The Great Depression of the 1930s and its Consequences to Germany - Example

THЕ GRЕАT DЕРRЕSSIОN ОF THЕ 1930S Name Institution Date INTRODUCTION The adverse conditions which occurred at the global level in the 1930's are referred to as the Great Depression. The severity of the Great Depression varied from one nation to another, however in most nations it began in the 1930s and lasted for about a decade. In fact, it is the deepest, longest, and pervasive depression that ever existed in the 20th century. Often it has been used as an example of how badly a global economy can decline. It is argued that the depression began in the United States, following a sharp decrease in stock prices in 1929, and eventually spread to global levels with a crash on the stock markets (Garraty, 1986). The Great economic crisis had distressing effects in many countries at both individual levels and national levels. There was a subsequent decline; personal incomes, tax revenue, and profits and dropped; as global trade reduced by about 50%, the unemployment rates increased by more than 30% in many countries. Cities especially those that rely on heavy industry were hit hard; bringing construction activities to a standstill. In addition, agriculture in rural areas was negatively influenced, crop prices decreasing by about 60%. The resulting condition was a tumbling demand amidst few alternative sources for employment (Cochrane, 1958). . The consequences of the Great Depression were more felt in Germany, which for several years had enjoyed artificial success, supported by the American loans and goodwill. When this assistance was cut off during the 1930s hard economic times; unemployment became a reality that shocked many Germans as companies downsized or shut down (Garraty, 1986). Others lost their hard earned savings as banks suddenly folded. These unpleasant realities led many German citizens to abandon conventional political parties in favor of more radical substitutes; for instance Adolf Hitler, and the Nazi Party. START OF THE CRISIS Many historians attribute the start of the Great Depression to the sudden and devastating collapse of US stock market prices in early 1930’s; however some researchers explain that the stock crash was more of a symptom, rather than a cause, of the Great Depression ( Rothbard,1963). Many investors suffered heavy losses in the stock market consequently downsized their expenditure by more than ten percent. A severe drought in the mid 1930s that ruined the US agricultural heartland made the situation even more complicated (Cochrane & Willard 1958). Consequently interest rates dropped greatly, with this deflation and the constant reluctance of individuals to borrow led to a depression in consumer spending as well investment were. By 1931, sales in automobile declined drastically, and a further deflationary spiral was witnessed in agriculture where prices on commodities plunged further, and in the logging and mining areas, where unemployment rates were high, with few alternative jobs. Scholars argue that the decline in the US economy as a key factor that subsequently lead to pulling down of many nations at first, then other internal strengths or weaknesses in each country made conditions better or worse. Frantic efforts to improve the economies of individual countries through the introduction of protectionist policies and retaliatory tariffs worsened the decline in global trade. CAUSES Recessions are regarded as a normal part of an economy due to lack of uniformity on demand and supply. However what turns a normal recession into a global depression is a subject that has raised debate and concern. Researchers have been in a constant search for the causes in order to design proper strategies that will ensure such conditions never occur again. Whether the Great Depression was primarily as a result of failure of free markets , or inability of government to control interest rates, curtail pervasive bank failures, or control on the money supply is a question that has been explained in several ways. There were several reasons for the global 1930 crisis. To start with, the structural weaknesses and explicit events that occurred in the US finally resulted into a major depression that become widespread to a global level, from country to country. In regard to this downturn, historians explain that structural factors, particularly the crash on the stock markets and bank failures as a cause of the great depression. On the other hand, monetarist economists argue that monetary factors, such as the Federal Reserve for United States move that lead to the contraction of the supply of money (Carlson, Mitchener, & Richardson,2010). In a nut shell, there are several theories that explain the depression. The fast point of view is explained by demand-driven theories; they include the Keynesian economics that point at the breakdown of international trade; the Institutional economists that point to over investment and under consumption thus resulting to an economic bubble; and the malfeasance by banking industries, as well as the incompetence of government officials (Rothbard, 1963). The demand-driven theories explain that the loss of confidence resulted to a sudden decrease in the consumption as well as the investment spending. Once panic accompanied with deflation set in, individuals believed that they could only stop further losses by avoiding the markets. A