Great Depression to Deep Recession

Political contexts of Economic Crises


John Samuel


Politics and economy are twins- shaped and driven by power-relations. Finance Crisis does not happen in a political vacuum. Politics and policy choices often shape, make and break economies and the financial architecture. So it is important to unpack the political contexts, causes and consequences of the financial and economic crisis. There seems to be a clear connection between war, economic crisis and political transitions.


In spite of the confident rhetoric of political leaders, economy did not necessarily dance according to their music. In early 2007, George Bush boasted that “economy is powerful, productive and prosperous”. It would be worthwhile to compare this with the message of President Calvin Coolidge to the congress on Dec 4, 1928: “Enlarging production is consumed by an increasing demand at home and expanding commerce abroad. The country can regard the present with satisfaction and anticipate the future with optimism”. Within less than a year of that statement, on 29th October 1929 the great crash happened at the New York Stock Exchange, arguably the most traumatic experience in the history of capitalism. The near universality of this economic crisis and its political implications are not too far to forget.


The political context of the great depression and the ongoing financial crisis are not the same. However, there is one shared context- concentration of wealth in few hands- and consequent increase of inequality. The prosperity of the USA in the 1920s was very fragile; five percent of the population received more than one third of the income and seventy percent of the population got an annual wage hardly good enough for survival. The roots of the great depression can be traced back to the consequences of the First World War. And the consequences of the great economic crash in the early thirties made enabling conditions for the rise of fascism as well as the context for the Second World War. This eventually led to the reordering of the world in the aftermath of the Second World War. However, there is a substantial difference between the political context of the great crash and that of the ongoing financial and economic crisis.


The present financial crisis is a result of the cumulative impact of the neo-liberal economic paradigm and unbridled financial capitalism in the last twenty years. The globalization of market, media, technology, and finance went hand in hand with the globalization of discontent and globalization of terror. They fed into each other with increasing virulence. Thus economic growth was accompanied by inequality, injustice and reactionary politics. George Bush and Osama Bin Laden fed into each other. The rise of neo-liberal capitalism- driven by hyper-consumerism and economic growth`-perpetuated a new addiction for oil. The oil addiction shifted the theatre of international politics to the West Asia and Gulf Countries. The powerful countries sought to control oil and other natural resources- through the power apparatus of the military and markets. This created new forms of imperialism and militarization. The new oil economy irrigated markets, war machines as well as terrorism. Though the gulf war in the early nineties proved to be a profitable enterprise for the USA, the Iraq war proved to be a lost game, in terms of economics and politics. The economy, military and the unilateral power of the USA got overstretched and became increasingly brittle. In spite of the boastings of Bush, the economy began to bleed in the context of a costly war. It was estimated that around US$ 3 trillions was used to blow up Iraq- killing hundreds of thousands of people, making deep wounds in the world as well in the economy. The eclipse of military adventurism and casino-capitalism- eventually shook the political power of the White House and the economic muscle of the Wall Street.



The context of the great depression in the 1930s needs to be located in the interwar economic and political order of the world. The crash of the New York Stock Exchange on Oct- 29, 1929 led to a deeper universal crisis-which at that time looked like a collapse of the capitalist world economy. However, it is important to note that at that period Communism was a viable economic and political alternative to capitalism. In spite of the great depression, economy of the USSR was less affected due to the strength of the state- controlled Soviet system of economy. The economic and political consequence of the First World War also created to fertile ground for the rise of right wing militant politics in the form of Nazism in Germany and Fascism in Italy and other parts of Europe. Though America emerged as an important player in the aftermath of the First World War, the USA was neither a unilateral super power nor the dollar became the super currency of the world. The finance capitalism was far less globalised than the preset time. The political economy of oil was still in its early stages. The world was still a big colony of the British and European powers.


Now the context is dramatically different. It is an irony of history that the USA blew up lots of money for the war in the Gulf and Iraq, and now the Economy of USA will have to depend on the money and oil from the very same Arab world. The USA has to depend on the trillions of Foreign Exchange reserve from the Gulf Countries, and other Asian countries, such as China, Japan and India. Many of the tops Banks and business enterprises in the West is increasingly owned by the rich Arabs through investments as well as the strategic use of the National Sovereign Funds of many Gulf countries. While the market in the Europe and the USA got increasingly saturated, the new power of vibrant markets shifted to emerging economies of Brazil, Russia, India and China.


