Causes, Impacts, and Recovery of the Great Depression in US, Germany, and UK, Exams of Economics

Download Causes, Impacts, and Recovery of the Great Depression in US, Germany, and UK and more Exams Economics in PDF only on Docsity! Stylianou Elizabeth Stylianou Professor Peter Min Eco 1326 M/W 2:30-3:55 May 2, 2008 The Great Depression and its Effects on America and the World From the beginning of human existence, individuals have depended on each other for survival by taking on different roles and aiding the rest of the clan. As history advanced, this dependence had been maintained, but the roles of people changed, and the clans grew. In the twentieth century, whole countries could be considered clans, and people were still interdependent, relying on other people both within and outside of their country’s manmade borders. As a result of this codependency, events that occurred in one area of the world greatly affected the international community. The Great Depression, although commonly discussed in its American context, greatly affected the whole world’s economy. The Great Depression was the most drastic period of economic deterioration the world had seen up to that time. This challenging ordeal affected nearly every country in the world, and stunted the global economy. Interestingly, there are certain patterns observed among countries experiencing the debilitating economic instability. In order to understand the global effects and the connections among the nations, it is important to comprehend the awful experience in the American context. The Depression in the United States Throughout the “Roaring 20’s,” the United States economy was booming. World War I had just ended, new technologies were becoming more affordable for middle class Americans, and American culture was developing and advancing radically. Infrastructure advancements, such as roadway and highway upgrades, power plant constructions, and telephone and sewer system installations, were funded by local state governments. These local governments were optimistic, hoping for future earnings due to these investments 1 Stylianou which left them in debt at the moment. Herbert Hoover, the last United States President of the 1920’s, said in 1928, "We in America today are nearer to the final triumph over poverty than ever before in the history of any land." Unfortunately this confidence would not last long. (http://en.wikipedia.org/wiki/Roaring_Twenties#Demobilization) The Federal Reserve Board was developed in 1913 to prevent bank panics and deliver government protection and regulation to large banks. It was the “lender of last resort.” Throughout the 1920’s, the Federal Reserve board favored these big banks by keeping a low interest rate and low reserve requirements. Interest rates are the charges that lenders impose on borrowers of money. The reserve requirement is a regulation concerning the amount of valuable currency a bank has on hand to fulfill customer withdrawal demands. Americans found that it was easy to buy stocks “on margin” due to low interest rates. This means that they could buy a stock with money they didn’t have, by borrowing from a lender, anticipating an immense return on their seemingly minor investment. Many Americans were “over-extended.” In 1929, the Federal Reserve Board began increasing interest rates, causing pandemonium among investors. (http://www.amatecon.com/gd/gdoverview.html) Most people acknowledge “Black Tuesday” as the beginning of the Great Depression. From Thursday, October 24, 1929 to Tuesday, October 29, 1929, the New York Stock Exchange declined an unprecedented amount. This debilitating deterioration caused mass chaos and panic throughout the nation. Economic repression, business failure, massive employee layoffs, and unnerving bank closures were directly related to the economic downfall. Since there was no bank insurance, any money that was in a bank would be lost when it failed. One of the first large banks to go bankrupt was the Bank of the United States. Panic-struck citizens tried to withdraw their savings from banks, but soon the banks went into insolvency and had no more money to give, so the people were left with nothing. Nearly one hundred forty billion dollars vanished by 1933, and eleven thousand of the twenty five thousand United States banks had failed. The Federal Reserve Board failed to react to the bank scares. Prior to his inauguration as president, Herbert Hoover had urged the Federal Reserve to increase the discount rate on speculative loans. He even urged the popular publications of the time to run stories on the dangers of buying “on margin.” Once in 2 Stylianou depressing effect on the country’s production. This is a direct response to maintaining the gold standard. On April 5, 1933, in the middle of the Great Depression, President Roosevelt passed Executive Order 6102, ordering citizens to release any gold in their possession to the Federal Reserve Bank. He revalued the dollar, and the United States currency had been devalued by forty one percent. The United States abandoned the gold standard. The Great Depression lasted until the United States entered World War II. During the war mobilization, patriotism encouraged businessmen to increase production despite increasing national debt and heavy taxes. People chose to work overtime to show their nationalism and to make extra money. Rationing and price controls were not questioned. Unemployment decreased because twelve million new workers were needed to replace the men called to serve in the military. The