Great Depression happened in 1929. It took over 10 years to cure.
Effects of depression:
13 million people became unemployed.
Industrial production fell by nearly 45% between the years 1929 and 1932.
Home-building dropped by 80% between the years 1929 and 1932.
From the years 1929 to 1932, about 5000 banks went out of business.
That's where when the buyer ran out of the market …. and this is what happening now in 2008. Investors are now panic and cash out from stock market.
As mass production has to be accompanied by mass consumption, mass consumption, in turn, imprints a distribution of wealth – not of existing wealth, but of wealth as it is currently produced – to provide men with purchasing power equal to the amount of goods and services offered by the nation's economic machinery.
Instead of achieving that kind of distribution, a huge suction pump had 1929-30 drawn into a few hands an increasing proportion of current produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
Debt is seen as one of the causes of the Great Depression, particularly in the United States. Macroeconomists including Ben Bernanke, the current chairman of the US Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher: in the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were clearly in debt when price deflation occurred or demand for their product declined often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.
Massive layoffs occurred, resulting in US unemployment rates of over 25% by 1933. Banks which had advanced this debt began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.Outstanding debts became heavier, because prices and incomes fell by 20-50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $ 140 billion in deposits.
Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
Federal Reserve and money supply
Monetarists, including Milton Friedman and current Federal Reserve System chairman Ben Bernanke, argued that the Great Depression was caused by monetary contraction, the consequence of poor policing by the American Federal Reserve System and continuous crisis in the banking system. In this view, the Federal Reserve, by not acting, allowed the money supply as measured by the M2 to shrink by one-third from 1929 to 1933. Friedman argued that the downward turn in the economy, starting with the stock market crash, would have been just another recession. The problem was that some large, public bank failures, particularly that of the Bank of the United States, produced panic and widespread runs on local banks, and that the Federal Reserve sat idly by while banks fell. He claimed that, if the Fed had provided emergency lending to these key banks, or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, and the money supply would not have fallen as far and as fast as it did. With significantly less money to go around, business people could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch.
One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit the Federal Reserve could issue was limited by laws which required partial gold backing of that credit. By the late 1920s the Federal Reserve had almost hit the limit of permitted credit that could have been backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes. Since a "promise of gold" is not as good as "gold in the hand", during the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on permitted credit, any reduction in gold in its losses had to be accompanied by a greater reduction in credit. Several years into the Great Depression, the private ownership of gold was declared illegal, reducing the pressure on Federal Reserve gold.
Recovery part ….
The massive treaty policies to counter the threat from Nazi Germany helped stimulate the economics of Europe in 1937-39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of manpower following the outbreak of war in 1939 finally ended unemployment.
In the United States, the massive war spending doubled the GNP, either masking the effects of the depression or essentially ending the depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts. Productivity soared: most people worked overtime and wave up leisure activities to make money after so many hard years. People accepted rationing and price controls for the first time as a way of expressing their support for the war effort. Cost-plus pricing in munitions contracts guaranteed businesses a profit no matter how many mediocre workers they employed or how inefficient the techniques they used. The demand was for a vast quantity of war supplies as soon as possible, regardless of cost. Businesses hired every person in sight, even driving sound trucks up and down city streets begging people to apply for jobs. New workers were needed to replace the 11 million working-age men serving in the military. These events magnified the role of the federal government in the national economy. In 1929, federal expenditures accounted for only 3% of GNP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state. However, spending on the New Deal was far smaller than on the war effort.