Great Depression Dbq

Undoubtedly the Great Depression of 1930 was one of the most ominous phenomenon in the economic and global history. This paper looks at three important aspects of the slump; first, did the crisis occur in the United States or it was a global event; second, if it occurred in the US, what was the reason behind the transmission of the crisis to other countries? At the end, the relation of the crisis and the presence of the Second World War will be delivered and the conclusion of the paper.

The orthodox view believes that the Great Depression originated from the States and it blames the monetary mechanism of 1920s for the occurrence and transmission of the Great Depression (Temin, 1993). During 1920s virtually all of the economic powers had

gold standard.

Gold standard has three essential characteristics: Firsts, flow of gold between economies without any barrier; second, the maintenance of fixed currency in terms of gold and, as a result, also other currencies; and third, the absence of lending international organization such as International Monetary Funds (Temin, 1993). After the First World War the US accumulate vast amount of gold from the other European country as reparations or the intervention cost that it implement during the war. However, under the gold standard there was no mechanism that forces the US to put this resource back into the circulation. Nonetheless, the Fed implemented restriction policies in order to curb speculation and outflow of gold. The polices not only did not prevented speculation but also its diminish the aggregate demand and bring economic downturn in the US. Meanwhile Bank of England increased the interest rate in order to attract capital and recover the outflow of gold. This policy brings long-term unemployment as well as public strike in the UK. Moreover, Germany had to pay huge amount of gold as reparation to other countries. As the America, UK, and Germany contracted it brings the other countries to recession under

the gold standard (Temin, 1993). Moreover, A regular flow of dollar was crucial for the debtor economies to pay their debt back. Dried up of inflow to European countries force them to pay their debt to the United State through the gold. This suggests that there would be cut in the money issued in the European country. Public spending was slashed, wages were cuts, and misery increase. However, the Fed did not take aggressive expansion policy and locked the gold received (Nicholas Crafts, 2010).
Another important implication of these features is the adjustment mechanism for the deficit countries is deflation rather than devaluation. Deflation leads to decrease in the prices, cut in the wages, and decrease in the size of economy. However, devaluation enables policy makers to increase the public expenditure and maintain the size of economy in the short term. In the Great Depression economies cannot implement aggressive expansionary monetary policy and most of policies implemented begger-thy-neighbour policies, such as increase the import tariff, as a result the crisis intensify and lasted long in 1930s (Temin, 1993) (Nicholas Crafts, 2010). Smoot-Hawley was the import barrier tariff that impose by the States in order to support the local producers, the European countries also increased import tariff as a reaction to this policy (N.Cooper, 1992). According to Temin import tariff should increase the investment in tariff increasing countries in the short run. Nevertheless, taking into account situation of the 1930s, imposed tariff diminished the total amount of trade in the world (N.Cooper, 1992).
In the contrary, in 2008 US spent 787 billion dollar for economic stimulation and that was the biggest and baldest countercyclical action in the American history. Bank of England decrease the interest rate to the lowest since the foundation of the bank. By these aggressive policies economies recover much faster and the effect of slump was smoother than expectations (Nicholas Crafts, 2010).
Fearon issued interesting pamphlet over the great scramble, in his paper he resurrects pervious papers, which claim that the great recession was the result of instability developed after the WWI (Eichengreen, 1992). There were four unexpected change in the global economic structure that trigger to economic recession. First, transformation of the industry; in most of economic powers the industries transform from in-durable goods to durable. The demand of latter is notoriously sensitive to the cyclical condition. The implication is that, consumers are not willing to spend on the in-durable goods during economic downturn. By the recession the consumptions of durable goods shrink and recession intensified. However, this was mainly happened in US in 1920 and this occurred in UK with a decade delay. Moreover, the First World War ceased the export of food from Russia and Eastern Europe and prompting the other producers to step into the breach, such as Canada, the US, Argentina, New Zealand. After Russian back to the market prices cut down and lands price collapse. Governments start to support this sector for a decades and this was a new burden for governments. Second, the pervasiveness of high unemployment rate before the advent of recession suggests the deterioration of labor market before the recession. Third, which extensively explained, is international monetary system; in 1926 world was fairly in the gold standard. Four, change in the pattern of international settlements: Japan and the US enter to the trade market and both when they incurred fixed cost they try their best to maintain the market. Hence, there was pressure in the European market. Moreover, US transmitted from debtor to creditor. Europe has to pay reparation as well as loans receive during the war by the state. One of the debtors was Germany and its consumption was higher than the production, hence, it cannot pay the money back. Overall, the US loans were not sustainable and sooner or later will be collapsed. The first two factors was mainly in the States, however, the last two factors were global phenomena (Eichengreen, 1992).

In addition to factor mentioned, believe that the lack of strong leadership in the world caused to pervasiveness and spread of global economic crisis.

World leader should stabilize the world by the following responsibility that it has; First, maintaining relatively open market for distress goods; Second, providing long term loans for countries in the case of recession; and the last but not the least, discounting crisis. Evidences prove that America fails in all of these duties; firstly, it implement Smoot-Hawley Tariff" while it supposed to smooth the international relation; Secondly, the US stop giving long term loans to Germany and France in the time of the need; thirdly, it bided up the price of Gold and silver in the time were countries have gold and silver standard (P.Kndleberger,

1974).

Zimmermann and Saalfeld try to investigate effect of the Great Depression on political stability of the European countries. They claimed that there is no significant effect of economic policies and the Great Depression on the stability of democracy in European countries. That is, it is not true to say if a country took specific economic policies then democracy would stabilize or survive. There is not enough economic measurement and data available that explain why the Germany fall into the National Socialism while the United Kingdom and the Netherlands or France stay liberal democracy. Germany suffered from deepest economic downturn and later enjoy from the fastest recovery. France never fully recovered from the economic crisis and Holland experienced highest unemployment rate, three years later than the other countries. The variance of the result of recession on the political stability is so large, hence, we cannot conclude that crisis bring extremist to the power. All of the European country suffered from the crisis and only one of them, Germany, shifted to the extreme (Ekkart Zimmermann, 1988).

As conclusion, gold standard is so vulnerable and inappropriate financial and monetary policies of the Fed in 1920s and 1930s caused the crisis and activate the ominous potential of the gold standard. Due to the post-war conditions as well as global economic structure the crisis intensify and spread in almost all of the interrelated economies. Concerning the linkage of the Great Depression and pervasiveness of the Second World War, an important third factor variable, which play an important role in explaining the advert of extremist, is missed in paper of Zimmermann and Saalfeld; “The Versailles Treaty”. Of curse, in almost all of the Europe they suffer from the Great Depression, however, in Germany the Great Depression was combined with humiliation from the treaty (Keynes, 1919). Hence, they look for a person or situation that can take revenge, this make extreme party more attractive for the Germans. Controlling for the “Versallies Treaty”, which Keynes described it as a “nightmare” or “catastrophe” which brings Germany to mass destruction , can clarify the relation between the economic crisis and political stability of a country.