Topic 5

Question 1

how did the first world war change the structure of the international economy?

Answer 1

abandonment of gold standard
international financial relations changed
altering of trade patterns
war demand for materials stimulated the worldwide expansion in their production

Question 2

how did international financial relations change after the first world war

Answer 2

US emerged as major creditor nation
British position weakened by war debts to the US
France also had large debts
Germany forced to pay reparations
disintegration of Austro-Hungarian and Ottoman Empires

Question 3

altering of trade patterns after WW1

Answer 3

european countries were making war materials and military equipment instead of civilian goods
stimulated industrialisation in countries like Australia, Canada, Brazil, India and Japan

Question 4

Main powers position on reparations for germany

Answer 4

France advocated for tough reparations as they were the largest recipient of reparations
Britain was concerned about the effects on the European economy of harsh reparations
US argued against reparations (Woodrow’s 14 point plan)

Question 5

treaty of versailles

Answer 5

28 June 1919
Surrender its naval forces, army was restricted to 100,000 and not allowed an air force
Lost 13% of pre-war territory and 7 million people (12% of population)
Took coal, agricultural and manufacturing resources
Give up overseas colonies
Admit Liability for war damage - War Guilt Clause
Pay reparations (132 billion gold marks) final payment made in October 2010

Question 6

Keynes position on reparations

Answer 6

opposed tough reparations arguing that destabilising germany would undermine post-war economic recovery in Europe, instead arguing for war debts to be forgiven

Question 7

total european debt owing to America by 1922

Answer 7

US$ 9.4 billion

Question 8

german rates of hyperinflation in 1923

Answer 8

over 100 million percent

Question 9

main causes of inflation

Answer 9

persistent shortages in civilian products, considerably worsened in 1923 by the French occupation of the German Ruhr and closure of its industries

the government’s monetary funding of its ballooning budget deficits and war reparations

Question 10

german government monetary funding war and post-war

Answer 10

the german government relied entirely on borrowing to fund military spending rather than raising taxation

war inflation amplified the budget deficits and made it increasingly difficult to effect funding through long-term borrowing

Question 11

German military government rationale for its war debt funding

Answer 11

on winning the war, the war debt would be paid for by annexing resource rich industrial territory to the west and east and imposing massive reparations on defeated Allies

Question 12

position of weimar republic in 1919

Answer 12

inherited a massive war debt that could not be service by raising tax revenue in the debilitated post-war state of the economy
the public refused to take up Government securities, so the government was compelled to issue short term treasury bills to finance its deficits

Question 13

German fiscal position by 1921

Answer 13

by 1921, as production of civilian goods began to recover, the German fiscal position deteriorated with the first reparation payments in june of that year

Question 14

devaluation of the mark and the first reparation repayment

Answer 14

first reparation payment marked the beginning of an increasingly rapid devaluation of the mark
mark fell in value from 90 to about 330 marks per USD

Question 15

impact of the devaluation

Answer 15

contributed to higher inflation via rising import costs
government began to issue money to buy foreign currency in equivalent gold marks to make reparations repayments

Question 16

impact of the devaluation on reparations

Answer 16

germany could not purchase gold to make reparation repayments
reparations were instead paid in goods such as coal
january 1923, French and Belgium troops occupied the Ruhr industrial region to appropriate coal
this led to a general strike supported by the government printing money that crippled national production and induced hyperinflation

Question 17

consequence of hyperinflation

Answer 17

led to price inflation outrunning the growth in the quantity of paper which eventually created a shortage of money for transactions

Question 18

shortage of money for transactions impact

Answer 18

gave the government an opportunity to bring the inflation under control by the issuance of a new revalued currency called the Rentenmark in October 1923

Question 19

Dawes Plan year

Answer 19

1924

Question 20

What did the Dawes Plan do?

Answer 20

ultimately facilitated currency stabilisation by the rescheduling of reparation payments and floating an international loan to make the first payment and enabled Germany to return to the gold standard with a new currency, the Reichsmark, at the old pre-war parity

Question 21

What did the Dawes Plan consist of?