Gross National Product doubled due to war spending. Americans united in the face of war and defeated the economic depression that plagued the country for a decade. The Depression Abroad After World War I, the United States was the primary financier of European reconstruction. Due to this international reliance on America, the Great Depression, which began as an American economic catastrophe, caused widespread devastation. Two countries which felt the worst of these detrimental economic effects were Germany and Great Britain. The Great Depression: Germany At the end of World War I, Germany was forced to pay reparations, as ordered in the Treaty of Versailles of 1919. Germany actually only paid one full reparation installment by the end of 1922 and could not continue the payments. The German currency, the “Reichsmark,” was over inflated, decreasing the value of its foreign debts. Hyperinflation began, and confidence in the German currency diminished as it depreciated. The Dawes Plan of 1924 was an American initiated strategy to alleviate tensions between Germany and the Allies. It proposed a reparation payment plan to England, France, and Russia, as well as United States loans to aid Germany in this 5 Stylianou challenging undertaking. This plan aided the German economy for a short time, but made it dependent on foreign investment, mainly United States investments. The Dawes Plan was not long lived, and was soon replaced by the Young Plan. The Young Plan was developed by an American led committee from 1929 to 1930. A more realistic reparation plan was provided and the Bank for International Settlements was established to oversee the transfer of payments. Before it could be approved, the New York Stock Exchange crashed epically, halting the promising agreement. The United States had to retract loans given Europe and cancel the promised credits which were to make the Young Plan possible. From 1924 through 1929, Germany recorded deficits, which means the country imported more goods than it exported. Once the Smoot-Hawley Tariff Act was passed by United States President Herbert Hoover in 1930, international trade deteriorated. Following American lead, many European countries resorted to protectionism, the economic policy of installing restrictive measures on international trade. Germany used foreign exchange controls to manage trade. These controls were aimed at German citizens who had transferred their money to foreign countries for stability. This collective strategy caused international trade to plummet, and the global economy plunged with it. Inversely, unemployment rapidly increased worldwide. In 1931, the unemployment rate in Germany was nearly thirty eight percent. As a result of this sequence of events, President Hoover proposed a one year suspension of reparation payments, called the Hoover Moratorium. As a direct result of the standstill and exchange controls, foreign creditors rushed to withdraw money from London banks. This put excessive demand on the British banks, which had lost their investments in Germany, and the economic depression deepened in Britain. Even with the extension, Germany tumbled deeper into depression. Furthermore, the government maintained the conventional finance method of preserving the gold standard. Germany endured a major banking crisis in 1931. The Reichsbank was the central bank of Germany from 1876 to 1945. It has been paralleled to the United States Federal Reserve. However, in the United States, banks have the legal right to convert bank reserves to cash if necessary. In Germany, banks relied on the Reichsbank to purchase currency. Therefore, the German banks were not as secure as the American 6 Stylianou banks. A major problem during the German banking crisis was that the Reichsbank itself was in trouble. It had less than the required forty percent reserves on hand, and, therefore, did not have sufficient assets to supply the banks with demanded currency. Furthermore, the Reichsbank could not borrow funds from other central banks, since most countries were feeling the economic contraction of the depression. The Reichsbank had practiced a deflationary strategy by keeping the discount rate higher than the rates in both New York and London. This was done to reduce the loss of gold. In order to pay foreign debts, the German government, the Weimar Republic, exerted deflationary pressure on the economy to reduce internal prices in order to catch up with the deflating gold standard. By 1932, it was understood that the economic situation in Germany had become so poor that it would be unable to repay its war debts. Representatives of Great Britain, Germany, and France met in the Lausanne Conference and suspended the reparation payments as a result of the global financial crisis. It is not surprising that the German people wanted relief from the economic pressure experienced after World War I. In 1919, these difficult times prompted many unemployed soldiers to join the German Workers’ Party. Due to his emotional speeches, Adolf Hitler became the leader of the group, now called the National Socialist German Workers’ Party, 1920. The three thousand members stood for national pride, militarism, and a racially pure Germany. Although the Nazi Party attempted a local coup d'état, called a putsch, it wasn’t until 1933 that the party gained national control. By this time, there was massive unemployment and business failure, and the government could not effectively relieve the strain despite its efforts. Taking advantage of the economic hardships of the Great Depression, the Nazi’s deviously campaigned to unify the German population through the national anti-Semitism. Using his oratory skills, Hitler gained the support of the majority of the population by blaming the Jewish financiers for the current economic hardships, promising economic revival, and protecting Germany from the evils of Communism. On January 20, 1933, German president Paul von Hindenburg appointed Adolf Hitler Chancellor of Germany. Hitler declared himself absolute dictator, and the former democracy in Germany was abolished. World War II was quickly approaching, and while it helped lift the United States out of the Great Depression, it would leave Germany in greater economic turmoil. 