Impact of Great Depression on British and German Policies - Essay Example

Impact of Great Depression on British and German Policies The Great Depression that took place between 1929 and 1933 had detrimental economic consequences for all the affected countries. This was also a period of inter-wars among various countries. Nonetheless, the Great Depression was highly felt in North America, Europe, and other industrialized nations. This was the longest depression that has ever been experienced in the developed Western world, and had the most severe consequences on the economy. Although the Great Depression started in the United States, it quickly spread to other developed nations in Europe, where its effects were also felt in various spheres (Robbins 2007). Nonetheless, this paper discusses the impact of the Great Depression on the polices of Germany and Britain between the years 1929 and 1932. It is believed that the present economic and financial situation has greatly been influenced or shaped by the Great Depression. The Great Depression is argued to have started in the United States, as a result of the stock market crash in New York in October 1929 (Robbins 2007). This was characterized by many detrimental consequences, including a decline in the global industrial output. However, different governments developed ways of dealing with the Great Depression, mainly through policy responses. Nonetheless, as compared to the present times, the policy responses adopted by governments in the Great Depression period are considered to have quite helpless, as compared to what the contemporary governments are capable of. Most of the policy changes undertaken by both Germany and Britain did not turn out to be fully effective in combating the effects of the Great Depression between 1929 and 1932. The Great Depression spread from North America to other European nations, including Britain and Germany, mainly because of the close relationship the United States had with some developed nations in Europe (Wrigley 2008). After the World War I, the United States was a key financier and creditor of most European nations. This was after their economies had been severely devastated by the war. In the case of Germany, the country had lost in the WWI, thus was required to pay reparations to the European nations that won the war, in accordance with the Treaty of Versailles (1919). Germany also needed to undertake industrial reconstruction, following the devastating effects of the war. This situation forced Germany to borrow money from the United States in order to accomplish the demands. However, when the economy of America experienced the Great Depression, the country had to recall its loan from Germany, and this was the major cause for the collapse of the banking system in Germany, which marked the beginning of the Great Depression in the Germany. The Great Depression had major effects on both Germany and the Great Britain. This affected the economic, social, as well as political spheres of these countries. As compared to the Great Britain, Germany was hit most by the Great Depression. In Germany, the rate of unemployment rose sharply. Beginning 1929, Germany started to experience increased unemployment rates, and this was felt until 1932. Overall, it is estimated that by 1932, 6 million of Germany’s workforce was unemployed. This represented 25% of the workforce. On the other hand, the effect of the Great Depression in Britain was highly experienced in its industrial and export sectors. The effects on these sectors in Britain were felt until the period of the WWII (Wrigley 2008). In order to alleviate the severity of the Great Depression, all the affected countries, including Germany and Britain, adopted various measures, which they considered effective to address the situation. In all those strategies adopted, a major aim was to protect the domestic production of the country. This included the imposition of tariffs, setting quotas on foreign imports, and raising existing tariffs, among others. Nonetheless, such measures were restrictive, thus limited international trade. A major way that the Great Depression influenced Germany and Britain was through a change in their policies. In order to combat the situation of the Great Depression, different countries, including Germany and Britain, adopted new policies in various spheres of the country. These new policies were considered a way of intervening in the situation. Therefore, there was either a change in the old policies, or a replacement of old polices with new policies. In most affected countries, including Germany and Britain, the governments responded to the Great Depression by focusing on the country’s economic policies. Nonetheless, in most countries, there was a restriction of foreign trade, as governments increased the tariffs on imports (Doerr 1998). The first response by most governments was therefore, to cut on their spending. It is believed that the governments overreacted in their response to the Great Depression, and this somehow led to a rapid spread of the Great Depression (Robbins 2007). The decreased government spending had resulted in a decrease in the demand of consumers for various goods and services. Nonetheless, most of the polices in the economy of countries, which governments adopted to deal with the Great Depression were deflationary in nature. These policies were also tied to the aspect of exchange rates in the countries. During this period, most countries were under the Gold Standard System (Doerr 1998). In this system, the value of currencies was defined in terms of gold, for which the currency would be exchanged for. For this reason, most countries ensured to maintain fixed exchange rates. In the period of the Great Depression, the interest rates remained high, and this limited borrowing by individuals and businesses. However, with the onset of the Great Depression, the central European banking system was influenced negatively. In 1931, one of the major banks in Germany, Darmstädter und Nationalbank, shut down. On the other hand, most of the