Answer 21

Ruhr Area to be evacuated by foreign troops
Reparation payments would begin at one billion marks the first year, increasing annually to two and half billion marks after five years
the Reichsbank to be reorganised under Allied supervision
the sources for the reparation money would include transportation taxes, excise and custom duties
Germany would be loaned 800 million marks from the US through a consortium of American investment banks

Question 22

Impact of foreign lending on German economy

Answer 22

heavy reliance on mainly american loans left the economy vulnerable to the Wall Street Crash of 1929 and directly spread the Great Depression to Germany

Question 23

political impact of hyperinflation

Answer 23

many people’s savings were wiped out, and many of those who lost their savings, commonly small businessmen and public servants, joined the Nazi Party in the early 1920s

Question 24

desire for restoration of the Gold Standard

Answer 24

after the exhaustion of WW1, the major nations wanted to return to the pre-war stability of the gold standard - prior to the war, the international monetary system under the gold standard provided a conducive environment for the growth of foreign trade and foreign investment

Question 25

when does a bimetallic standard work

Answer 25

works smoothly whilst the ratio between the values at which silver and gold was freely minted into coins approximated to the ratio of values in the international bullion market

Question 26

what happens if silver and gold ratios diverge?

Answer 26

the metal with the higher international market value will flow out of a country in return for the lower value metal, eventually leaving it with only he lower value metal in circulation

Question 27

major catalyst for the international adoption of the gold standard pre-war

Answer 27

the decision by a unified Germany to change from a silver to a gold standard
this was made possible by the larger war indemnity that France was forced to pay Germany on its defeat in the Franco-Prussian War
additionally decline in the value of silver

Question 28

1878 gold standard

Answer 28

Belgium, Holland, France, Switzerland and Scandinavian countries joined Britain on the gold standard

Question 29

US adoption of gold standard pre-war

Answer 29

the US did not officially adopt the gold standard until 1900, however, the resumption of convertibility of paper in 1879 meant it effectively operated on the gold standard via its bimetallic standard

Question 30

external adjustment under the gold standard

Answer 30

called price-specie-flow mechanism
when the external account is in surplus, specie will flow in as net foreign payments and specie reserves will increase, inducing a lowering of interest rates, greater lending and a monetary expansion that will, in turn, raise income and prices of tradable goods. the higher prices relative to foreign goods will thereby lead to a turnaround in trade flows and a tendency toward external balance.

Question 31

external adjustment in reality

Answer 31

relied on central bank management, especially by the Bank of England, with most foreign trade financed through London, its market providing international liquidity to smooth out external adjustments

Question 32

crucial factor to the re-establishment of the pre-war international monetary policy

Answer 32

Britain’s return to the gold standard and London’s capital market resumes its central role in international finance

Question 33

what happened to the british exchange rate in 1919

Answer 33

the wartime peg of the USD/pound exchange rate was abandoned so that it could fluctuate as a measure of progress

Question 34

impact of abandonment of wartime peg

Answer 34

post-war boom caused a global price inflation that was quickly arrested by US Fed raising interest rates in 1920

Question 35

1920 to 1923 value of pound to USD

Answer 35

By 1923 the pound had recovered from its low of US $3.60 in 1920 to reach US $4.60 but Britain had still not achieved parity on price competitiveness with the US

Question 36

Keynes Opposition to Britain’s Return to the Gold Standard

Answer 36

argued that a return to the pre-war gold standard would require a persistent deflationary policy that would worsen the already high 10% unemployment

Question 37

according to keynes, how much would unemployment need to fall by to bring about partity with the us

Answer 37

12%

Question 38

Keynes’ alternative proposition

Answer 38

thought it would be wise to delay the return to gold until wage and price inflation in the US increased toward that existing in Britain

Keynes argued instead for a stimulatory monetary policy to revive British industry and reduce unemployment, which was incompatible with a return to the pre-war standard

Question 39

British Treasury Argument

Answer 39

argued that unemployment could only be reduced by a worldwide recovery in trade for which stabilisation of the exchanges was a necessary precondition

further argued that Britain’s repayment of foreign creditors in full value pounds was necessary if London’s position as world’s premier capital and money market was to be restored

