[[The Great Depression Flashcards
What was the role of Gold Standard in propagating the crisis?
Why did the economic crisis persist for so long?
Due to the haphazard way countries came off the Gold Standard which benefitted devaluing countries but harmed their trading partners
International trade failed to recover post-WWI due to several trade barriers and high tariffs
Policies that done goofed:
1. Protectionism and lack of international cooperation
1930s: USA increased tariffs substantially (Smoot-Hawley tariff) -> almost immediate retaliation -> falling export earnings -> raised unnecessarily high tariffs on imports (government overreacted) -> reduced another country’s exports -> Great Depression spreads
- Interest rates kept high during the early years of the Great Depression
Attempt to persuade people to hold currency by overvaluing it (fear of capital flight). Prices were falling -> real interest rates rising -> cost of borrowing rose -> businesses who borrowed to invest had costs increase while demand was falling -> business collapse - Initial policy response: deflate economy to cut government spending
Key objective: balanced budgets, even during a depression
Fall in exports -> demand fell -> governments reduced demand rather than increasing it -> deepening crisis
What was the role of monetary policy and international cooperation for preventing crises?
What is the Great Depression?
One of the most dramatic events in modern economic history and became subject to renewed study in the wake of the 2008 Financial Crisis
What are the Great Depression’s effects on economic activity?
What are the short-run factors that led to the Great Depression?
(1) currency instability, (2) de-globalisation, (3) highly politicised labour relations, (4) fluctuations in economic activity, (5) destabilising reparations payments
What are the long-run factors that led to the Great Depression?
(1) haphazard way countries came off the Gold Standard (benefitted devaluing countries but hurt trading partners)
(2) WWI -> mistrust between countries, interrupted economic growth
What are the factors related to changes in economic structure during WWI that underpinned the Great Depression? (Eichengreen, 1992)
- Changes in composition of production
Traditional industries (iron, steel, coal, textiles and shipbuilding) declined in importance -> ‘new industries’ of 2nd Industrial Revolution (chemicals, electrical engineering and motor vehicles): selling ‘consumer durables’ (cars, appliances, etc.) which are more expensive than consumer goods for everday use (foodstuffs and textiles) and aren’t bought on a daily basis, thus sensitive to cyclical fluctuations (demand declines during economic crises) - Operation of labour market
Interwar period: time of deflationary pressures -> wages adjusted downwards such that real wages remain the same. But wages: sticky & don’t adjust to price levels easily
Rise of unionisation and collective bargaining -> restricted downward flexibility of wages
Forces that raises wage above equilibrium -> labour surplus (unemployment) - Operation of International Monetary System
Gold Standard: suspended in 1914 bc of WWI
Return: protracted & uncoordinated, some countries joined at pre-war parity and some didn’t
Overvalued currencies: pound, lira or krona
Undervalued currencies: Belgian and French francs
Policymakers didn’t follow the ‘rules of the game’, central banks didn’t raise discount rates in response to BOP deficits bc didn;t want to raise further unemployment - Pattern of international settlements and capital markets
WWI changed such patterns
European producers lost overseas markets due to barriers to trade (like blockades)
Markets (esp. Latin American) were taken up by US producers
European countries (Britain most notably) joined Gold Stanard at overvalued exchange rates -> undermined competitiveness of British producers further -> Britain no longer the world key trading power & largest creditor, taken by the USA, but USA didn’t recycle BOP surplus, straining trading partners, and increased tariffs
//Why would a creditor nation raise tariffs?
To what extent should the interwar Gold Standard be blamed for the Great Depression?
The crucial mechanism that allowed the Gold Standard system to operate in 1870-1914 wasn’t in place
Creditor countries supposed to lower interest rates -> inflate economy -> bring BOP equilibrium. But USA didn’t do this
France hoarded gold, didn’t follow the ‘rules of the game’ -> tightening world money supply (USA and France together held 60% of world’s gold)
Policymaker of countries on the Gold Standard initially chose to stay -> experienced deflation
Worsened by developments in USA: (1) US Federal Reserve adopted restrictive monetary policy & increased interest rates
-> (1) reduction in domestic investment -> reduction in economic activity
-> (2) international implications: reduced foreign lending -> deflationary impulse transmitted by Gold Standard throughout the world economy -> European countries also had reduction in economic activity and deflation
(2) consumer behaviour: delayed spending in durable goods and uncertainty in households due to 1929 Stock Market Crash
//The Great Depression historical framework alongside changes in the international economy
1820-1870: great deal of variety (like changing exchange rates) which are examples of bilateral and multilateral trade
1870-1914: fixed exchange rates and multilateral settlements attributed by the Gold Standard
1914-1919: Crisis 1 - WWI
1919-1931: returned to fixed exchange rates but serious prolems
1920s: reversal of trends before WWI ->
(1) currency instability
(2) de-globalisation
(3) highly politicised labour relations
(4) fluctuations in economic activity
(5) destabilising reparations payments -> political feud over German reparations, overshadowing precarious functioning of capital markets, many blamed large war reparations for hyperinflation in Germany -> unable to pay reparations
1923: France occupies Ruhr, Germany -> civil resistance, hyperinflation escalates
1924: US-brokered Dawes Plan -> enabled Germany to resume borrowing from US, Germany has currency reform: Reichsmark, Germany pays reparations to France and France uses reparations received from Germany to service their war debts to US
1928: US Federal Reserve raises interest rate to curb bubble, foreign lending dries up -> Germany and Argentina hit
1929: began with Wall Street (New York Stock Exchange) crash followed by Hawley-Smoot tariff caused by (1) composition of production, (2) operation of the labour market, (3) lack of adherence to the ‘rules of the game’ of the Gold Standard, (4) changes in pattern of international settlements-> wave of retaliatory tariffs, Germany in crisis, The Young Plan: new payment scheme, deflation: asymmetry of interwar Gold Standard, deficit and surplus countries deflated
Most affected countries 1929-1933: USA & Germany (GDP fell by around 30%, industrial output fell by around 50%, unemployment 25-33% of labour force)
Early 1930s:
1. Period when international economy had fixed exchange rates and multilateral settlements
2. Period when international economy managed currencies and bilateral trade
1931: Crisis 2 - banking crisis
1931-1939: interventionist governments, end of fixed exchange rates (the Gold Standard), and bilateral trade
1939-1945: Crisis 3 - WWII
//Unaffected country during the Great Depression
Union of Soviet Socialist Republics (USSR) -> isolated from international economy, but had its own internal ecoomic & social problems
What could countries do during the Great Depression?
- Leave Gold Standard -> make money cheaper -> higher prices -> inflation -> interest rates can be lowered -> domestic economic expansion -> domestic/foreign prices lower -> trade balance improves
Sterling bloc: UK, Sweden, Scandinavia - Stay on the Gold Standard -> deflation resumes
Gold Standard bloc: France, Switzerland, Belgium, the Netherlands - Introduce exchange controls: independent monetary policy and fixed exchange rates, sacrifice free movement of capital
Exchange controls bloc: Austria, Germany, Czechoslovakia, Poland
