A Comparison Of The Great Depression Of

1922 And I Essay, Research Paper

A comparison of the Great Depression of 1922 and its effects between the United States and the rest of the world The introduction of the discussion will focus on the origins of theGreat Depression and the escalating events that led to it. This willprovide adequate foundations to bring up questions and attempt to answerthem in an objective fashion as to why and how the Depression affecteddifferent industrialized countries in different ways. The core of the debate will consist of detailed comparable analysesof the consequences of the Depression with an emphasis on the economicaspects. The conclusion will provide a brief overview of the ways used bythe different governments to get out of that dark episode of world economichistory. When studying the Great Depression and it’s effects, it is notunusual for historians to choose World War I as a starting point for theirinvestigation. The reason for that is the importance of the repercussionsthe conflict had on the economies of all the countries that were involvedin it. First of all, the War made it impossible for Europe to maintainprevious levels of production. For example, before the War, France, theU.K. and Germany accounted for about 60 percent1 of the world’s exports ofmanufactured goods, a share of the market which they could not sustainduring the conflict. Consequently, Europe took many of its markets to theU.S. and Japan. The stunted growth of the European economies meant a lowerdemand for raw materials, which in turn lowered the demand for Europeanexports. In agriculture, things didn’t look any better, as it was the sectorwhich employed the most people. At the end of World War I, Europe wasforced to import food from the U.S.. Moreover, these transactions wereconducted on a credit basis since Europe could not afford to pay for itspurchase at that time. Clearly, the U.S. was going from being a traditional debtor ofEurope before World War I to becoming its creditor: America had financedthe war and it was issuing loans for its reconstruction. However, theattitudes in the U.S. were evolving in an unusual direction: an increasingnumber of American financiers were starting to literally seek ut potentialborrowers which led to competition among U.S. banks and the spreading ofunsound lending.2 The main object was to “do the most business”, even atthe expense of essential caution. What seemed like a beginning of recovery from the Great War, was infact an immense accumulation of debts, which made the internationaleconomic order vulnerable to depression. Analyzing these events with theinsight we have today, they seem even more unbelievably audacious given thehigh instability of the borrowing nation. (i.e., Europe) The triggering event was the crash of the Wall Street stock marketin October of 1929. The stock market collapsed after steady declines inproduction, prices and incomes over three previous months which forced thespeculators to revise their expectations. Anxiety soon gave place to panicwhich led to the crash. However, the depression affected the differentindustrialized countries in various ways and degrees of intensity. The depression was of especially great magnitude in the U.S. because there were not any welfare benefits for laid off workers. In theperiod between 1929 and 1933, money income fell by 53 percent (real incomefell by 36 percent.)3 As a consequence, demand fell significantly, whichin turn led to lower production and more layoffs– up to a high of 25percent rate of unemployment in 1933. Despite the severity of the situation, the Federal Reserve did notpursue a monetary expansion on policy which would have stimulated theeconomy through lower interest rates and increased the stock of money incirculation. This inaction is often attributed to the fact that marketinterest rates in 1930-1931 fell to very low levels, much lower than in theearlier recessions (of 1924 and 1927), and therefore, the Federal ReserveBoard wrongfully saw no need to pursue an expansionary monetary policy.4An indicator of that inaction is that open market operations did notprovide sufficient money reserves for a banking system faced withdepositors anxious for liquidity (monetary expansion would have filled thatneed). If the Federal Reserve had provided additional funds to the bankingsector after 1930, bank failure would not have been so numerous and thedecrease in the attack of ???? would have been (at least) slowed down. Still, it would not be accurate to make the Federal Reserveresponsible for all these problems. Other factors contributed to theprecipitation of what began as a cyclical recession into what we now knowas the Great Depression. One of those is the Hawley Smoot tariff of 1930which in essence made America more protectionist than ever, sending importduties to record highs. Evidently, retaliation from other countries wasquick to come. The new tariff act accelerated the downfall of Americantrade volume, which was probably the last thing the U.S. needed at thatstage. President Hoover had always been in favor of protective tariffswhich he considered a strictly domestic issue and he supported the HowleySmoot Act. Therefore, he clearly failed to see the implications of such amove. Soon, the Depression was spreading to the rest of the world,especially to Europe. There, the single country that was most affected wasGermany whose very weak economy could not cope with the slow disappearanceof American capital. Let us mention that Germany was still payingreparations (for World War I), which made its situation even more delicate. Germany was forced to borrow from Great Britain and France which could notcompensate for the decline in U.S. lending.5 The trap in which Germanyfound itself was quite disconcerting: she had to pursue deficienarypolicies to gain the confidence of investors in order to attract foreignfunds. At the same time, devaluaton posed a major problem. It increasedthe burden of the external debt (through the exchange rate mechanism) whichwas payable in foreign currencies.