Question 40

later commentators opinions on British return to gold standard

Answer 40

later commentators have asked why Britain did not seek to return to the gold standard at a lower exchange rate e.g. US$ 4.40

this may not have made much difference given that after Britain’s return to gold, France and Belgium deliberately fixed their franc currencies in 1926 at lower rates to advantage their export industries

Question 41

implications of Britain’s return to the gold standard

Answer 41

Keynes was proved correct
continued deflationary policy to keep Britain on an over-valued currency led to persistent economic stagnation and unemployment until the Great Depression
Led to general strike
Britain failed to return to its dominant role in the international monetary system

Question 42

when did Britain return to gold standard?

Answer 42

1925

Question 43

Britain General Strike

Answer 43

1926 - British trade union movements resisted the attempt by employers to reduce the money wages of workers in established industries (beginning with coal mining)

Question 44

British abandonment of gold standard

Answer 44

In 1931, in the midst of the Great Depression, Britain abandoned the gold standard as policymakers sought to independently stimulate the economy. This led to the collapse of the gold standard

Question 45

restoration of gold standard post-war

Answer 45

by 1928 most nations returned to the gold standard so in appearance the international monetary system had been restored

Question 46

what enabled post war recovery

Answer 46

the stabilisation of exchange rates and prices via, crucially, American loans

Question 47

when did weimar germany reach its pre-war production?

Answer 47

by 1925, then proceeded to expand in the following years on the basis of a building construction boom

Question 48

european economic boom

Answer 48

late 1920s up to 1929, started by building construction boom in germany

Question 49

commodity prices in 1920s

Answer 49

decline in price as a result of the growth in global production outstripping its demand

Question 50

1920s progress in agriculture

Answer 50

rapid technological progress with increased use of chemical fertilisers, mechanisation and improved methods for breeding plants and animals. development of combustion-powered tractor with ancillary apparatuses

Question 51

raw material prices during war and immediately post-war

Answer 51

price rose considerably due to the strong demand for war materials and food, together with the loss of agricultural production in areas of europe devastated by conflict and occupation especially in France, Belgium and in central and eastern europe

Question 52

impact of wartime prices on economies not directly involved in conflict

Answer 52

naturally encouraged global agricultural production

Question 53

post-war impact on raw materials and agricultural prices

Answer 53

war-time demand for primary products declined at the same time as European supplies recovered and appeared on the market.
weak industrial expansion also contributed to low agricultural prices, rising farm debt and general distress for producers in the 1920s
led to increased protectionist measures for agriculture by primary producing countries

Question 54

post-war impact on commodity exporting nations

Answer 54

By mid-1929 a number of commodity exporting nations that relied on capital inflow began to experience considerable foreign debt problems as international credit conditions tightened
- largely a result of the US Fed raising interest rates in 1928 and 1929

Question 55

most defining event of the interwar period

Answer 55

great depression

Question 56

when is great depression commonly understood to have started

Answer 56

1929

Question 57

what marked the start of the great depression

Answer 57

collapse of stock prices on New York’s Wall street on Black Tuesday 29 October

Question 58

how much did world gdp contract between 1929 and 1932

Answer 58

15%

Question 59

peak unemployment in germany during great depression

Answer 59

30% in 1932

Question 60

peak unemployment in US during great depression

Answer 60

25% by 1933

Question 61

peak unemployment in Britain during great depression

Answer 61

15% in 1932

Question 62

peak unemployment in Australia during great depression

Answer 62

29% in 1932

Question 63

peak unemployment in Canada during great depression

Answer 63

27% in 1933

Question 64

summary of impact of great depression in one sentence

Answer 64

had far-reaching implications for social, political and policymaking institutions and for international relations in the 1930s and beyond

Question 65

how long is the great depression generally considered to have lasted

Answer 65

throughout the 1930s - so from 1929 to 1939

Question 66

when did most recoveries begin to recover and why did this not align with the end of the depression?

