The Great Depression (chap 4)

Question 1

Bilateral agreement , which where the three main kinds ?

Answer 1

1. Compensation Agreement , effective barter agreement
2. Clearing Agreement, Bilateral agreement ,each country a bank account in the other country
3. Payment Agreement ( cover goods and financial transactions) (Germa-Anglo 1937)

Question 2

Attempts of international cooperation after the Great Depression:

Answer 2

1. The bank for international Settlement (BIS)
2. The tripartite Monetary Agreement (France,USA,UK)
3. The Ottawa Agreement (1932) (system of tariffs between commonwealth )
4. Cartels (commercial companies )

Question 3

Regional Currency Systems: (after the Gold Standard collapse)

Answer 3

1. Sterling Area
2. Dollar Area
3. Exchange Control Area
4. Gold Bloc (until 1936)
   - Japanese bloc could be also added

Question 4

Sterling Area (regional currency system):

Answer 4

• Used pounds sterling as an international currency

- United Kingdom, commonwealth (except Canada), several small European countries , much of the Middle East

Question 5

what is the exchange control system?

Answer 5

• with exchange controls foreign currency transactions are controlled by the central bank (discord trade pattern)
• a disadvantages was the distortion in trade pattern

Question 6

in the context of 1930’s, advantages of exchange control system ?

Answer 6

1. They prevented foreign exchange crises

2. They enabled government to pursue expansionary domestic policies, without the worry of escape of financial capital .

Question 7

Trades restrictions examples: (after gold standard)

Answer 7

1. Smoot-Hawley Tariff (1930)- in U.S

2. Import Duties Act (1932) - in U.K

Question 8

What is the function of The bank for international Settlement (BIS) ?(post-gold standard)

Answer 8

• Promote cooperation between central banks

- manage German reparations payments

Question 9

Contemporary explanation to the U.S depression: (at that time)

Answer 9

1. The classical approach
   - Say’s law and self equilibrating powers
2. The Austrian school
   - Result over investment in the 20’s
   no government intervention
3. “Liquidationists”
   - viewed as punishment for the excessed of the 20’s
   - believed in allowing the depression to continuo if not encourage deflation

Question 10

Non-monetary factor that show the weakness in the US economy 30’s :

Answer 10

1. Inequality (main)
2. the corporate structure
3. problems with external balances
4. economics orthodoxy
5. composition of production
6. agriculture (main)
7. A collapse in housing construction (main)
8. Alvin Hansen

Question 11

Recents explanation of the US depression:

Answer 11

1. Credit Hypothesis (Ben Bernanke)
   - effect on deflations in the banks
2. Deflationary Expectation
   - static effect
   - dynamic effect
3. the stock market crash
   - started it or prolong the depression (dismiss)

Question 12

what international factor were present in the U.S depression ?

Answer 12

• Charles Kindleberger theory
• Gold Standard (lack of symmetry)
• European Financial crisis of 1931
• Protectionism

Question 13

explanation of the US depression according to the Credit Hypothesis? (Ben Bernanke)

Answer 13

• The same as debt deflation hypothesis of Fisher but this time, he focus in the effects of deflation in the banks
• deflation in the price of assets
• –> less nominal value
• –>fear insolvency
• –>cut lending
• –>focus in secure investment (such as government securities )
• –> Borrowers were unable to obtain funds
• Chain reaction , causing more deflation in the market

Question 14

What is the monetarist explanation of the Great Depression ?

Answer 14

1. The U.S Federal Reserve (The Fed) Policies
2. The banks failure
3. Gold Standard

Question 15

who is Charles Kindleberger? and what effect had in the U.S depression ?

Answer 15

• He was the creator of the theory “Kindleberger”
• he emphasized that the shift in world economic leadership (London to Washington)
• The Depression was able to spread from US to other mayor economies:
  1. partly through the mechanism of gold standard (deflationary bias)
  2. Partly the lack of economic leadership from the US, and inability and/ or unwillingness of U.K and U.S

Question 16

what is Deflationary Expectation Theory about ? (US depression)

Answer 16

• The price decreased of 33% ,
• The gold standard (by mandating deflation) bore(had) the major responsibility for the slump.

creation 2 possible effects:

1. the Static Effect (Keynes effect):

• is expansionary - on consumption
• based in the fall on prices (fast) and same amount of NOMINAL money (money not causing inflation or deflation), increasing punching power

2. The Dynamic effect (Mundell effect ):

-is contractionary
-based on expectation of future prices
(if people expected deflation , postpone purchases)

in 1931, Keynes effect overpower the Mundell effect
over-comsunption

Question 17

the stock explanation to the US depression:

Answer 17

the stock market crash in 1929 was the start of the slump

• it already had been dismissed by historian

Question 18

what monetary factors were present in the US Depression?

Answer 18

• Small banks , local banks

- U.S Federal Reserve should have given credit to banks