7 Stylianou dependent on America. The pound was overvalued, so interest rates were kept high in efforts to stabilize the currency. The Bank of England would not raise the Bank Rate any more, as American advisors urged. Great Britain went off the gold standard on September 20, 1931 and began using fiat currency once again. Fiat currency is money that has value because the government demands that it be used to pay taxes. Britain built up its gold reserves at this time while the rest of the world faced deflation. The United States was forced to abandon the gold standard in 1933, emulating Great Britain. Once Britain abandoned the gold standard, Montagu Norman focused on national monetary policy rather than international financial strategies. British banks did not fall as badly as the banks in other countries. This is attributed to the merger of British banks before the depression hit, giving the banks greater collective strength, as well as their willingness to go off the gold standard. Until 1913, Britain was the dominating power in global finance and trade. World War I greatly impacted the global economy, altering the economic relationship among nations. The United States fared the best coming out of the war and emerged as the economic leader. It was up to the United States to help European countries recover from economic turmoil and to be the moderating country in preserving peace among Germany and the Allies. Although initial efforts began favorably, economic instability within the United States cut the recovery efforts short. The stock market crash and the resulting economic depression sunk the global leader and brought the rest of the world with it. The interdependency of countries and their collective economic collapse led the entire world into the Great Depression. Initially the United States, Great Britain and Germany clung to the gold standard as a way to return to economic stability. By the early 1930s, the United States and Great Britain recognized that leaving the gold standard behind was the only way to restore the economy. Germany, on the other hand, held onto its old ways steadfastly throughout the 1930s, contributing to its deteriorating economic condition. The banking crises in the United States, Germany, and most of Europe further led the world into economic decline. Britain, once dominating the financial field, became helpless, although its banking system did not crash. The industrial revolution resulted in excess production; however, as unemployment levels rocketed and wages became 10 Stylianou increasingly unstable, consumers could not afford to buy these goods. International trade declined as countries adopted America’s protectionism policy, hoping that citizens would purchase their own country’s surplus of goods. This series of events dug a deep hole from which the world could not climb out. World War II brought about the necessary changes for the world to be lifted out of depression. Industrial companies were devoted to military production, unemployment decreased, regulatory practices restored confidence in banks, and the world was ready for another war. The Great Depression was over, but a new crisis was about to begin. 11 Stylianou Bibliography 1) Green, Harvey. The Uncertainty of Everyday Life: 1915-1945. New York: HarperCollins Publishers, 1992. 2) Johnson, H. Clark. Gold, France, and the Great Depression, 1919-1932. New Haven: Yale University Press, 1997. 3) Kindleberger, Charles P. The World in Depression: 1929-1939. Berkeley: University of California Press, 1986. 4) Rothermund, Dietmar. The Global Impact of the Great Depression: 1929-1939. New York: Routledge, 1996. 5) Saint-Etienne, Christian. The Great Depression, 1929-1938: Lessons for the 1980s. Stanford: Hoover Institution Press, 1984. 6) Temin, Peter. Lessons from the Great Depression. Massachusetts: The MIT Press, 1989. 7) http://en.wikipedia.org/wiki/Germany 8) http://en.wikipedia.org/wiki/Great_Depression 9) http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression 10) http://en.wikipedia.org/wiki/History_of_the_United_States_dollar 11) http://en.wikipedia.org/wiki/New_deal 12) http://en.wikipedia.org/wiki/Roaring_Twenties#Demobilization 13) http://en.wikipedia.org/wiki/Smoot-Hawley_tariff 14) http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 15)http://encarta.msn.com/encyclopedia_761584403/ great_depression_in_the_united_states.html 16) http://fcit.usf.edu/HOLOCAUST/TIMELINE/nazirise.HTM 17) http://hoover.archives.gov/exhibits/Hooverstory/gallery06/gallery06.html 18) http://ingrimayne.com/econ/EconomicCatastrophe/GreatDepression.html 19) http://mars.wnec.edu/~grempel/courses/world/lectures/depressionresults.html 20) http://www.42explore2.com/depresn.htm 21) http://www.amatecon.com/gd/gdoverview.html 22) http://www.english.uiuc.edu/maps/depression/about.htm 12