The dramatic recession in the USA in 1930 spread to Germany and the rest of the world. The industrial production in the US and Germany fell about a third from 1929 to 31. There was a slump in the demand and price of primary commodities-including rice, tea, coffee, wheat and silk. Many of the Asian, African and Latin America countries- dependent on the export of primary commodities suffered due to the slump in demand. The world trade fell by 60%. The crisis resulted in the rise of massive unemployment which varied between 20 to 50%- in different countries. The epidemic failure of Banks and credit-crunch actually led to the great stock exchange crash. By the second half of 1930, 603 banks failed, including the Bank of the United States, which accounted for the loss of about one third of the total deposits. By January 1932, 1860 banks have failed. The automobile production- a key sector of the economy in those days- reduced more than 50% within two years. The combined output of the world’s seven economies declined around 20% within three years of 1929 to 32. Millions lost job and unemployment in the USA and Germany was above 33%. The depression resulted in a sharp increase in tariff and resultant reduction in international trade. And the world trade almost collapsed. In fact, Great Brittan- the original imperialist masters of the “free trade” abandoned free trade in 1931.

However, the immediate response to the depression was a series of half baked panic reactions- including protectionism, cutting deficits and more conservative budget with less public expenditure. This further made the situation worse. It took another five years of concerted effort to re-energize the economy. And as a matter of fact, the Second World War helped the USA to increase demand and production to shift the economy in to a growing pattern.






The seeds of the Second World War were very much there in the ‘reparations.’ The vast and undefined ‘reparations’, as the cost of war and the damage done to the victorious powers, was imposed on Germany in the Versailles Peace Conference in 1919. Though John Maynard Keynes – who participated in the Versailles Peace conference as a young economist in the British delegation- warned against “reparations’ through an illuminating paper, The Economic consequence of Peace (1920) - the political leaders of the day ignored his arguments. As a result Germany plunged in to an economic crisis in the aftermath of the First World War, and this is what provided the fertile ground for the rise of Hitler and that of Nazism.

There is a connection between economic crisis, political turmoil and possible shifts in the governance. Germany was indeed a major industrial power and when the crisis of Germany was followed by the crash of the US Economy- there was a much more impact- economically and politically. This gave rise to Fascism in many parts of Europe. But it also gave rise to the New Deal of President Franklin Roosevelt in the USA, following the economic model of John Maynard Keynes. The New Deal consisted of a series of policy and economic measures to address unemployment and stimulate economic demand. The first New Deal Programme (1933-35) sought to restore public confidence and resulted in a series of legislation, including the one on Public works and policy measures. The second phase of the New Deal began in 1935. Path-breaking social legislation in 1935 included Social Security Act (a scheme for unemployment insurance, disability insurance and old age pension) and Wealth Tax Act and the National Labour Relations Act. In the eight year history of the New Deal, a total of US$ 11 billion was spent and provided employment for 8 million workers in the USA. The New Deal signified the role of the state in redistribution of wealth. Though the package was a radical step in many ways, it did not help to completely address the economic crisis- as the USA again faced a recession in 1937-38. However, it represented the far-reaching and stunning socio-economic reforms and established the role of an interventionist state. Thus began the political legitimacy for the Welfare state across the world.

The finance crisis may lead to a deep recession. Such a shift is powerful enough to shape new paradigms of policy, development and institutional framework in the next five years. Great Depression was the beginning of a paradigm shift in the policy, politics and nature of the state. The political outcome of the Finance Crisis may be too early to predict. But one could see multiple shifts in the political process and governance in the years to come.

The ongoing financial recession played a very important role in shifting the politics of the USA. It is yet to be seen whether the team of Barack Obama can turn the tide of politics and economics. There is indeed a danger of conformist politics with a high doze of optimistic rhetoric. A black man in the white house may be a great political symbolism. But whether it would transform the politics and economics in the world still remains a billion dollar question.