drop in demand amid increased investment and supply resulted to a drop on prices of goods, and subsequent reduced profits. The second point of view is explained by monetarists, they argue that who believe that the Great Depression began as a normal recession; however the strategy mistakes by monetary authorities, resulted to a shrink on the money supply which to a large worsened the economic condition, causing the recession to ascend into a Great Depression(Rothbard, 1963). On the same breath, some scholars explain that debt deflations eventually result to a situation where those who borrow continue to owe ever more in real terms. The heterodox theories on the other hand downplay the explanations of the monetarist and Keynesians. For instance, some classical macroeconomists argue that the various labor market policies imposed in the early in 1920s and 1930s intensified the Great Depression. The Austrian school of economics explains the macroeconomic effects on money supply, and as well how the central banking resolutions can lead to an economic bubble. Demand-driven Keynesian theory According to John Maynard Keynes (British economist), reduced aggregate expenditures in the economy contributes to an immense decrease in employment and therefore income. In such a condition, the economy is pushed into equilibrium at declined levels of economic activity and elevated unemployment (Klein, 1948). In explaining the great depression Keynes point of view is simple; he explains that to provide adequate employment, governments ought to run deficits as the economy decelerates , this is because the private sector lacks the capacity to invest sufficiently to keep production at a normal level that will restore the economy from recession. During these times of economic crisis, the Keynesian economists raised concern and advised governments to improve the economic situation through increasing government spending and on cutting taxes. As the devastating effects of the Depression continued to eat up into society, Franklin D. Roosevelt tried farm subsidies, public works, as well as other devices to boost the diminishing economy in vain. Keynesians argue that such a move only improved the economy to insignificant levels, since Roosevelt failed to spend adequately to elevate the economy out of recession till the beginning of World War II. Breakdown of international trade Some economists explain that the sudden decline in global trade during 1930 contributed to the worsening of the depression; more so in the countries that significantly relied on foreign trade (Rothbard, 1963). While international trade was only a fraction of the overall economic activity in the U.S. and US would as well depend on other businesses like farming, the trade was of mush significance to many other nations. In monitory terms, the American exports decreased from approximately $5.2 billion in the year 1929 to about $1.7 billion in the year 1933; additionally the process decreased , the exports volume reduce by more than a half. Hardest hit were agricultural commodities like cotton, lumber, and tobacco. In regard to this theory, the decline in agricultural exports resulted to a default in the repayment of loans among many African farmers, subsequently leading to bank runs on rural banks that characterized the early period of the Great Depression. Debt deflation According to Irving Fisher the predominant factor that resulted to Depression was over-indebtedness and deflation. Fisher closely links loose credit to over-indebtedness, which sparked speculation, and asset bubbles. He outlines vicious cycles that that lead to the boom to bust as flows; The debt liquidation could balance the fall of prices that came with it. The mass effect of the liquidation rush increased liability (the value of each and every dollar owed), in relation to the value of the dilapidated asset holdings. Individually efforts towards lessening the debt burden effectively increased it. Paradoxically, the more these individuals tried to settle their debts, the more they developed liabilities. This self-aggravating turn of events progressed the 1930 recession into the 1933 great depression (Carlson, Mitchener, & Richardson,2010). Monetarist view Monetarists explain that the Great Depression was as a result of monetary contraction; it was a consequence of the American Federal Reserve System inaction, as well as the continued predicament in the banking system. The Federal Reserve failed to act appropriately thus hindering the supply of money and the supply shrank by one-third from 1929–1933, thereby converting a normal recess into the Great Depression. The Federal Reserve contribute to the failure of some major public banks failures; leading to a panic and a further widespread run the on local banks, as the Federal Reserve idly watched the bank’s collapse. If the Fed had acted swiftly to provide emergency lending to sustain these key banks, or introduced government bonds in the open market as a measure that will provide liquidity thus increase money levels after the collapse of the key banks, the rest of the financial institutions would not have collapsed. With significantly reduced money circulation in the economy, business enterprises would not access new loans and as well could not even renew their old loans, therefore many were hindered from further investment (Rothbard, 1963). . New classical approach The neoclassical