Donna Warner

Donna Warner

Donna Warner

The Great Depression that was felt around the world was traced back and “all major factors contributing to the depression can be traced back to the United States.” [1] It then moved to Europe. In Germany, the Depression struck at the already weakened economy barely being able to recover from WW I from post-war reparations. The Depression created a loop of debt. The American banks loaned Germany money that the Germans used to pay Britain and France reparations and Britain and France used those reparations to pay war debt to the United States.[2] When the U.S. could no longer loan money to Germany the whole loop stopped.

When the stock market crashed in the U.S. it sent a wave across to Europe.  The Germans had to cut unemployment benefits and other public services to keep their head above water, unemployment increased in Germany to 30%.[3] The Stock market lost one half of its value. A severe banking crisis hit Germany in 1931 when the National Bank failed. Germany closed the banks to avoid runs and they abandoned the Gold Standard. Between 1930 and 1933, Germany’s stock money fell to 40 %, prices and industrial production fell and unemployed increased. With Nazi rearmament and monetary expansion, their economy boomed and industrial production increased and full employment returned.[4]

The U.S. stock market crash in 1929 created an unemployment rate of 25 %. By 1938 the unemployment was still in the double digits. The panic spread and a run on the bank caused banks to collapse and  then they closed. “The money supply fell, the economy slowed and bank and business failures multiplied…”[5] Agricultural prices fell dramatically and many farms were lost. The U.S. stock market lost 2/3 of its value. The Federal Reserve was not capable of handling the crisis and taking the measures necessary to end the crisis. There are many theories surrounding “why.”[6] By the time FDR took office all the banks were closed. FDR promised work for the unemployed and bank reforms. Production  was way down. FDR instituted his work programs but unemployment still remained high. Bank reform restored some confidence in the banks. Federally insured deposits also helped to restore public confidence. By 1937, industrial production was above 1929 levels. Social Security was put into effect. Economic expansion began in the Summer of 1938 and lasted through the war and pulled the U.S. out of the Depression.[7] The Depression was particularly harsh for Germany and the U.S.; Britain,  France, and Japan faired better.

Britain had already suffered losses since WW I; shipping never recovered, foreign investments declined, English banks were no longer the main lenders, coal production declined and manufacturing suffered. By the time of the Great Depression, the UK unemployment was at 16%.[8] Britain’s Prime Minister responded to the Depression” by imposing further restrictions on government spending….”[9] The pound was devalued and they abandoned the gold standard. Freeing up currency allowed the Brits to provide financial assistance to distressed areas and provide protection to key industry. Their expansionary monetary policy played a role in their recovery and their economy was surprising resilient.[10]

France experienced a strong economy during the 1920s and wasn’t affected by the Depression until 1932. French society had feelings of desperation. World trade slowed down, production decreased and unemployment spread. On top of the Depression there was an attempted  overthrow of the government in 1934.[11]France was plagued during this time with demonstrations, protests, and strikes. After the attempted coup, Prime Minister Daldier resigned “which led to the formation of a broad-based government…[the] street protests serve to redefine the basis of democratic legitimacy in the midst of crisis.”[12]Japan fared the best in the Depression . It was unusually mild. The stock market rose between 1933-1938. Takahashi is given credit for turning Japan around and stabilizing everything. [13]

Classical economic policies include: full employment, equilibrium (aggregate demand = aggregate supply; AD=AS), spending equilibrium where too much saving and not enough investment puts savings and investment out of equilibrium. Spending and investments has to balance. Classical economic  policy could not work in the depression, it would cause a complete shutdown. To pull through the Depression money had to be expanded which means to increase the deficit. People needed to be put to work. Confidence in banks needed to be restored. Federal deposit insurance helped soothe the fear. It comes down to the policies that you need to restore the economy are not in keeping with Classical economic policies.[14]

References

“IV. Economic Development and Economic Policies Before WW I.” Powerpoint. Slideserve. https://www.slideserve.com/Royce/iv-economic-development-and-economic-policies-before-wwi

Great Depression. International Encyclopedia of the Social Sciences. Ed. William A. Darity. Vol. 3, 2nd ed.2004. Detroit:Macmillan Reference. USA. 367-371 Required reading, Week 4.

Module 4: The End of Optimism? The Great Depression in Europe. Required reading. Week 4

 

[1] Module 4: The End of Optimism? The Great Depression in Europe. This quote comes from Dietmar Rothermund’s Study.

[2] Ibid

[3] Great Depression.  International Encyclopedia of the Social Sciences. Ed. William A. Darity, Jr. Voll. 3 2nd ed. Detroit: Macmillan Reference. USA. 2008, p. 367-371.

[4] Ibid

[5] Ibid

[6] Ibid

[7] Ibid

[8] Great Depression, International Encyclopedia of the Social Services. Ed. William A. Darity, Jr. Vol 3. 2nd ed. Detroit:                   Macmillan Reference USA. 208. P. 367-371.

[9] Ibid

[10] Great Depression, International Encyclopedia of the Social Services. Ed. William A. Darity, Jr. Vol 3. 2nd ed. Detroit: Macmillan Reference USA. 208. P. 367-371.

[11] Module 4: The End of Optimism? The Great Depression in Europe.

[12] Ibid

[13] Ibid

[14] IV. Economic Development and Economic Policies before WW I. PowerPoint. Slide Serve. https://www.slideserve.com/Royce-economic-development-and-economic-policies-before-wwi.

 

 


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