the great depression and thereafter Flashcards
what were the causes of the great depression?
the 1929 crash
the agricultural crisis
deflation
bank collapses
wrong headed policies
loss of confidence
falling aggregate demand
why was the 1929 crash a cause of the great depression?
the excahnge value of any asset depends on what people are prepared to pay. a given security may represent a nominal value of 100 but its price might increase by a multiple of this is buyers think they can sell it for even more. the wall street boom was caused by people borrowing money in order to buy securities in a decade long rise in prices. once the selling begins, it can prompt a sudden rush and then panic as asset prices fall fast and even faster. this will cause debts to appear as expensive assets cannot be repaid if the assets have lost their value. this resulted in bankruptcy
why was the agricultural crisis a cause of the great depression?
US agriculture had expanded during the first world war to sell to Europe but in the 1920s europe had recovered and so the US expansion has caused over production meaning farm prices fell. there was also a dust bowl caused by poor agricultural practices and sustained droughts. this meant that crops failed and farms went bankrupt. thousands went hungry and internal migration soared
why was deflation a cause of the great depression?
US price levels declined from 1929 to 1934. as prices fall, there is the temptation for consumers to postpone spending as they wait for price to drop further. the collapse in consumption therefore only prolonged the depression and the real value of debts rises as deflation takes hold so those who are heavily indebted found their situation worse
why was bank collapse a cause of the great depression?
as spending fell, as debts rose as farms and businesses failed, the people liquidated their assets - withdrawing whatever depsotis they could. this led to the bak pulling loands and sought emergency capital from other banks. this spread internationally. in the four years between 1930-33 alone nearly 10,000 banks failed or were suspended,
how was wrong monetary policy a cause of the great depression?
milton friedman argued that the great depression was caused by the banking crisis which saw 1/3 of banks vanish and a reduction of shareholder wealth and a contraction of the US money supply by 35%. this caused deflation of 33%. by not lowering the interest rates by not increasing the monetary base and by not injecting liquidity into the banking system to prevent it from crumbling, the federal reserve passively watched the transforming of a normal recession into the great depression. he argued that the great depression would of just been a normal creash if the federal reserve had taken aggressive action
how was the wrong trade policy a cause for the great depression?
the tariff act of 1930 known as the smooth hawley tariff raised import duties on over 20,000 foreign goods to record levels in order to promote the BoP surplus. this enforced deflation on all other nations and increased antagonism and promoted retaliation. it caused a round of trade restrictions that has since been called beggar my neighbour policies. this caused world trade to slow dramatically.
why was the loss of confidence a cause for the great depression?
falling interest rates, falling commodity prices, falling wages for labour force which all these factors meant falling industrial costs. this should incentivise investment however the business confidence and expectations were clearly negatiev
how was the falling aggregate demand a cause for the great depression
all the evidence and arguements contribute to a falling aggregate demand for each country involved in world trade. the fall in net trade, income and consumption caused a downward shift in the AD curve on the aggregate spending against national income curve. this led to a fall in national income. the AD curve fell and stayed below that level required for full employment. the solution was to cut free of the gold standard mentality and for governments to deliberately spend more than they tax.
what was the 1947 marshall plan?
the 1947 Marshall Plan – a US aid package which totalled $13 billion($130 billion in 2015 prices) in economic support to help rebuild Western Europe, avoid the mistakes of the 1919 and contain the spread of communism
what was the 1947 general agreement on tariffs and trade?
the 1947 General Agreement on Tariffs and Trade GATT (which became the World Trade Organisation in 1995) aimed to negotiate a world-wide reduction in trade restrictions and protectionism.
what did the US and UK agree on about rebuilding post war trade?
they agreed that an international system of fixed exchange rates was ideal to lend stability, discipline and authority to any system,
what type of fixed exchange rate system did keynes want?
keynes urged the creation of a genuine internation currency and a world central bank with the power to create credit and to require both deficit nations and surplus nations to change their policies in the event of difficulty in maintaining stable exchange rates
what type of fixed exchange rate system did the US want:
they wanted a reserve fund which cemented the position of the dollar and the USA as the world dominant player in international trade
what was the bretton woods agreement?
The Bretton Woods meeting in the USA, June 1944, was set up to ensure post-war prosperity by avoiding the depression and economic conflicts between countries in the 1930s that was believed contributed to the drift to war. it focused on two key issues. how to promote a growth in trade and how to pay for rebuilding the war damaged economies of Europe
it established two internaiton organisations:
the international monetary fund to underpin a set of fixed exchange rates that would stimulate trust, trade and expansion
the world bank to make longer term loans
it also created the dollar standard where all countries tied their currencies to the dollar. it allowed for the devaluation of a currency that was in fundamental disequilibrium. a fixed pool of reserves was embedded in the IMF a quota of national currencies and gold was to be subscribed by each country in accordance to their economic importance.