Answer 66

most economies including the US began to recover from deep depression by 1933 or 1934, but the severity of the downturn and the rate of recovery varied between them

Question 67

which industrial nation was most severely affected?

Answer 67

US

Question 68

US contraction in industrial production and gdp during depression

Answer 68

industrial production is estimated to have contracted by nearly 50% and GDP by 30% between 1929 and 1933

Question 69

Germany contraction in industrial production and GDP during depression

Answer 69

industrial production contracted by 40% and GDP by 20% between 1929 and 1932

Question 70

UK contraction in industrial production during depression

Answer 70

industrial production contracted by 28% between 1929 and 1931

Question 71

France contraction in industrial production and GDP during depression

Answer 71

industrial production contracted by 24% and GDP by 15% between 1929 and 1932

Question 72

how did recovery differ between nations

Answer 72

variation reflected the self-indepence of their autarky

Question 73

Japanese recovery from depression

Answer 73

japan recovered strongly in 1932

Question 74

UK recovery from depression

Answer 74

UK began to recover in 1932 but gained momentum in 1933

Question 75

france recovery from depression

Answer 75

In France recovery remained weak such that GDP failed to reach its 1929 level by the end of the 1930s

Question 76

German recovery from depression

Answer 76

continued to strengthen so that GDP had exceeded its 1929 level by 1935

Question 77

US recovery from depression

Answer 77

recovery began in 1934, gathered strength in 1935 and 1936 until afflicted by another downturn in 1937-38

Question 78

overarching cause of great depression

Answer 78

represented a catastrophic and persistent failure of demand (over-production/under consumption)

Question 79

what exacerbated and spread the depression

Answer 79

the state of the international economy in the late 1920s

Question 80

most common explanation by historians for great depression

Answer 80

most involve a failure of policy and institutions, in particular, the international monetary system based on the gold standard, the Federal Reserve Bank and the Hoover Administration as well as corresponding policymakers among the major nations

Question 81

catalyst for the great depression

Answer 81

restrictive monetary policy of the US federal reserve bank in 1928 and 1929 in an attempt to arrest a speculative price boom on Wall St

Question 82

why was restrictive monetary policy the trigger for the great depression

Answer 82

contributed to a decline in industrial production in the US, discernible by mid 1929
policy extracted gold reserves from RoW placing upward pressure on world interest rates and leading to a tightening in credit conditions
eventually burst the stock market bubble causing a crash

Question 83

impact of stock market crash on private wealth

Answer 83

declined by some 10% increasing the ratio of debts to assets of consumers as well as financial institutions and led to a decrease in consumption expenditure, especially on consumer durables. also led to some immediate bank failures

Question 84

international propagation of great depression

Answer 84

US downturn was quickly transmitted to the rest of the world, especially Europe, by the calling in of its loans as US financial institutions attempted to shore up liquidity and redress their deteriorating leverage position
- drying up of american capital flows brought about a collapse of credit based investment and consumption in Europe
- banks in other countries compelled to also tighten monetary policy to maintain gold reserves

Question 85

how did the downturn become a great depression?

Answer 85

wall street stock market did recover somewhat in early 1930 before steeply declining
bank failures
lack of prudential controls and coherent monetary policy
decline in spending that brought on a price deflationary process

Question 86

1930 bank failures

Answer 86

in november and december about 600 US bank failures occurred as a result of bank panic that followed the collapse of calwell and co, a large financial holding company and tennessee and the largest bank in NY

Question 87

deflationary spiral as a cause of depression

Answer 87

collapse of demand led to a deflationary spiral that increased the real interest rate and exacerbated the financial position of indebted firms and households and intensified the reluctance to borrow which further depressed spending

Question 88

how did great depression impact US farmers

Answer 88

rural towns in America were hit especially hard with many farmers already indebted because of the persistence of low agricultural prices in the 1920s. recurring droughts in the mid-west in over farmed and marginal farmings areas in the 1930s contributed to the rural depression

Question 88

major contributor to the deflationary spiral

Answer 88

collapse in commodity prices as the demand for raw materials by industry and the consumption of foodstuffs sharply declined

