October 29, 1929 which later got ill-famed as Black Tuesday, marked the beginning of what we know today as the Great Depression of the 1930s. “The DJIA fell 12% with more than 16 million shares traded in the panic sell-off”.
Though many people think that the beginning of the spiral downwards for U.S started on this day; on hindsight, many believe that the American economy had been showing worrying trends, six months prior to the Black Tuesday, itself.
There was a growing chasm between the haves and the have-nots. More than 60% of the population was living below poverty levels, while a mere 5% of the wealthiest people in America accounted for 33% of the income, and the richest 1% owned 40% of the nation’s wealth. Many economists like Raghuram Rajan today opine that since the rich typically spend a smaller portion of their income compared to the poor, who spend almost all of their income, rising inequality acts as a threat to aggregate demand in the economy.
During the roaring 1920s, people were investing heavily in the stock market, even using loans from banks. With the crash in the stock market, Americans started withdrawing their money from the banks. The more the people withdrew, the more the banks failed and by 1933, more than 11000 of the banks had collapsed. With a lack of faith in banks, people started hoarding money rather than spending it.
With reduced expenditure, demand for products and services went down.
With lowered demand, an already high unemployment rate reached its highest level at 25% in 1933.
For years, American farmers overplanted and poorly managed their crop rotations, and between 1930 and 1936, when severe drought conditions prevailed across much of America’s Plains, what was called Dust Bowls, were created. This drought contributed immensely to the great depression.
By 1934, nearly one-half of all residential loans were delinquent and over 1 million families lost their farms. In 1932 alone, 273,000 families were evicted from their homes. Between 1929 and 1932, construction of homes dropped by an incredible 80%.
So the market crash triggered a wave of withdrawal and hoarding of money, leading to a lower expenditure on products and services further leading to unemployment which then became a vicious cycle.
The Indian PM’s announcement on Nov 8th 2016 did to India, what the stock market crash did to America in 1929. After the initial deposits into the banks of the demonetisated currency, with a growing distrust in the banking system, the people are now hoarding whatever money they have.
In September 2016, reports had suggested that the “unemployment rate in India had shot up to a five-year high of 5 per cent in 2015-16, with the figure significantly higher at 8.7 per cent for women and 4.3 per cent for men.” Sectors dependent on cash have been hit hard after the Demonetisation and it’s only going to spike the unemployment rate. This is further going to hit the demand for products and services.
Credit Suisse estimated that the top 1% in India own more than half of the country’s total wealth. The richest 5% own 68.6% of the country’s wealth, while the top 10% have 76.3%. At the lowest rung of the ladder, the poorer half, share among their sorry selves, a meagre 4.1% of the nation’s wealth. With the demonetisation, it’s a known fact that this gap between the rich and the poor has only widened. This will take it’s toll on demand as well.
Our very own dust bowl is also in the making. Demonetisation has hit the sowing of rabbi crop and we may be facing our own man-made famine.
Now you may say, but the 1929 bloodbath in the stock market crash occurred because of lax regulations. But I would say, you are looking at the cause and not the effect. The end result was the same; lesser disposable income which is used for expenditure.
Is recession waiting for us, around the corner? If yes, how long and how bad it will be would depend on how well Modi and his team can manage this catastrophe. Till now, their performance has been dismal.
Quite like Modi, then U.S President Hoover promised that the recession resulting from the Crash of 1929 would be brief and that prosperity was waiting just around the corner. He in fact said in March 1930, things would get better in 60 days. The depression had actually set in.
Inspite of the terrible state that the economy was in, Hoover refused to provide any direct federal assistance. On the other hand, he used the army to remove 20,000 members of the “Bonus Army,” a group of World War I veterans and their families who were demanding economic relief.
Did we witness our Black Tuesday on Nov 8, 2016? Only time will tell.