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December 5, 2018

Revisiting President Roosevelt’s success in countering Great Depression of 1930’s

Islamabad

December 5, 2018

Tackling a Current Account Deficit of around $ 20 billion, plummeting stocks, the ever-widening Rupee-US Dollar parity and depleting FOREX reserves , the Imran Khan-led Pakistani government may learn some lessons from the way former American President Roosevelt had fought the Great Depression of 1930’s by initiating a revolutionary construction spree.

Having announced plans to construct five million low cost and affordable house units for the low-income groups, Premier Imran Khan is thus knowingly or unknowingly toeing in the footsteps of President Roosevelt, who had also stimulated the private home building industry to increase the number of individuals who owned homes.

However, what Imran Khan’s government lacks is enough cash to accomplish its projects involving construction and development. Pakistani banks, of course, hold the key along with private builders to Imran’s dream.

Over 85 years ago, Roosevelt had also simplified the mortgage process for the homeless.

The Home Owners' Loan Corporation was established by Roosevelt to stop the foreclosures of American homes, besides establishing a US$ 3 billion a $3 billion "Public Works" bill.

These construction and development projects had employed more than 8.5 million workers who built 650,000 miles of highways and roads, 125,000 public buildings as well as bridges, reservoirs, irrigation systems, parks and playgrounds etc.

All these initiatives had somehow helped the United States to come out of the financial quagmire.

The Great Depression of the 1930’s:

The Great Depression started in the United States after a major fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday). It was the longest, deepest, and most widespread depression of the 20th century.

Research shows that the Great Depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939. It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors.

Effects and causes of Great Depression:

Consumer spending and investment in United States and many other countries had nose-dived, causing steep declines in industrial output and employment as failing companies laid off workers.

By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s banks had failed.

Throughout the 1920s, the U.S. economy expanded rapidly, and the nation’s total wealth more than doubled between 1920 and 1929.

This was the period when the New York City’s stock exchange at Wall Street had become a hub of reckless speculation.

People hailing from all walks of life and irrespective of their financial standing were investing in stocks. The stock market did expand resultantly and touched its peak in August 1929.

By then, production had declined, salaries of working class had fallen and unemployment had increased. The stock prices were thus much higher than their actual value. The farm sector was having terrible times due to drought and declining food prices by as much as 60 per cent.

American banks had an excess of large loans that could not be liquidated.

Consumer spending hence slowed down and unsold goods began to pile up. Surprisingly, and the stock prices continued to show bullish trends.

Then followed the stock market crash of October 24, 1929!

A record 12.9 million shares were traded that day, known as “Black Thursday.”

Within the next five days, some 16 million shares were traded after another wave of panic had swept Wall Street. Millions of shares ended up being worthless.

Investors who had bought stocks with borrowed money were wiped out completely. Consumer confidence vanished and industries started firing their workers.

Those who survived on jobs were offered lower wages.

For those who were lucky enough to remain employed, wages fell and buying power decreased and the number of foreclosures and repossessions climbed steadily.

By 1930, around four million Americans looking for jobs were unsuccessful to win bread for their families. By 1931, the number of jobless had soared to six million.

While American industrial production had dropped by half, the numbers of homeless had increased manifold.

Farmers could not afford to harvest crops and starvation started in many cities.

A large numbers of investors had naturally lost confidence in the solvency of their banks and demanded deposits in cash. Bank runs then swept the United States.

During the first 10 months of 1930, not fewer than 744 American banks had failed.

Overall, around 9,000 banks had failed during the 1930s. By April 1933, around $7 billion in deposits had been frozen in failed banks.

By May 1930, automobile sales had declined to below the levels of 1928. Prices in general began to decline, although wages held steady in 1930.

At its peak, the Great Depression saw nearly 10 per cent of all farms change hands despite federal assistance.

By 1932, some 15 million people (more than 20 percent of the U.S. population at the time) were unemployed.

This was the time when Franklin Delano Roosevelt had emerged triumphant as American President. So, he had actually inherited a worst economic mess, far worse than what Imran Khan had probable inherited.

Between 1929 and 1932, worldwide GDP fell by an estimated 15 per cent. It is imperative to note that the global GDP had fallen by only one per cent during the 2008-2009 Great Recession.

According to the “New York Times, the “Wall Street Journal,” the “Economist,” the “Journal of Monetary Economics” and the “Encyclopedia Britannica,” international trade had plunged by more than 50 per cent during the Great Depression. Unemployment in the United States alone had risen to 25 per cent and in some countries; the jobless ration had climbed to 33 per cent.

What did Roosevelt do?

During Roosevelt’s first 100 days in office, his administration passed legislation that aimed to stabilize industrial and agricultural production, create jobs and stimulate recovery.

Many economists have estimated that the money spent across the United States, following the outbreak of Great Depression, in relief spending was associated with a reduction of one infant death, one suicide and 2.4 deaths from infectious diseases.

He introduced many “First New Deal” and “Second New Deal” projects like the Federal Deposit Insurance Corporation to protect depositors’ accounts and the Securities.

Similarly, the Securities Exchange Commission was established to regulate the stock market and prevent abuses of the kind that led to the 1929 crash.

Roosevelt’s initiatives were aimed at stimulating the private home building industry and increase the number of individuals who owned homes. He had simplified the mortgage process for the homeless.