Question 89

European Currency Crisis

Answer 89

May 1931 - Credit Anstalt collapsed leading to a run on the Schilling which led to a run on the Reichsmark in June and July. reichsbank ran out of reserves and instituted exchange controls. currency crisis spread to the pound sterling

Question 90

how did the treasury bank deal with the currency crisis

Answer 90

unwilling to raise the rate, they supported the pound by direct intervention, that is, by buying pounds at gold parity, which they financed by borrowing gold reserves from the US and France. this was unsustainable and they abandoned gold standard in September 1931

Question 91

Smoot Hawley Act

Answer 91

passed in 1930
substantially increased the American tariff on imports
had been considered beforehand to protect producers, especially in agriculture

Question 92

impact of american protectionist policy i.e. Smoot Hawley Act on other countries

Answer 92

sparked retaliatory protectionism by foreign countries that became fortified in the 1930s, contributing to the 50% contraction in international trade between 1929 and 1933

also contributed to collapse of gold standard as it made it difficult for debtor countries who relied on exports to service and repay their foreign debt

Question 93

impact of Smoot Hawley Act for America

Answer 93

may have aided American recovery and the adoption of autarkic policies by nations following the example of the US did lead to more self-reliant monetary and fiscal policies to stimulate internal demand

Question 94

Actions of the federal reserve following Britain’s abandonment of gold standard

Answer 94

with the blessing of the Hoover Administration, the Fed chose to resist the international pressure and preserve the gold value of USD. to do so, it raised nominal interest rates, further pushing up real rates with a disastrous effect on banking

Question 95

what did the fed’s depression policy reflect

Answer 95

a concerted effort to preserve the gold standard even though it was being abandoned in Europe

Question 96

how many banks failed in the US 1930-33

Answer 96

8812 banks

Question 97

how did the bank failures end

Answer 97

Roosevelt called a bank holiday in March 1933 and imposed controls on foreign exchange trading to decouple monetary policy from the gold standard

Question 98

hoover administration fiscal policy response 1929 to 1931

Answer 98

at first adopted an expansionist policy to stimulate investment consisting of tax reductions and the income of federal public capital outlays

Question 99

hoover administration fiscal policy post 1931

Answer 99

reversed expansionary policy through large tax increases to eliminate the budget deficit and relieve international pressure on the USD, further contributing to the depression

Question 100

Roosevelt’s New Deal

Answer 100

began in 1933 and a more aggressive fiscal expansion was implemented that provided welfare relief, jobs programs and public work. the funding was more direct in trying to curb unemployment

Question 101

fiscal policy 1933 to 1936

Answer 101

steady modest focal expansion as tax revenue growth lagged behind spending. in 1937 policy was tightened through higher taxes contributing to the 1937-38 recession before expansionary fiscal policy was adopted in 1939 and 40 as war approached

Question 102

why was recovery in US slower and longer than other nations

Answer 102

because of policy mistakes that worsened the depression and the modestly, and at times, inconsistency of expansionary macroeconomic policy. This also explains why UE remained high until the beginning of WW2

Question 103

First New Deal years

Answer 103

1933-34

Question 104

main objective of first new deal

Answer 104

to provide relief and to restore confidence in banking, business and consumer spending

Question 105

elements of first new deal

Answer 105

Banking: emergency banking act (treasury supervision), glass-steagall act (regulate and limit bank speculation), federal deposit insurance corporation (insured deposits up to $2500 to stop runs on banks), Securities Act (balance sheet disclosure), and to regulate wall street - the US securities and exchange commission created in 1934

relief: public works administration (1933-35 $3.3 billion in 35,000 mainly construction projects)

Farm and Rural programs: resettlement administration, rural electrification administration (to install rural electricity infrastructure), agricultural adjustment act (to raise agricultural prices and increase farm income)

Question 106

second new deal years

Answer 106

1935-38

Question 107

second new deal main objective

Answer 107

income redistribution through extension of social welfare and progressive taxation mainly applied to taxing corporate earnings