perspective argues that the turn down in productivity that resulted to the initial decline in production and a protracted recovery was policies that negatively influenced the labor market. In simple terms, the economic decline was a result of the decline in the capital stock, labor force, as well as the productivity with which these inputs were used. Austrian School According to the Austrian view, it was the money supply inflation that lead to a shaky boom in asset prices and as well as in the capital goods. By the time Fed responded in 1928, it was already too late thus a major contraction in the economy was inevitable. According to this view, the artificial obstruction of the economy was a tragedy preceding the Depression, and the government efforts improve the economy following the 1929 crash only made things worse. Marxist According to Marxist view, capitalism tends to generate unbalanced amassing of wealth, resulting to over-accumulations of capital which unavoidably lead to a crisis . Such crises are inevitable and remain severe till the inconsistency inherent in the mismatch between the production forces in relation the modes of production this eventually resulted to ultimate point of failure. The crisis period consequently encourages intensified class conflict and results to change in society. Inequality theory In regard to this view, the Great Depression was caused by an over-investment in the heavy industry capacity compared to the earnings from the independent businesses; therefore raising the question of bargaining power. The answer was, the government had to pump money to consumers' pockets to counter this situation. That is, it must redistribute individuals’ purchasing power, maintain an industrial base, as well as re-inflate prices and income to march consumer spending. IMPACT OF THE GREAT DEPRESIION IN THE HISTORY OF GERMANY By 1920s the most visible and pressing issue in Germany was political instability, accompanied with violence and economic distress. The problematic 1920s period was in dire need for a strong leadership but disappointingly the Germany political systems provide a series of feeble coalition governments, with many of them being politically impotent (Speer, 1970). Germany’s economic situation was also perilous. Germany persistently suffered from a food blockade that stretched all the way to mid-1919 (Cooper, 2004).The subsequent Berlin 1921 reparations bill (up to a tune of $US30 billion) killed Germany hope of ever getting an economic recovery. The already distressed economy in Germany could not bear such a burden and this evidence there after by Germany’s continuous defaulting on the reparation quarterly repayments to the Allies. In fear that the bankrupt Germany would eventually destabilize the economy of Europe, the United States come to its rescue. The Dawes Plan that ensued in 1924 lead to the settlement of reparations repayments, and further availed billions of foreign loans to jump-start the Germany economy. This injection of capital enabled German industries to recover, thus a subsequent quick improvement in employment, income and enhanced living standards. But the artificial prosperity was short lived. In 1929 Germany was ravaged by the Great Depression, which drained the country foreign money as well as capital. Threatened with the economic crisis; unemployment, and starvation again for the second time in a decade, German citizens in despair lost faith in their government and abandoned the conventional political parties. Instead, they embraced periphery groups that were steadfast in destroying democracy; in particular the National Socialist German Workers Party (NSDAP), that had been small during the 1920s. But as situations in Germany deteriorated, NSDAP’s electoral fortunes improved under the leadership of Adolf Hitler (Kershaw, 1987). By 1932, the emergence of a Hitler-led government - which led to the subsequent death of German republicanism – was the reality to reckon with. CONCLUSION The adverse global economic crisis of 1930 lead to decline in employment, income and a depression of many sectors in the economy of many countries in the world. Debates in regard to what made the Depression so long and deep continue. Some economists argue that the structural factors while other economist argue that the government intervention contributed to making the Depression worse. A more widespread view among economists, however, is that the concurrent tightening of monetary and fiscal policy turned the tough situation into an awful one. Germany was not an exception; it was equally hit hard by the Great Depression. For several years Germany enjoyed artificial success as a result of support by American loans and goodwill. However with the U.S economic crisis of 1930 had a ripple effect on many countries (Germany included) and unemployment becomes a reality that shocked many Germans, as companies downsized or shut down. Others lost their hard earned savings as banks suddenly folded. These unpleasant realities led many German citizens to abandon conventional political parties in favor of more radical substitutes, namely; Adolf Hitler, and the Nazi Party. References Carlson, M., Mitchener, K. J., & Richardson, G. (2010). Arresting banking panics Fed liquidity provision and the forgotten panic of 1929. Cambridge, Mass.: National Bureau of Economic Research. 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