The US Congress had then passed a bill that paid commodity farmers (farmers who produced things like wheat, dairy products, tobacco and corn) to leave their fields fallow in order to end agricultural surpluses and boost prices.

The National Industrial Recovery Act guaranteed that workers would have the right to unionize and bargain collectively for higher wages and better working conditions.

Almost every American, during Roosevelt’s first 100 days in power, had found something to be pleased about and something to complain about.

Roosevelt believed that full economic recovery depended upon the recovery of agriculture and raising farm prices was a major tool, even though it meant higher food prices for the poor living in cities.

During his inaugural address on March 4, 1933, Roosevelt said: “First of all, let me assert my firm belief that the only thing we have to fear is fear itself.”

The next day, Roosevelt declared a four-day bank holiday to stop people from withdrawing their money from shaky banks. On March 9, 1933, Congress passed Roosevelt’s Emergency Banking Act, which reorganized the banks and closed the ones that were insolvent.

By the spring of 1933, the economy continued to improve throughout the next three years, during which real GDP (adjusted for inflation) grew at an average rate of 9 percent per year.

He constructed dams and hydroelectric projects to control flooding and provide electric power to the impoverished regions like Tennessee and created the Works Progress Administration, a permanent jobs programme that employed 8.5 million people from 1935 to 1943.

The Works Progress Administration had financed a variety of projects such as hospitals, schools and roads, and employed more than 8.5 million workers who built 650,000 miles of highways and roads, 125,000 public buildings as well as bridges, reservoirs, irrigation systems, parks, playgrounds and so on.

The $ 3 billion Works Progress Administration projects weren’t allowed to compete with private industry, so they focused on building things like post offices, bridges, modernizing poor farms, schools, highways and parks. This state authority also gave work to artists, writers, theater directors and musicians.

Farm production in United States had increased dramatically thanks to mechanization, more potent insecticides and increased use of fertilizer.

In 1935, Congress passed the Social Security Act, which for the first time provided Americans with unemployment, disability and pensions for old age.

In 1936, while campaigning for a second term, Roosevelt told a roaring crowd: “The forces of ‘organized money’ are unanimous in their hate for me – and I welcome their hatred.”

A sharp recession had again hit the United States in 1937, reversing many of the gains in production and employment. This state of affairs had prolonged the effects of the Great Depression through the end of the decade.

The countries affected by Great Depression included United States, Britain, Chile, Germany, Soviet Union, Chile, Spain, Sweden, Italy, Iceland, Thailand, Poland, Belgium, Switzerland, Portugal, Australia, Latin America, Japan, India, Ireland, Netherlands and New Zealand etc.

In Canada, for example, half of Roman Catholic women defied Church teachings and used contraception to postpone births.

Depression-era hardships had fueled the rise of extremist political movements in various European countries, most notably that of Adolf Hitler’s Nazi regime in Germany, which was already in political turmoil.

Investors were nervous and withdrew their short-term money from Germany, as confidence spiraled downward.

A key German bank had lost 150 million marks in the first week of June 1931, 540 million in the second, and 150 million in two days, June 19–20 of the same year.

It was the German aggression that had actually led to World War II.

Recovery:

In most countries of the world, recovery from the Great Depression began in 1933.[11] In the U.S., recovery began in early 1933.

Despite Roosevelt’s best efforts, the Great Depression dragged on.

Workers grew more militant: In December 1936, for example, the United Auto Workers started a sit-down strike at a car plant in Michigan had lasted for 44 days to spread to some 150,000 autoworkers in 35 cities.

By 1937, to the dismay of most corporate leaders, some eight million workers had joined unions and were loudly demanding their rights.

In order to protect his projects from meddling of courts, President Roosevelt had come up with his infamous “Court-Packing Plan” in 1937. He had a plan to add enough liberal judges to the Court to neutralize the “obstructionist” conservatives.

But, as soon as the conservative arbiters caught wind of the plan, they started voting to uphold Roosevelt’s New Deal projects.

The American GDP, however, returned to its upward trend in 1938.

Apart from the United States, many affected nations also took steps to counter the grave financial turmoil.

For example, in Japan, the government launched a nationwide campaign to induce households to reduce their consumption, focusing attention on spending by housewives.

In Germany, the government tried to reshape private household consumption under the Four-Year Plan of 1936 to achieve German economic self-sufficiency.

The advent of World War II had also helped many countries like Great Britain and United States to reduce joblessness, a research conducted by the US Library of Congress had concluded.

By 1937, unemployment in Britain had fallen to 1.5 million. The mobilization of British manpower, following the outbreak of World War II r in 1939 had ended unemployment in the United Kingdom.

When the United States entered into the war in 1941, it finally eliminated the last effects from the Great Depression and brought the U.S. unemployment rate down below 10 per cent.

Research shows that American and European women had helped their leaders fight Great Depression to a great extent, although it was hard for them to deal with food and clothing and medical care with shrinking income levels. Birthrates fell everywhere, as children were postponed until families could financially support them. The average birthrate for 14 major countries fell 12 per cent from 19.3 births per thousand populations in 1930, to 17.0 in 1935.

Many economists believe that government spending on the war caused or at least accelerated recovery from the Great Depression, though some consider that it did not play a very large role in the recovery. It did help in reducing unemployment.

Following the Japanese attack on Pearl Harbor in December 1941, the production output of American factories increased.

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