Question 108

elements of second new deal

Answer 108

social welfare: social security act (permanent system for universal retirement pensions, unemployment insurance and benefits for handicapped and needy, financed by payroll taxes), food stamp plan introduced in 1939

employment works programs: Works progress administration (nationalised unemployment public relief schemes aimed at returning unemployed to the work force)

tax policy: Revenue Acts (to tax wealthy and undistributed profits tax and graduated corporate income tax)

housing: Housing Act 1937 (to eliminate urban slums)

Labour relations: national labour relations act

Question 109

legacy of new deal

Answer 109

established a national social security system, putting in place the regulatory framework for banking, legislating the union rights of workers and collective bargaining, and laying the foundations for a wider tax base and more equitable tax system

Question 110

Roosevelt’s policy post new deal

Answer 110

began to adopt a more Keynesian approach to stimulate the economy (i.e. deficit spending) which was put in place when defence expenditure increased from 10% in 1936 to 16% in 1940 to 41% by 1950

Question 111

When did Germany begin recovering from depression

Answer 111

began in late 1932 just before Hitler and the Nazi’s came to power in early 1933

Question 112

German UE in 1934

Answer 112

well under 10%

Question 113

German economic expansion from mid-1930s to war

Answer 113

expanded by 9% PA - spurred on by rearmament

Question 114

what are the reasons for Germany’s initial recovery

Answer 114

the reichsbank restored confidence to the banking system by easing credit conditions for business

state-financed work creation schemes first implemented by Chancellor Bruning of the last Weimar government to ameliorate unemploument

these schemes were expanded under Nazis

Question 115

Economic Recovery in Nazi Germany

Answer 115

persistent expansionary fiscal policy with a low-rate monetary policy

employment creating public works programs with public investment

expanded labour services programs and other incentives

tax concessions to promote motor vehicle industru

Question 116

Why was Britain’s great depression less severe than other industrialised nations?

Answer 116

because the economy struggled with economic growth in the 1920s - the whole interwar period was economic stagnation

Question 117

what worsened the great depression in britain

Answer 117

tightening of fiscal policy in 1931 in a failed attempt to defend sterling parity against gold

Question 118

when did economic recovery begin in Britain

Answer 118

1932

Question 119

economic recovery in britain

Answer 119

began in 1932 and was built on a cheap money policy, that is low interest rates. made possible by the abandonment of the gold standard

Question 120

Britain’s cheap money policy

Answer 120

Bank of England sharply reduced its discount rate in late 1931 into 1932
treasury converted 5% war loans to an issue yielding a more economic 3.5% thereby reducing the interest on the government’s large debt

Question 121

Exchange Equalisation Account

Answer 121

created by Treasury in 1943 to stabilise foreign exchange flows so that the sterling remained stable consistent with cheap monetary policy

Question 122

how did the low interest rate policy in britain contribute to recovery

Answer 122

stimulated interest-sensitive spending, especially inducing a boom in residential housing construction that characterised recovery, mainly in the South of England

Question 123

British protectionist policy

Answer 123

in 1932 Britain adopted a general tariff of 10% on imports, with only raw materials exempted and reciprocal concessions negotiated on trade with countries in the commonwealth

Question 124

Fiscal benefits from cheap monetary policy

Answer 124

reduction in debt-servicing cost to the government budget, enabling increases in unemployment benefits, welfare relief as well as some other public expenditures

Question 125

treasury view of fiscal policy in 1930s

Answer 125

a balanced budget was necessary to maintain financial and investment confidence

Question 126

when does fiscal policy become expansionary in Britain

Answer 126

only from 1936 onwards does it become moderately expansionary with increases in defence spending from 118m pounds to 353m in 1938

Question 127

debate over macroeconomic policy in Britain

Answer 127

in 1920s and 30s debate developed over how to restore health to Britain’s economy and eliminate high unemployment - treasury view vs Keynes view

Question 128

Keynesian macroeconomic argument

Answer 128

Keynes argued that besides a low interest rate monetary policy at the expense of the gold parity, an expansionary deficit-financed fiscal policy, consisting of investment in public works, should be undertaken to reduce unemployment

