Today most of the world’s leading experts compare the economic crisis in 2008 with the Great Depression (1929-1932). Both crises began in the United States, with the financial sector followed by the collapse of stock markets, falling consumer demand, rising unemployment, and devaluation of money. Both of these periods in the history of economics caused thousands of tragedies by depriving people of homes and savings, which they kept in the U.S. dollars (White 1990). Knowing and studying the events of the past century, one begins to carry out comparison of events of both centuries. The issues of this essay are:
- The factors, which caused the Great Depression.
- Different ways, in which the major economies dealt with the Great Depression.
- Nations that succeeded in overcoming effects of the Great Depression.
Today the significance of the Great Depression in the academic literature has undergone radical revision. The opinion that the crisis occurred as a result of free speculation market was the dominant explanation in most historical studies for decades. It was also considered that Roosevelt saved the country because of his the New Deal. However, today more scholars have come to the opposite conclusion that the origins of the Great Depression came from the negligent monetary and financial policy of the U.S. government in the late 1920 and early 1930 (Hudson 2008). This policy included a whole range of major failures, which illustrated not only poor management of the State’s Central Bank, but were also destructive to the trade tariffs, taxes, stifling private initiative, showed ineffective control of production and competition in the trade sector. Here one can also add the irrational destruction of crops and cattle, and forced labor laws. 12 years of agony was the result not of the free market, but a large-scale political incompetence.
The Body of the Paper
- The factors, which caused the Great Depression
Many people still do not know that not the free-market capitalism, but economically destructive policies of the authorities were the true roots of the problem. Old myths about depression never die. The greatest myth of the twentieth century is that responsibility for the Great Depression rests with capitalism and the market economy, and only intervention of the state led to America’s economic recovery (Reynolds, 1979). There are also some myths about possible roots of the Depression. The first myth is that America crushed and was dragged into a depression because of the stock market that was known as one of the pillars of capitalism. Another one is that the Great Depression was like one, but not as four consecutive declines, merged into one (Sennholz 1975).
To understand the problem question we have to remind how it all began. In the beginning of the 20th century, the U.S. was one of the leading and the most economically prosperous countries in the world. United States has been developing faster and producing more than other countries. Their share of world production has steadily increased and the country strengthened its position. This period of time has got its name in the history of the United States as the era of prosperity. However, the Crisis crashed the U.S. more than other countries (Romer 1990).
The outbreak of the global economic crisis takes its beginning in 1929 and lasts until 1932. Until now, economists have not reached a consensus on the causes of the Great Depression. There are a number of theories on this. However, here we observe a combination of factors – the four declines that caused the Great Depression.
One of the most common explanations for sharp economic downturn is Keynesian, with its typical emphasis on the lack of money. While the money was tied to the gold reserves, it has limited the country’s money supply. As a result, the limited growth of money supply and mass of commodities originated strong deflation – the fall in prices, which led to financial instability, the bankruptcy of many businesses, and non-payment of loans (Dominguez, Fair, Shapiro, 1988).
Another very well known explanation of this phenomenon is a concept of a ‘bubble’ in the stock market. At that time there was a popular practice of giving loans. By the beginning of the crisis the value of loans to commercial banks due to the currency speculations formed a vicious circle that led to the formation of economic bubble (Hudson M 2008).
Another reason is isolated restrictive measures imposed by Hawley-Smith’s law (1930), who established high customs duties on imported goods. Trying to protect domestic producers, the government of protectionist measures raised the prices of cheap imports. This, in turn, has reduced the already low purchasing power of population, forcing other countries to apply countermeasures to harm the U.S. exporters (McKinnon, Pill 1997).
Another reason may be called the margin loans. This type of loan was popular in 1920s because all were playing at the stock market. On the 24th of October, 1929, the New York brokers, who gave out margin loans, started massively demanding payment for them. Everyone had to get rid of the shares to avoid paying for margin loans. It caused a shortage of funds at banks and for the same reasons led to the collapse of sixteen thousands of banks, which allowed international bankers not only to buy up banks of competitors, but also for mere pennies buy up large American companies (Keynes 1930).
