When the Great Depression hit in 1929, the extent to which the economic crisis reverberated around the world was unprecedented in terms of its nature, size, outreach, implications and results. With the collapse of the New York Stock Exchange on “Black Thursday”, October 24, the American financial markets were the first to suffer the repercussions.
Within three weeks, those markets lost 10 times the United States federal budget at the time – exceeding the total US expenditure during the First World War.
The crisis soon spread, causing economic growth rates to deteriorate all over the world. Thousands of corporations went bankrupt, and many factories closed due to the halt in production. The aftershocks from the worst economic collapse in history stifled the global economy for a decade.
Due to the vast depth of the crisis, factors beyond the economy were affected as well – such as the 1932 US presidential election, which Franklin D Roosevelt won and remained in office for a record 12 years. His campaign focused on economic aspects, in which he promised to fight recession and to alleviate the rising rates of unemployment.
While in office, Roosevelt oversaw laws to stabilise the agricultural economy and reform industry. He also established social welfare institutions through which more than three million young people were employed.
Although his role in winning the Second World War cannot be ignored, his success in facing the Great Depression is one of the main reasons he stayed in office longer than any other US president. Roosevelt won a staggering four times, but he died just a few months into his fourth term in 1945.
The Depression fuelled racism as people competed for what few jobs were available. A lot of people, especially the young, joined leftist movements that promised to solve unemployment and to address the reasons for the crisis.
This economic crisis served as one of the most important milestones in the development of modern economic thought. New ideas began to emerge as a result of the Depression – mostly in terms of the state’s economic role and the setting of macroeconomic policy.
The great economic thinkers at the time included John Maynard Keynes, who called for increasing the state’s role in the economy and for it to intervene to balance supply and demand, achieve full employment, and control financial investments and procedures. These notions contradicted the prevailing economic thought at the time, which was to achieve full employment and remedy any economic imbalances without government interference or monitoring.
Keynes’s ideas successfully pulled several economies out of recession. The economic role of the state started to expand and nations adopted policies through which they could control overall demand and levels of employment.
The state’s role thus became more involved in rectifying the imbalances that may result from implementing free market mechanisms. It also played a role in redistributing income and revenue in a way that enhanced equality and social justice in the community.
Met with global success and praise from economic thinkers until the early 1960s, support for Keynes’s theories began to decline following the rise of a new group of economic thinkers called the Neoclassicals: this group called for minimising the role of state intervention in the economy, claiming that it leads to the misuse of resources.
But Keynes’s ideas remain to this day – particularly in light of the 2007-2008 world economic crisis, which some blamed on the decline of the state’s role in the economy.
It could be argued that a return to Keynesian thought born in the Great Depression helped the US economy pull out of the worst phases of the recent crisis. The US government intervened in the economy in every way possible, from buying assets and major corporations to pumping cash into the market.
Dr Jamal Sanad Al Suwaidi is the director general of the Emirates Centre for Strategic Studies and Research