The History Of The The Great Depression Economics Essay

The Great Depression was a world-wide economic and fiscal crisis that took topographic point between 1929 and the 1942. It was the deepest depression in the 20th and the twenty-first century merely comparable – if non in length – with the slack caused by the subprime mortgages in 2007. It is normally known, that the event that triggered the Great Depression was the dramatical clang of the stock market in October 29, 1929 known as “ Black Tuesday ” . That twenty-four hours over 12.9 million of portions were sold and fell c.a. a 22 % . This set a full point on the intensifying guess in stock markets during that decennary and started a period of planetary recession.

The Great Depression brought a period of digesting autumn of the industrial production in the developed states, which stopped bring forthing so high measures due to the autumn of the aggregative demand in the economic system. The pecuniary policies pursued by the pecuniary governments ( Cardinal Banks and Federal Reserve ) created a deflationary motion doing monetary values fall about 20 % in two old ages[ 1 ]. vBoth – the autumn of the industrial production and the deflation – fostered an until that day of the month inexperienced autumn in the Gross Domestic Product of approximately one half in the US, from 103 billion US Dollar to 55 billion US Dollar.[ 2 ]Consequently, the unemployment figures boasted to about 26 % at its extremum in the US ( Graph 1: Datas of Unemployment in the US between 1930 and 1942[ 3 ]) and did non retrieve normal figures until one decennary subsequently, because of the stiff rewards imposed by the Hoover disposal.[ 4 ]Investings diminished highly throughout the period of the Great Depression, which contributed to a worse economic state of affairs. All these factors forced the economic system to prostration at a planetary graduated table and pointed to an disused pecuniary government.

For the past 80 old ages, economic experts have tried – with more or less success – to happen the causes for this mammoth macroeconomic downswing. The sentiments of the experts differ non so much in the forces that contributed, but in the overall weight of each force within the account. I will seek to explicate these causes in a simple and direct manner to turn to the inquiry: “ Did international capital flows cause the Great Depression? ”


First of all, I feel compelled to explicate the model within which these forces interacted. This was the New Gold Standard. It is necessary to underscore that the Gold Standard existed since the nineteenth century, but was suspended during the World War 1. The New Gold Standard kept the thoughts of its predecessor is. It was a pecuniary system that created fixed exchange rates between currencies depending on the sum of gilded each state had in modesty and provided the possibility of free capital motions within the states in the New Gold Standard. This pecuniary government was considered successful before the World War One, but why did it neglect after its Restoration?[ 5 ]

Before World War One, London was the fiscal Centre of the universe. Due to its monolithic excess in its Trade Balance it acted as the universe ‘s great loaner and investor. All states in shortage depended on it investings and there was growing and comparative prosperity. Therefore, it is possible to appreciate the necessity of holding a state with a great excess to maintain the economic system natation.

The World War One can be seen as an break in the development of the universe economic system, as the Gold Standard was suspended between the states involved in the war, being the US the last state to abandon it in 1917. What did suspended mean? There was no possibility any longer to interchange money for gold, albeit the exchange rates still were present. During that short period of clip, the Gross Domestic Product of the states involved was sustained through military production. The US benefitted from the state of affairs, since it build up its gold militias at the disbursal of the European states.

A displacement in the powers was obvious by the terminal of the war. The US emerged as the most powerful state in the universe, while the European states, particularly France and Germany had been weakened by the dearly-won war. At this point there was no international pecuniary system in usage and the states had floating exchange rates. Due to the expected possible jobs of these types of exchanges – great fluctuations and the possible menace of states publishing paper money and therefore, making inflation- Britain decided to be the first state to return to the Gold Standard at a prewar par. Britain knew that the first twelvemonth were traveling to be tough, but expected to be the best pick in the long tally. The US set being in the Gold Standard as a necessity to finance the European states with capital motions – as Britain had been making until before World War One.[ 6 ]

At this point it is needed to explicate the “ Cardinal macroeconomic Trilemma ” . It says that any macroeconomic government must choose two out of three of the undermentioned elements of the “ inconsistent three ” . These are “ free capital motions ” , “ fixed exchange rate ” and “ independent pecuniary policy ” . For us, this means that if the Gold Standard wanted “ free capital motions ” and a “ fixed exchange rate ” it could no t hold independent pecuniary policies.[ 7 ]Therefore, no state was allowed to alter the pecuniary policy to bail out its domestic economic system. Monetary Authorities controlled the money supply by purchasing or selling gold, since it were the gold militias by a money multiplier what determined the money supply.[ 8 ]

