2.6.2 Great depression Flashcards
What is important abiut the great depression and GFC of 2008
o different interpretations
o policy responses in the US and UK
What was used in the great depression and 2008 GFC
Demand side policies
Briefly describe the great depression
- 1930s, the world experienced a severe depression
- UK, unemployment was over 15% and in the US it was almost 25%.
- areas most affected in the UK - primary & manufacturing industry which relied on exports and so were impacted 6by the collapse of world trade.
What is the general cause of the great depression?
set off by the Wall Street Crash of 1929 when there was a
sharp fall in share prices on the New York Stock Exchange
What are different interpretations of the cause of the great depression?
1) loss of consumer and business confidence - shareholders lost money in the crash, others became worried about what would happen, and firms cut back investment which led to a downward spiral in AD.
2) US banking system - Banks had lent too
much during the 1920s, created an unsustainable boom and the system was unable to deal with issues following t crash. The gov allowed banks to fail after the crash, which decreased confidence further and reduced loans to
businesses and consumers, causing a fall in AD.
3) Protectionism - reduced world trade which decreased AD and lowered confidence. Firms involved in exports were no longer able to pay bank their loans, which caused bank failures in the USA.
State an example of protectionism in the US and how it may have contributed to great depression
- America introduced the Smoot-Hawley Tariff Act in 1930 which decreased imports to the USA.
- Countries which traded with America saw a reduction in exports which decreased in AD in their countries.
- American also suffered from a fall in exports as other countries retaliated.
Why might the gold standard have contributed to the effects of the great depression in the UK
- The UK was also affected by its commitment to the gold standard, in which its currency was fixed to the value of gold and therefore fixed to other currencies.
- It left the gold standard in 1914 but re-joined in 1925 at the 1914 level and value, despite the fact the value of the pound had fallen.
- The rejoining of the gold standard meant the pound was appreciated rapidly and exports fell as they became more expensive.
- The UK went into the Great Depression with an overvalued exchange rate.
Describe two parts of the UK policy response in 1930 great depression
- a balanced gov budget would fix things (so cut spending to balance with falling government revenue)
- contractionary monetary policy due to membership in the gold standard
Describe the UK’s classical approach of a balanced government budget
- UK government followed deflationary fiscal policy of cutting government spending during the Great
Depression. - There were major cuts to public sector pay and unemployment benefits (by 10%) ad raised income tax from 22.5% to 25%
- the cuts made things worse — unemployment kept rising, and the economy stayed in recession (lower AD)
How did the gold standard stop expansionary monetary policy?
- Monetary policy was also contractionary, because of Britain’s membership of the Gold Standard
- BC: The Gold Standard was a system where currency could be swapped for a fixed amount of gold from the central bank, so the amount of currency in the system was fixed, depending on how much gold the central bank held.
- so no expansionary monetary policy such as expanding the money supply or lowering interest rates. It also meant that exchange rates were effectively fixed (with the pound overvalued, so British exports weren’t
competitive).
How did leaving gold standard in Sept 1931help the UK
- could then lower interest rates and devalue the pound (25% relative to other currencies)
- This had an expansionary effect — consumption and investment increased. interest rates can also be cut
For example, more houses were built, which provided jobs and contributed to growth.
How did the US respond to the great depression
● The US government originally had the same view over a balanced budget as the UK.
● However, Franklin Roosevelt was elected in 1932 with his New Deal which promised public sector investment, work schemes for the unemployed and fiscal stimulus.
● The USA reached full employment in 1943 (two years after joining the war- the same as Britain). Roosevelt’s New Deal is an example of Keynesian expansionary fiscal
policy but can be argued it was not large enough to be successful, although it did have a large impact as the US unemployment figure was so high.
What is the new deal an example of
Keynesian expansionary fiscal policy
Compare the GFC and GD
- Global Financial Crisis was much less severe than the
Great Depression - both were started in the US and spread throughout the world and both had large, long term
effects on the economy
How did the GFC start in USA
(long ref to PMT notes 2.6)
