Could the Great Depression of the 1930s hold significant lessons for Indian policy makers today as the level of economic activity plummets consistently for the last few months. The level of unemployment in India is highest ever in the last 45 years. In August the Index of Industrial Production recorded a negative growth, this year. While the government has come up with certain policy measures as reduction in Corporate Taxes, it seems the problem is more to do with the demand levels prevailing in the economy. Thus, supply side measures as tax cuts may not stimulate growth. The Great Depression may hold significant lessons for us. The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States. The timing of the Great Depression varied across nations; in most countries, it started in 1929 and lasted until the late 1930s. It was the longest, deepest, and most widespread depression of the 20th century. The Great Depression had devastating effects in countries both rich and poor. Personal income, tax revenue, profits, prices, stock markets dropped, while international trade plunged by more than 50%. Unemployment in the U.S. rose to 25% and in some countries rose as high as 33%. There are several theories as to what caused the Great Depression. One was the explanation that was put forth by Keynes. Keynes was an economist and he explained the cause of the Great Depression as lack of general demand in the economy. According to him, People and Government were not spending enough. Consequently, the demand was adversely impacted. Stocks of goods in factories were not being sold. Prices had to be dropped. But even that was not enough. As the demand was lacking, factories piled up stocks of unsold good. This caused them to cut back on production. This caused unemployment. As unemployment rose, demand further was impacted. Businesses were not able to sell goods and were not making profits, causing a cut back on investment in capital expansion. As profits declines, people could not make profits on stocks of companies and started selling their shares leading to a stock market crisis. It can also be said that one of the causes of cut back in investment by the companies was to lack of demand for money or credit by companies from the banking system, as well. So banks started cutting the rate of interest to incentivize the companies and consumers to borrow more. However, that could not happen as borrowers were not willing to borrow anything due to depressed economic activities. They were saving. The other school of thought was that the depression was caused by a shortfall in supply of money or credit from the banking system. As Banks were getting impacted by non-performance of companies and lack of aggregate demand a few large backs collapsed. The Federal Reserve, it is said should have stepped in and infused the banking system with money so as to prevent is from collapsing. The collapse caused further panick in the economic system causing the economic activity to slow down even more. It was believed that this contraction in supply of money and credit to companies was one of the major causes of depression. With significantly less money to go around, businesses 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.
To me the Great Depression has many valuable lessons. I would tend to agree with Keynes that there was a significant slowdown in the level of aggregate demand and hence factories started shutting down. The monetarists contention that supply of money/credit was contracted as the Central Band did not rescue the banks is also true. It is important to understand the complexity of economics and appreciate that if large banks collapse, it shatters the confidence of people and they prefer saving rather than investing anticipating that savings may be needed for bad times. So the Federal band should have prevented the large banks from collapsing. That is the job of the Federal or any Central bank as the guardian of last resort. However, it cannot be said with confidence that greater amount of money/credit with banks would have translated into greater borrowings by the companies. In my opinion, the companies would not have borrowed any money. This is because nothing was selling. There was lack of demand. In the current context of the Indian Economy, picking up from experiences of the Great Depression we need to ensure that the Government creates demand through investment in Infrastructure and Agriculture. The Government should put money in hand of the poor immediately through short term employment guarantee schemes like MNREGA. At the same time, it should ensure that the Banking system is robust and has enough money to lend. The banking system must inspire the confidence if its customers that their money is in safe hands and that they are getting adequate returns. The government must also provide incentives to the companies through tax cuts so that their profits increase and they invest in new innovative areas which have a higher growth potential.
Anisham
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