commercial banks in Britain were less affected. This was mainly because of their strong branch structure and their secure policy towards involvement in industry. Nonetheless, this situation placed the gold standard under threat. In Germany, the fall of the Reichsbank later in July 1931 resulted in its incapability of borrowing any funds. Therefore, in August 1931, Germany was forced to abandon the gold standard. Similarly, Britain due to the Great Depression, also experienced negative effects on its banking system, and was also forced to abandon the gold standard on 20th September 1931. Thus, because of the Great Depression, both Germany and Britain were forced to abandon the gold standard, a system they had utilized for the past years. Since the Great Depression occurred after the WWI, it was impossible for countries to develop an international action to stop the Great Depression, as the relationship between major developed countries had deteriorated. Therefore, by 1931, the United States withdrew funds from European nations, leading to the economic devastation of the European economic system (Doerr 1998). Therefore, in order to deal with the Great Depression, each individual country was responsible for major economic and political decisions that would address the situation. In Germany, the government adopted exchange control policy, while in Britain, the government devalued the country’s currency. Nevertheless, all the Great Depression is also associated with various political implications. For instance, in Germany, the response to the Great Depression paved way for a militarist government (Fisher & Hornstein 2002). This kind of government led to the adoption of foreign policies that were highly regressive, and contributed to the WWII. On the other hand, in Britain, the government focused on developing welfare systems as an intervention. Compared to Germany, the economy of Britain did not suffer severely in the period 1929–1932, as a result of the Great Depression. In addition, the recovery of Britain from the Great Depression was quite fast, as compared to other nations, including Germany. Therefore, it is possible to argue that Britain adopted policies that were more effective in combating the Great Depression in the country. These policies include monetary policy, fiscal policy, and trade policy. However, Middleton (2010) notes that in Britain, unemployment rates rose quickly in 1929, leading to a budgetary crisis. In 1931, the occurrence of the banking crisis worsened the situation, leading to the collapse of the Labour government. This was replaced by a national government that was conservative-dominated. Nonetheless, in Britain therefore, combating the economic situation and promoting recovery became major policy issues that the government did for both economic and political reasons. In Britain, the foundation of the country’s economic policy in the 1920’s included the aspects of minimal budget rule, the gold standard, fiscal constitution, and a minimalist state (Johnson 2013). However, the goal of Britain was to ensure that no political interferences affected the country’s fiscal, monetary, and trade policies. Nonetheless, between the period of 1929 to 1932, Britain experienced major effects of the Great Depression. For instance, the unemployment rate in Britain doubled at the end of 1930 and this rose in 1931 to include 25% of the workforce (Johnson 2013). In order to counteract this, Britain later abandoned the gold standard and adopted restrictive fiscal policy. This included the cut on government spending, lowering of interest rates, and restricting international trade. Fiscal policy refers to the use of taxation and government spending to influence the economy. Governments therefore, use fiscal policies to influence the economy. In Britain, it was highly agreed that the country needed to ensure debt reduction and budget balance. Therefore, the government considered that a consistent and effective debt reduction policy would make it possible for the lowering of interest rates (Simmons 1997). Additionally, balanced budgets were considered important in maintaining the value of the pound. Therefore, to achieve this, even after devaluing, Britain maintained fiscal orthodoxy, as well as budget orthodoxy, as part of its recovery program (Dockrill & McKercher 1996). Nonetheless, the budget remained in surplus, and the government raised taxes. Additionally, the year 1931 saw government spending being cut. For the whole period, until 1932 and few years beyond, Britain maintained severe fiscal tightening, which maintained high taxes. Nonetheless, Britain aimed at avoiding budget deficits as a way of controlling inflation and prevent further deterioration of the pound. This was believed to make it possible for the conversion of the public debt to decreased interest rates. On the other hand, the aspect of trade policy in Britain had divided the country along partisan lines. The Conservative party in Britain supported the adoption of tariff protection. With the onset of the Great Depression, the Conservative party advocated for the tariff protection as a means of protecting the country’s currency (Simmons 1997). A few months after devaluation, the Tariff Act was voted. This therefore, was construed as a conscious act of policy. The main reason for adopting the tariff protection as a policy in Britain was to reorganize industry and agriculture and help to solidify the empire. In the period between 1929 and 1932, the tariff protection policy was meant to improve the balance of payments, to maintain the gold standard, and stimulate employment (Johnson 2013). However, there was a major divide between the liberals and conservatives. While the liberals opposed higher tariffs, the conservatives supported them. The liberals argued that high tariffs would raise the cost of food and consequently increase the cost of living. On the other hand, the Labour party supported free trade. Nonetheless, in 1930, it was agreed that increased tariffs was the only policy option for initiating domestic growth and maintaining