The First World War also was one of the causes of the Great Depression. American economy was initially ‘inflated’ with military orders of the Government, which after its completion declined sharply, leading to a recession in the country and in the sectors related to the military-industrial complex of the economy (Grossman 1994).
The Great Depression began in the United States. Therefore, people expected decisive actions from the authorities of the United States. Government reforms of Roosevelt helped to overcome the Great Depression and promoted economic growth in the United States. However, they have not solved all the problems associated with the Great Depression. To the end of the Great Depression there were millions of unemployed, thousands of abandoned businesses and farms in the country (Steinbeck 2002).
- Different ways, in which the major economies dealt with the Great Depression
The Great Depression in the United States had impact on the major world economies and policies pursued by many countries. In most states, a policy of protectionism increased the duties on the imported goods to stimulate domestic producers, which caused multiple contraction of international trade. To improve effective balance and increase competitiveness of domestic goods, many countries took devaluation of the currency (including U.S., UK, France, etc.), and subsequently the global economy refused to provide all the currencies with gold. The level of industrial production regressed by 30 years to the beginning of the 20th century. The business of farmers and small entrepreneurs has got worse. The number of unemployed in industrialized countries with a market economy was more than 30 million people; at the same time the number of supporters of both communist and fascist regimes rose (Hudson M 2008).
- Nations that succeeded in overcoming effects of the Great Depression
The worst economic crisis hit the United States and Germany, the most developed capitalist countries, where domination of powerful monopolies in the economic life was undivided. The depth of economic crisis in France was not so deep, but the crisis lasted there until 1935. About the same situation was with industrial production in Italy. It declined by almost a third. In England, the decline in production in the industry sector, which has just reached the level it had before the crisis in 1913, was relatively small. Crisis in the Nordic countries was relatively less deep (Bernanke, James, 1991).
However, it is necessary to pay attention, considering the two concepts of overcoming the effects of the Crisis that took place in Germany and France. In Germany, the concept of recovery was associated with strengthening of the Fascist party in the political life of the country and its rise to power. Hitler’s government program was as follows:
- Suppression of the revolutionary movement;
- Regulation of the economy in the interests of big capital;
- Revision of the Versailles peace (Hamilton 1992).
The core of the economic policies of fascism was militarization of the capitalist economy; active use of direct and indirect levers of government regulation; the use of coercive economic growth of the public sector in military production; a huge increase in military spending; increasing tax burden; the policy of autarky; appearance of the elements of the planned organization of production; unchecked growth of bureaucracy and complexity of managing the economy – all these changes were derived from the main, militant, function of fascism in the economy.
With the financial support of American monopolies, Nazi Germany revived and updated heavy industry and greatly increased military capabilities, creating a powerful military and economic base. The results of government policy were impressive. They allowed Germany to avoid the economic crisis of 1937-1938 years (Friedman, Schwartz, 1963).
In France, the crisis came later than to other countries. There was a decline in industrial production in France until the end of 1930s. It was not as deep as in the U.S. or Germany, but lasted longer than in any other major capitalist country. In France, the recovery from the crisis was associated with formation of the so-called Popular Front government, headed by Blum. In the economic sphere, it carried out actions that, first of all, contributed to the advancement of the middle class and small-scale producers:
- The government granted a reprieve to repay the debts of enterprises in industry, commerce and agriculture;
- Taxes for small businesses were reduced, for large ones they were increased, and secondly, the government intensified state intervention in the economy (Johnson 1998).
In the field of agriculture, the State Grain Bureau was established, which has been buying grain from farmers at fixed prices, which were higher than the lowest crisis prices, twice or even triple as large. In the field of finance, Bank of France was reformed. The Bank was placed under control of state, although it remained the property of individuals. In the field of industry the government announced nationalization of several military factories. The National Society of railways was founded in 1937. Under the management of this society were all French railways.
Economic crises are an integral part of capitalist society. They regularly take place to a greater or lesser extent, from century to century. The worst crisis came in the 30s of the last century and ended only with arrival of the Second World War, when the U.S. economy turned to the war production, and so at this stage it stayed. Many scientists believe that to this day arms are the major U.S. export product, so the United States has a vital interest in the eternal war throughout the world. Otherwise, another Great Depression could plunge the country into disaster.