Question 129

Treasury macroeconomic argument

Answer 129

a balanced budget was necessary to maintain investment confidence, arguing against deficits to finance public works programs on the basis of the crowding out view

Question 130

Keynes General Theory 1936

Answer 130

Keynes outlined an alternative theory of output which showed that unemployment was caused by demand failure and provided the rationale for why an expansionary deficit-financed fiscal policy consisting of increases in government investment, could overcome the crowding out objector and achieve lower unemployment

Question 131

Keynes Principle of Effective Demand

Answer 131

saving is a function of income and in a closed economy its level can always be increased up to a maximum at the full employment level of income and output
hence budget deficits can be financed by higher levels of saving generated by an increase in income below full-employment without constraining existing private investment

Question 132

when was Keynesian fiscal policy implemented by US and Britain

Answer 132

Only seriously implemented in the late 1930s for the purpose of rearmament and then in the 1940s to prosecute war against the Axis powers

Question 133

Japanese implementation of Keynesian fiscal policy

Answer 133

implemented from 1931 for rearmament and war

Question 134

German implementation of Keynesian fiscal policy

Answer 134

implemented in the early 1930s to recover from its severe depression and then from the mid-1930s it was employed by the Nazis for rearmament and preparation for war

Question 135

Keynes role in government policy making

Answer 135

During WW2 Keynes was a key economic advisor to the British government, where he shaped the nation’s wartime economic policies as well as its post-war recovery policy. he also contributed to shaping the international institutions of the new world order established after the war by the US

Question 136

major structural deficiencies that led to Great Depression

Answer 136

European economies dependence on American credit, especially Germany, with its reliance on short term as well as long term american funding

Depressed commodity prices caused by excess global capacity in the 1920s (1) caused contractions in indebted countries reliant on commodity export income and (2) depressed rural income and demand globally, especially in the US

US trade protection intensified by Smoot Hawley Act made it nearly impossible for major European nations to service and repay US-financed foreign loans and sparked the further spread of protectionist policies internationally

until the successive abandonment of the gold standard by major nations from 1931, monetary policy was constrained from lowering interest rates in response to deflation

the distribution of income in favour of the wealth y in the 1920s, especially in the US, contributed to the large decline in consumption and its depressed levels as unemployment grew

the lax US prudential regulations and policing in banking and securities allowed for destabilising speculative activity and excessive leveraging that led to bank failures and the near collapse of the credit system. connected to this was the policy incoherence of the Federal Reserve Banking System

Policy failures of central banks that sprang from outdated laissez-faire based conventional wisdom about appropriate policy responses

Question 137

Main historical implications of the Great Depression

Answer 137

intensified political as well as economic isolationism as nations adopted autarky to solve their economic problems

encouraged military-minded leaderships in Japan and Nazi-germany

contributed directly to political extremism through high UE and ultimately to the rise and spread of fascism, undermining democratic rights and liberty, especially in Europe

led to collapse of German Weimar republic

Question 138

Keynesian Revolution

Answer 138

Keynes central ideas on policymaking to maintain a full employment economy were adoped following the experience of the great depression and the subsequent lessons learnt

Question 139

how did the keynesian revolution begin?

Answer 139

With a change in Keynes’ thinking about economy theory and policy in the late 1920s leading him to challenge Treasury View

Role on MacMillan Committee (1929) allowed him to question conventional wisdom and recommend alternative policy

Question 140

How did the Keynesian revolution spread?

Answer 140

In the late 1930s a younger generation of economists and economic advisors became adherents to Keynes’ ideas and through them influenced policu

Question 141

When and how did the Keynesian revolution alter the conventional wisdom of policy making and shape the institutional machinery of government?