the gold standard value of the pound (Simmons 1997). Britain in 1931 formally abandoned free trade, thus embracing protectionism. Previously, free trade had been used to achieve international solutions to Britain’s problems. In 1930, the Federation of British Industries (FBI), who supported higher tariffs, developed a Memorandum on Industrial Policy (Dockrill & McKercher 1996). This stressed the importance of tariffs as the best remedy to the Great Depression. On the other hand, the Labour party members and trade unions supported the trade policy of restrictive international trade, while the conservatives considered reducing unemployment as a means of balancing the budget. Nonetheless, later the government considered external tariffs as the best policy in addressing the external imbalance, as compared to unemployment insurance. On 17 November 1931, the National government in Britain passed the Abnormal Importations Act, which allowed the Board of Trade to impose duties reaching 100% to all imports entering Britain in large quantities (Johnson 2013). Furthermore, in January 1932, in order to regulate the amount of imports entering Britain and balance the budget, there was an imposition of a 10% general tax on all imports entering the country. This was established as the Imports Duty Bill in February 1932 (Simmons 1997). In Germany, the Great Depression also influenced the country’s policies in varying ways. Major impact was on the country’s fiscal, monetary, as well as trade policies (Fisher & Hornstein 2002), just like in Britain. During the period of the Great Depression, there were several changes in the fiscal policy of Germany, as it became highly procyclical. This means that during the period between 1929 and 1932, the changes in fiscal policy resulted in the magnification of the economic and financial fluctuations in the country. First, seeing the worsening budget situation, the government in Germany adopted an austerity policy. This policy is associated with the cutting of government spending, which also influence government investments. For instance, in 1932, the Germany government cut its spending on construction by half. Overall, the highest cut on government spending was felt between 1931 and 1932 (Fisher & Hornstein 2002). This included cuts on civil service pay, among others. The austerity policy in Germany also cut subsidies by 25%. Furthermore, for a balanced budget of unemployment insurance system, there was a cut on benefits, and also an increase in the contribution rates. Additionally, the Great Depression led to a decrease in revenues; therefore, the government in Germany had to ensure that the revenues are back on high, in order to avoid more detrimental effects. In this regard, the government under the austerity policy introduced various income surtaxes in order to raise revenues. However, the previous corporation and basic income tax systems were unchanged. The cabinet in Germany also increased different indirect taxes. A major effect of the austerity policy in Germany is that it reduced transfers to states; therefore, this resulted in the states and municipalities increasing their local taxes (Fisher & Hornstein 2002). Overall, the policy changes in Germany during the Great Depression between 1929-1932 are considered to have been ineffective in addressing the economic crisis that prevailed. Since most of the fiscal policy in Germany was procyclical, this only aggravated the magnitude of the impact of the Great Depression during this period. However, after the adoption of contractionary policies in Germany in a bid to deal with the Great Depression between 1929 and 1932, the rise of Hitler in 1933 saw the adoption of expansionary economic policies, which improved the economic situation of Germany. In conclusion, this paper has proved that surely, the Great Depression had an impact on the policies of Germany and Britain. These mostly were the economic policies of these countries. This effect came about since Germany and Britain had to address or stop the Great Depression, which was proving to be devastating to the countries’ economies. Therefore, policy changes were considered the most effective strategy of combating the Great Depression. Nonetheless, Germany and Britain adopted varying policy changes, which each country considered effective. As seen, in the period of the Great Depression between 1929 and 1932, Germany adopted economic policies that were highly contractionary and restrictive. These however, did not succeed in combating the economic crisis within this period. On the other hand, the policy changes of Britain too changed to become contractionary throughout this period. Nonetheless, during the period 1929-1932, the countries were not yet in the recovery period of the Great Depression. Therefore, the failure of contractionary policies led to their adoption of quite expansionary economic policies at the onset of the recovery period in 1933. Nevertheless, the impact of the Great Depression on policies of Germany and Britain was significant in propelling the countries towards economic recovery. Works Cited Dockrill, M & McKercher, B 1996, “Diplomacy and World Power: Studies in British Foreign Policy, 1890–1951,” Cambridge University Press, London. Doerr, P 1998, “British Foreign Policy, 1919-1939,” Manchester University Press, London. Fisher, J.D.M. & Hornstein, A 2002, “The Role of Real Wages, Productivity, and Fiscal Policy in Germany's Great Depression 1928-1937,” Rochester. Johnson, G 2013, “The Foreign Office and British Diplomacy in the Twentieth Century,” Routledge, New York. Middleton, R. 2012, “Can Contractionary Fiscal Policy Be Expansionary?: Consolidation, Sustainability and Fiscal Policy Impact in Britain in the 1930s,” Rochester. Robbins, L 2007, “The Great Depression,” Ludwig von Mises Institute, New York. Simmons, B 1997, “Who Adjusts?: Domestic Sources of Foreign Economic Policy During the Interwar Years,” Princeton University Press, New York. Wrigley, C 2008, “A Companion to Early Twentieth-Century Britain,” John Wiley & Sons, New York. Read More