A great opportunity was offered to France to alter its rates when acquiring on the Gold Standard. Thus, France devaluated its currency, preferring this instead than deflation. Germany entered the Gold Standard and the US rewarded them with capital flows that allowed them to retrieve its economic system. By the minute when the Gold Standard was reconstructed in 1926, Britain had lost a great sum of it Gold in favour of the US and France – which now with its extremely devaluated currency construct up its gold militias. The impossibleness of changing the exchange rate did nil but exacerbate it job with the gold escapes. The system was rebuild, but was falling apart due to dissymmetries. This was no admiration, if we see the gilded militias France and the US had been enlarging.

A great job became clear at this point. The government provided penalty for the states with gilded deficit, by compeling them to deflate alternatively of devaluate, but states with great excess – 60 % of the gold militias belonged to France and the US – were non obliged to blow up. This meant that while the US and France needed to spread out its money supply massively, they did non harmonizing to its militias since they had no demand to and its Monetary Authorities had non the necessary tools to make it[ 9 ]. If they would hold done this, monetary values would hold increased, every bit good as the nominal income. This would hold fostered a rise of the imports and the gold would hold flown out in payments, cut downing the militias and increasing the gold retentions of other deflating states. Anyhow, the system did non work and the US and France were two of the few states that did non debar ( Graph: Entire Money Supply in the United states[ 10 ]) .

The period of economical and pecuniary enlargement brought high degrees of guess in the markets, particularly in the NYSE.[ 11 ]This meant for the US in 1928 a alteration in policies to contractionary policies ( see Graph ) . The 2nd thought behind the execution of contractionary policies was the decrease of capital escapes provoked by the inflationary period. Germany who had been blow uping during the last decennary – partly due to the American capital flows and the Dowes Plan – feared hyperinflation and guess, so that the authorities initiated investing discouraging policies. In the minute of that, investors started being cautious about puting in Germany, fearing that the capital controls could avoid the repatriation of financess. This besides helped making dissymmetries in the allocation of the investings. The Atlantic economic systems contracted as a consequence of its policies and the US could non move as a loaner any longer. With no state any longer with power sufficiency to prolong the world-wide economic system with its capital flows, the world-wide economic system derailed and the daze spread from the US to the other states[ 12 ]. This set the first rock of the Great Depression.


As you should hold surely seen, the causes are all interlinked and it is executable to explicate the brew of the Great Depression ; foremost through the Restoration of the Gold Standard – notice that states which did non reentered the Gold Standard performed much better during that clip, Spain for illustration – and secondly through the deficiency of capital motions. This persisted throughout the decennary in most states, being the Great Depression a period of really weak fiscal integrating. From that clip on, the states acted as closed economic systems in the capital markets what ended with capital stationariness and little inefficient markets that impeded to accomplish the highest return within the economic system. Impermanent fluctuations in ingestion could non be eased through external markets, which besides was a factor for higher inefficiency.

I want to stop this essay taking up once more Bernanke ‘s statement that I quoted on the first page. The message he sends is simple. With the base on balls of the old ages, people tend to bury the lessons of the history. In his address he comments the valuable experience we have learned from the Great Depression and the accommodations that have been done to the economic and fiscal position and to the establishments – as the debut of new authorities bureaus and plans such as the Federal Deposit Insurance and the Securities and Exchange Commission, for case. He claims – as most monetarists – that with the cognition that we have presents about economic sciences the Great Depression could hold been prevented.

It is of import to detect that at the minute of the address – March 2, 2002 – Bernanke was merely a FED governor, non the Chairman of the Federal Reserve Board like he is since 2006 – yes, before the recession started. He was portion of the mass of economic experts and non-economists who thought that there was nil to fear about the macroeconomical state of affairs of the universe. Time has proven him incorrectly, because one twelvemonth after his address the biggest crisis since the Great Depression has non been avoided.

This proves two things. The first 1 is, that we will ne’er hold plenty cognition to forestall those crises. The 2nd thing is, that it is ever more simple to claim that you can foretell something with hindsight, as Bernanke should likely cognize by now.