The United Kingdom represented another major force on the globaleconomic scene. The British economy was not hit immediately as violentlyas Germany’s. However, as the repercussions of the world crisis becameincreasingly clear, Great Britain experienced a notable decline in itsexports which was even greater than the decrease in its imports. Those twofactors contributed to generate a deficit in its balance of payments. Still, compared to most other industrialized countries, the U.K. got through the Depression in better economic health.6 In the case of France, things went a significantly different way. First of all, out of the four biggest industrialized countries of the time(U.S., Germany, U.K. and France), France was the last to be hit by theDepression. Many possible reasons are hypothesized to explain that fact,but the one that is most often heard is the undervaluation of the Frenchfranc. The French economy began to feel the effects of the world crisis in1932. Around that time the Depression caught up with the French economythrough an important decrease in its exports (due impart to the sheardownsizing trend in the volume of world trade), combined to an increase inimports. The problems faced by France were also worsened by the fact thatit still was maintaining the gold standard long after all of the otherindustrialized countries–starting with Great Britain in 1931–had switchedto fleeting exchange rates. As for Japan, we can safely say that it is the one country amongtoday’s industrialized nations that got through the Great Depression withthe least damage to its economy.7 Now that we have illustrated how the world crisis affected variousnations in different ways, it seems only logical that they would puttogether solutions that were adapted to their individual problems. In the United States, Hoover had failed to bring a solution to theDepression, and he was replaced by Roosevelt in 1932. The new presidentbrought with him the New Deal, which can be qualified as a collection ofprograms aimed at stimulating different sectors of the economy (like theAgricultural Adjustment Act and the National Industrial Recovery Act). Asit turned out, the New Deal was not a particularly successful economicinitiative, but it was definitely a political success, probably because itsgoal was to help the American people (even though the means used toaccomplish that were never very clear). What proved more effective atbringing economic solutions to what was really an economic problem was the”Keynesian theory”. In 1938, Roosevelt, facing the semi-failure of his NewDeal, finally gave in to an increasing number of his close advisors whowere confident that Keynes’ ideas would be more successful.8 Theunderlying theory to Keynes’ ideas was that recovery could only comethrough fiscal expansion–in other words, running a bigger budgetarydeficit. The additional expenditures were pumped into the economy througha variety of government actions–like major public works–in order tostimulate demand by providing people with income. In Germany, the Nazis’ victory at the 1933 elections was a majoraccelerating factor on the road to recovery. The Nazi program aimed firstand foremost at the reduction of unemployment and it did accomplish atleast that. However, the realization of the plans was conditioned by anomnipotent government which was best described by Peter Hayes’ analogy(1987):”It is perhaps accurate to say that, to German industry, the emergenteconomic system was stiff capitalism, but only in the same sense that for aprofessional gambler poker remains poker, even when the house shuffles,deals, determines the suite and the wild cards, and can change them atwill, even when there is a ceiling on winnings, which may be spent only asthe census permits and for the most part only on the promises.”9 One other essential vector that Nazis used toward recovery wasrearmament, starting in 1936. Hitler used the defense industry to satisfytwo of his im???: recreate a strong Germany while giving people work. The case of Great Britain is different. We have mentioned earlierhow well (relatively to other nations) the U.K. got through the Depressionyears. Let us now attempt to explain why. Three elements are oftenmentioned in the British recovery: the abandoning of the gold standard in1931, the adoption of higher tariffs and the devaluation of the pound. When the U.K. abandoned the gold standard, it gave itself a competitiveadvantage via-a-vis those countries which did not. The new tariff lawshelped by protecting domestic industries and the 30 percent devaluation ofthe pound added to the competitive edge of the U.K by making Britishproducts cheaper to the rest of the world. In the face of Depression, France reacted quite differently fromthe other industrialized countries. Confident in its strong economy until1932, France did not abandon the gold standard until June 1937 and did notdevalue the franc until October 1936. Those two factors made France ratheruncompetitive for most of the 1930’s, given the actions taken by the U.S.,the U.K., and Germany. Those measures, in time, helped lift France out ofthe Depression but the recovery there might have occurred a few yearsearlier if the French had only signed their policies to that of the UnitedStates and Great Britain in particular.10 When it comes to Japan, two reasons are proposed to explain itsgood economic performance through the Depression: the fact that it had aplanned economy, and the early understanding of the advantages ofdevaluating the yen. Japan improved its competitive position that way andit reacted very soon after the Depression hit. As a result, the effects ofthe crisis were greatly reduced from the start. Footnotes 1″The origins and nature of the Great Slump,” Fearn. 2″The origins and nature of the Great Slump,” Fearn. 3″Capitalism in Crisis,”edited by Garside. 4″La Crise economique dans le monde el en France,” Nogaro. 5″The origins and nature of the Great Slump,” Fearn. 6″The Great Depression, 1929-1938,” Saint Etienna. 7″The Origins and Nature of the Great Slump,” Fearn. 8″Capitalism in Crisis,”edited by Garside. 9″Capitalism in Crisis,”edited by Garside. 10″Capitalism in Crisis,”edited by Garside.


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