EC120 Week 20, Topic 15 Notes: Origins and Propagation of the Great Depression

Key Issues

  • The 1929 economic downturn was triggered by the Wall Street Crash, though other elements contributed.

  • Industrialized countries addressed the recession through various economic strategies.

  • Monetary policy and commitment to the Gold Standard were significant factors during the crisis.

  • The recession evolved into the Great Depression because of national policies that either worsened or alleviated its effects.

  • Different countries experienced varying degrees of success in recovering from the depression, influenced by the specific policies implemented.

The Wall Street Crash, 1929

  • Stock market prices plummeted in October 1929, exacerbated by tight monetary policy since late 1928.

  • Causes of the crash included a speculative bubble, economic deceleration from late 1928, speculation, and restrictive monetary policy.

  • Stock market crashes do not invariably lead to depression.

Onset of the Great Depression

  • The economic downturn ensued after the stock market crash, amplified by the Smoot-Hawley tariff in 1930.

  • US interest rates were lowered, yet the total money supply decreased.

  • The depression extended globally owing to monetary constraints in Europe, loan repayments to the US, and declines in international trade and prices.

Banking Crises in the United States

  • Contradictory monetary policies followed the stock market crash: limitations to curb speculation and expansion to alleviate economic decline.

  • Banking crises: bank runs precipitated numerous bank closures.

  • Successive bank failures post-1930 triggered deposit withdrawals, curtailed lending, and deflation, intensifying the depression.

Collapse of the Gold Standard

  • European dynamics: the recession led to borrowers defaulting and banks facing distress.

  • Central banks were restricted in their ability to provide support, necessitated by a reliable commitment to uphold gold parity and a lack of international cooperation.

  • The Gold Standard proved vulnerable during the currency crises of 1931, originating in Austria and impacting Hungary, Germany, and Britain.

The World Economic Conference, 1933

  • The conference sought to stabilize exchange rates, restore trade, and alleviate governmental debt. However, it encountered obstacles due to divergent domestic political objectives and ambiguities in currency policy.

Characteristics of the Great Depression of the 1930s

  • Widespread deflation occurred from 1929 to 1932 but generally stabilized afterward, with the exception of France.

  • Real wages and industrial output diminished. Recovery transpired after 1932, particularly in nations that abandoned the Gold Standard.

  • GDP declined across countries with substantial international connections, with North America experiencing the most pronounced decrease.

Searching for explanations

  • Temin: The Great Depression resulted from the pressures exerted by World War I on the gold standard.

  • Questions arise concerning the catalysts of the depression, its severity, prolonged duration, and diverse global repercussions.

Recovery

  • Recovery commenced upon abandoning the Gold Standard, accompanied by expansionary monetary and fiscal measures.

  • However, recovery was impeded and inconsistent due to trade barriers, diminished capital reserves, and expectations of deflation.

J.M. Keynes’s diagnosis

  • John Maynard Keynes identified insufficient aggregate demand as the underlying cause of the economic downturn.

  • Solution: implementation of fiscal and monetary policies to bolster aggregate demand and employment.

National policies in the recovery

  • Recurring motif: a transition in policy orientation from conventional financial practices toward proactive governmental intervention.

  • Varying national outcomes: observed in the United States (election of FDR in 1932), Japan, Germany (rise of the Nazi regime), Britain, and France.