense of déjà vu.
The current economic and social crises created by Corona Virus is being talked about as the most severe in the history of the world. It will lead to deep scars on the global economy and many people say it is even worse than the Great Depression of 1929-39. It is estimated that 170 countries in the world will see a negative GDP in 2020.
The world is not new to a global economic crisis. But the current one is a pandemic with far-reaching and deep financial damage. It is not caused by a faulty fiscal or monetary policy and neither by an asset bubble and unlike the previous crisis, it has impacted every single person on the planet.
Let’s do an in-depth assessment of the causes and impact of the previous crisis-the Great Depression of 1929-1939 when a decade ( 1919-1929) of economic prosperity and boom ended up in a world-shattering catastrophe. It was caused by a combination of growing inequality, high tariff protectionism, an increase in consumer debt and margin loans against stocks.
There were two distinguishing features of the Great Depression: severity and length.
It all started in America in the post-1919 euphoria after their victory in the First World War. America was bustling with economic activity – electrification, cars, air travel, household appliances, radios and other new technological advancements that lead to unlimited financial optimism and consumerism in the country. This was also an era when buy today, pay later or instant gratification hit the mainstream.
America issued Liberty Bonds to pay for the war and many people became investors for the first time while they started to trade the bonds. This led to a group of people to believe in the opportunity to make people trade in other investment options of stocks and shares for raising private capital on the New York Stock Exchange. The idea took off and the speculative frenzy infected people across America. Celebrities invested in the stocks and became speculators. At the same time, big Wall Street speculators became celebrities as they were seen as bringing in wealth to America. Most self-respecting Americans saw it as their birthright to be rich.
Then came the doomsday – October 24, 1929 when the stock market crashed. Confidence was gone overnight as the good and the bad plunged in a free fall in the days that followed. USD 25 billion (25% of America’s GDP at that time) worth of wealth was wiped off in just five days. But it was not the free fall in the stock market which led to the Depression. It was the events that followed coupled with the inability and the ineffectiveness of the Government policies to put the economy back on track, that caused it.
The domino effect of the crash led to 10000 banks (40 % of the total banks) failing between 1929-33. The economic output went down by 25% leading to unemployment levels of 30%. The prices of the goods fell by over 60% and it became difficult for the businesses to sell in the environment of deflation.
President Franklin Roosevelt took over in 1933 and said “Never before have we had so little time in which to do so much.” And what followed was the “New Deal” program where the Government passed laws to employ the jobless, support the crop prices, ensure bank deposits and stabilize the economy. The underlying objective was Relief, Recovery, Reform.
Roosevelt maintained a steady course and kept the public informed about his plans and progress through frequent radio broadcasts. He made people believe that they were partners in the efforts of the Government. It gave a lot of confidence to the public at large when the President addressed them as friends and they believed that they were exactly that.
Dr Shubh Gautam
(For American Precoat )
American Precoat 