Answer 141

During WW2 and post-war recover
Wartime experience and post-war needs equipped policy makers with the knowledge to implement Keynesian policy in peacetime

Question 142

What lessons from Great Depression became important for policy makers

Answer 142

achieving and maintaining full employment became the central objective of macroeconomic policy in the post-war era

Question 143

Summary of Keynes’ Central Policy Ideas

Answer 143

public investment program to achieve and maintain full-employment policy

sustained low interest rate policy to support private spending, minimise the government’s debt servicing burden, and pursue euthanasia of the renter by distributing income in favour of low income earners to increase MPC

universal social welfare and progressive taxation system that would increase MPC

inflation controlled by way of wage-income policies

liberal trade policy based on reciprocity and an international monetary system that provided an expansionary bias to external adjustment process

counter-cyclical policy to rely on fiscal policy through adjustments to taxes and short-term government spending

split budget into current account, composing current expenditures and revenue from taxes and other dividends and capital account, composed of public capital spending (less asset sales) financed by public debt. Current account should be balanced

Question 144

Which bits of Keynes’ thinking did Western Governments employ?

Answer 144

focus on counter-cyclical policy, and from 1950s, monetary policy was used to regulate the cycle and inflationary pressures. deficit spending was employed to counter downturns to maintain full employment

Question 145

Bretton Woods Conference

Answer 145

Held in July 1944 in Bretton Woods to establish a new international monetary system

worked out articles of agreement of the IMF and agreement for the establishment of the International Bank for Reconstruction and Redevelopment

Question 146

New Bretton Woods Exchange System

Answer 146

exchange rates of member countries were fixed at par against the USD or gold, and agreed to peg the exchange rate of their currencies against other countries within a range of 1% around the par value

Question 147

How did the IMF deal with pressure on exchange rates due to disturbances in a countries BoP

Answer 147

IMF had a pool of foreign exchange reserves upon which it could draw

Question 148

overarching purpose of the IMF

Answer 148

to create conditions for open multilateral trade in which the transfer of goods and services between countries was unfettered by trade restrictions and controls over international payments

Question 149

three main objectives of IMF

Answer 149

a multilateral system of payments based on worldwide convertibility of currencies through elimination of foreign exchange controls by countries

exchange rate stability was to be secured by preventing competitive exchange rate devaluations. any adjustments arising from persistent external imbalances were to be done in an orderly and transparent way

the stability of exchange rates was to be maintained consistent with member countries pursuing policies for full-employment

Question 150

removal of foreign exchange controls

Answer 150

members had to remove forex controls on current account transactions consistent with reestablishing convertibility of their currency
transition period for countries to build up their USD reserves

Question 151

what would the IMF do in a case of fundamental and persistent equilibrium in BoP

Answer 151

IMF would step in to supervise exchange rate adjustments in concept with IMF agreement to devalue or revalue their currencies against the USD up to 10% of their par value to correct a fundamental external balance disequilibrium

Question 152

when did most industrial countries in Europe acquire sufficient USD reserves

Answer 152

1958
e.g. Britain, Germany, Switzerland, Italy and France

Question 153

When did Japan get enough USD reserves

Answer 153

1964

Question 154

non-resident convertibility

Answer 154

meant that exchange regulations of these countries only applied to their residents; whilst non-residents could freely shift funds for current account purposes from one country to another

Question 155

Reason for establishment of IBRD

Answer 155

to assist finance post-war reconstruction but was later given theb broader role of extending aid to developing nations

Question 156

What did IBRD do

Answer 156

made loans for specific development programs of nations

Question 157

GATT establishment

Answer 157

established in 1947 in Geneva

Question 158

two major principles for GATT

Answer 158

there should be multilateral and non-discriminatory approach to international trade (exceptions were customs unions, temporary external balances and developing countries to aid their growth)

There should be no quantitative trade restrictions (exceptions were for short-term external balances purposes or developing countries)

Question 159

was bretton woods successful

Answer 159

Yes, helped establish multilateral trade which would play an important role in promoting growth and development in the post-war era

nations actively employed Keynesian fiscal and monetary policy to generate demand consistent with objective of maintaining full employment

Question 160

Bretton Woods nth country problem

Answer 160

as the nth country, the USD could not be adjusted in the event of America facing a fundamental balance of payments disequilibrium - by the 1970s this imbalance would bring down the system