The Recovery from the Depression of the 1930s
http://www.applet-magic.com/recoverypod.htm
applet-magic.com
Thayer Watkins
Silicon Valley
& Tornado Alley
USA
The Recovery from the Depression of the 1930s
The Depression of the 1930s was notable among depressions not only for
its severity but also for its duration.
The statistic which best represents the social impact of the Depression is
the unemployment rate.
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The Recovery from the Depression of the 1930s
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As the above graph indicates that while the economy recovered somewhat
from its state in 1933 the unemployment rate remained in the 15 percent
range for the rest of the decade. The unemployment rate did not drop
from depression levels until the economic impact of World War II was
felt. The high level of demand during that war reduced the
unemployment rate to minuscule levels. While the unemployment rate
should be the defining characteristic of economic depression the standard
definition is in term of GDP. The level of production did recover its
previous high level of 1929 fairly quickly but this was still significantly
below what the economy was capable of producing. The output of an
economy is measured by its Gross Domestic Product )GDP) and the
graph below shows the decline in production from its high point in 1929
to its low point in 1933 and its subsequent recovery.
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The rise in GDP after 1933 was not sufficient to drop the unemployment
rate from depression levels because while the GDP was growing the labor
force also was growing. Furthermore increases in productivity meant
that for the same level of GDP there were fewer jobs. In order to bring
down the unemployment rate the rate of growth of GDP has to be greater
than the sum of the growth rates of productivity and the labor force. The
table below tells what was happening to the components of demand.
The National Income Accounts for the Great Depression in the U.S.
(1992 Prices)
YEAR
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GDP
CON
SUMP
TION
INVEST
MENT
GOVERN
MENT
PUR
CHASES
EXPORTS
IMPORTS
NET
EXPORTS
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The Recovery from the Depression of the 1930s
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1929
790.9
593.9
92.4
105.4
35.6
46.3
-10.7
1930
719.7
562.1
59.8
116.2
29.4
40.3
-10.9
1931
674.0
544.9
37.6
121.2
24.4
35.2
-10.8
1932
584.3
496.1
9.9
117.1
19.1
29.2
-10.1
1933
577.3
484.8
16.4
112.8
19.2
30.4
-11.2
1934
641.1
519.0
31.5
127.3
21.4
31.1
1935
698.4
550.9
58.0
131.3
22.6
40.7
-18.1
1936
790.0
606.9
75.5
152.5
23.7
40.2
-16.5
1937
831.5
629.7
94.0
147.0
29.9
45.3
-15.4
1938
801.2
619.5
61.3
157.8
29.6
35.2
1939
866.5
654.0
79.5
171.8
31.2
36.9
1940
941.2
688.0
111.3
174.2
35.4
37.8
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The Recovery from the Depression of the 1930s
http://www.applet-magic.com/recoverypod.htm
1941
1101.8
737.1
137.3
288.0
36.4
46.5
-10.1
1942
1308.9
719.7
72.1
692.0
23.9
42.2
-18.3
The above table indicates that consumers, investment and government
purchases were generally increasing after 1933. Note however the decline
in GDP and Investment in 1938. This was a recession within the
Depression.
At this point it is worthwhile establishing a more general theory of what
determines the level of demand and output in an economy. If consumer
purchases is a function of income which, in turn, is a function of GDP
then we must look to the components which are not functions of GDP,
what are called autonomous demands, for the determinants of demand.
The level of autonomous demand is the sum of investment purchases,
government purchases and net exports. The graph below shows GDP
plotted versus Autonomous Aggregate Demand (AAD) for the years from
1929 to 1997.
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The Recovery from the Depression of the 1930s
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The relationship between GDP and AAD is strong but the World War II
years do not fall on the line because during that time consumers were not
allowed to buy as much as they wanted to and had the income for.
Nevertheless there does appear to be a strong correlation indicating that
generally if AAD goes up then GDP goes up and if AAD goes down then
GDP goes down. The graph below shows the times series for AAD and
GDP plotted over time. The GDP graph seems to reproduce the ups and
downs of the AAD graph. The conclusion is that GDP recovered from the
Depression because the combined total of investment, government
purchases and net exports grew to a level that pushed GDP to full
employment and the full utilization of capacity.
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