The Great Depression

Question 1

background of Great Depression

Answer 1

• 1929 to mid-1930s
• output losses average 30%
• largest global recession ever
• led to rise of totalitarian regimes

Question 2

preconditions of 1920s that led to Great Depression

Answer 2

• agriculture
• labour markets
• unbalanced economic growth and shifting consumer baskets
• european reconstruction efforts after WW1

Question 3

preconditions of 1920s that led to Great Depression - agriculture

Answer 3

• WW1 demand for primary produce dropped post war, leaving dropping product price and overproduction
• farmers took out loans from bank to expand farms to meet WW1 demand
• overproduction meant farmers couldn’t repay loan to bank
• banks then were facing defaults and 6000 banks closed in the west, contributing to banking crisis

Question 4

preconditions of 1920s that led to Great Depression - labour markets

Answer 4

increased rigidity in labour markets
- high wages - fixed wages in 1920s and employers were reluctant to reduce wages so they chose to cut back on workforce instead
- low mobility - lack of transferable skills, housing costs
- resistance to cut wages - same as high wages
- lack of social safety nets - no unemployment insurance or social welfare programs so workers were reluctant to leave their job as they were likely to not get another

Question 5

preconditions of 1920s that led to Great Depression - unbalanced economic growth and shifting consumer baskets

Answer 5

• lack of diversification in American economy in 1920s - reliant on construction and automobiles
• late 1920s - industries began to decline and weaken
• this happened and there wasn’t enough strength in other industries to support economy
• led to fragile and unstable growth
• consumers shifted towards consumer durables - more vulnerable to cyclical instability but only in US really

Question 6

preconditions of 1920s that led to Great Depression - European reconstruction efforts after WW1

Answer 6

• Paris Peace Conference 1919/20 - forced Germany and its allies to repay money from war
• countries unable to pay so Europe forced Federal Reserve to keep interest rates down
• very little central bank cooperation
• adjusting difficult due to disintegration of world trade and end of mass migration

Question 7

why did US monetary policy tighten in 1928?

Answer 7

to address growing concerns about
- speculative stock market investment due to excessive borrowing
- excessive credit expansion and rising consumer debt - led to economic instability
- gold outflows and the need to maintain a stable gold reserve
- overall imbalance in the economy - growth fueled by debt and speculation
OVERALL aim to prevent economic collapse but consequence of slowing down the economy and deflationary spiral

Question 8

Reason for quick transmission and severity of the crisis

Answer 8

• global monetary tightening reduced global demand - further undermined by 1929 stock market crash
• made worse again by growing importance of consumer durables
• decline in labour market flexibility limits economy’s ability to adjust
• tight money and bankrupt companies = banking failures (loss of deposits and severe disruption of financial intermediation)

Question 9

Schools of thought for reasons for Great Depression

Answer 9

• Austrian School
• Friedman (1967)
• Eichengreen (1992)

Question 10

Schools of thought for reasons for Great Depression - Austrian School

Answer 10

• argued for excessive credit expansion in US - particularly in second half of 1920s
• consistent with view that Fed Reserve didn’t look sufficiently at domestic economic conditions due to focus on European reconstruction efforts
• ISSUE - not clear when stocks in US became overvalued
• ISSUE - only aims to explain US and not rest of the world

Question 11

Schools of thought for reasons for Great Depression - Friedman (1967)

Answer 11

• Growing concern over 1920s stock market speculation
• Federal Reserve holds back on interest rate increases until 1928 to avoid destabilising fragile European economies