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Thursday, August 06, 2020

Economists comparing current crisis with Great Depression: What was it?

With the novel coronavirus pandemic severely affecting the global economy, some experts have begun comparing the current crisis with the Great Depression.

By: Explained Desk | New Delhi | Updated: April 6, 2020 12:16:49 pm
Economists comparing current crisis with Great Depression: What was it? Waiting for relief checks during the Great Depression in California. (Source: Wikimedia Commons)

With the novel coronavirus pandemic severely affecting the global economy, some experts have begun comparing the current crisis with the Great Depression — the devastating economic decline of the 1930s that went on to shape countless world events.

Experts have warned that unemployment levels in some countries could reach those from the 1930s era, when the unemployment rate was as high as around 25 per cent in the United States.

Currently, unemployment levels in the US are already estimated to be at 13 per cent, highest since the Great Depression, according to a New York Times report.

What was the Great Depression?

The Great Depression was a major economic crisis that began in the United States in 1929, and went to have a worldwide impact until 1939. It began on October 24, 1929, a day that is referred to as “Black Thursday”, when a monumental crash occurred at the New York Stock Exchange as stock prices fell by 25 per cent.

While the Wall Street crash was triggered by minor events, the extent of the decline was due to more deep-rooted factors such as a fall in aggregate demand, misplaced monetary policies, and an unintended rise in inventory levels.

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In the United States, prices and real output fell dramatically. Industrial production fell by 47 per cent, the wholesale price index by 33 per cent, and real GDP by 30 per cent.

The havoc caused in the US spread to other countries mainly due to the gold standard, which linked most of the world’s currencies by fixed exchange rates.

In almost every country of the world, there were massive job losses, deflation, and a drastic contraction in output.

Unemployment in the US increased from 3.2 per cent to 24.9 per cent between 1929 and 1933. In the UK, it rose from 7.2 per cent to 15.4 per cent between 1929 and 1932.

Unemployed men queued outside a depression soup kitchen opened in Chicago by Al Capone. (Source: Wikimedia Commons)

The Depression caused extreme human suffering, and many political upheavals took place around the world.

In Europe, economic stagnation that the Depression caused is believed to be the principal reason behind the rise of fascism, and consequently the Second World War.

It had a profound impact on institutions and policymaking globally, and led to the gold standard being abandoned.

How did Great Depression impact India?

The Depression had an important impact on India’s freedom struggle. Due to the global crisis, there was a drastic fall in agricultural prices, the mainstay of India’s economy, and a severe credit contraction occurred as colonial policymakers refused to devalue the rupee.

German economic historian Dietmar Rothermund writes in a 1980 paper at the Indian History Congress, “The decline of agricultural prices, which was aggravated by British financial policy in India, made substantial sections of the peasantry rise in protest and this protest was articulated by members of the National Congress.”

The effects of the Depression became visible around the harvest season in 1930, soon after Mahatma Gandhi had launched the Civil Disobedience movement in April the same year.

There were “No Rent” campaigns in many parts of the country, and radical Kisan Sabhas were started in Bihar and eastern UP.

Agrarian unrest provided a groundswell of support to the Congress, whose reach was yet to extend into rural India.

The endorsement by farming classes is believed to be among the reasons that enabled the party to achieve its landslide victory in the 1936-37 provincial elections held under the Government of India Act, 1935– which significantly increased the party’s political might for years to come.

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