Economic Strategy during the Great Depression and World War II - Essay Example

Economic Strategy during Great Depression and World War II World economy in the contemporary times is in the throes of a recession the likes of which the world has not witnessed since the collapse of the international economic order and the ensuing tragedy often referred to as the Great Depression of the 1930s. It is now being argued by many that the best solution to a recession is war, indeed it has been historically proven that war does seem to be the successor for recession in the economy thereby serving as its cure (Economic Times, 2008). After the 1797's economic deflation, there was war between US and France from 1798 to 1800. The war between US and Great Britain in 1812 followed the depression in 1807-1808. The long depression of 1873-1879 paved the way for war between US and Spain and the First World War which lasted till 1918.  Most relevant to our discussion here is the fact that the Great Depression was followed by World War II. During the period of the great depression there was an attempt by the man at helm, Herbert Hoover, who was then the President of US to maintain labor rates at 1929 levels. What this ended up doing was that it caused massive unemployment. World economy became stagnant, and labor rates fell and kept falling in order to make the refurbishments to adjust with production levels. The world was only rescued by the advent of World War II, with increased war production and mobilization-- solving the unemployment problem. The prevailing conditions are no different from that in 1920-1930's. The credit crunch after the sub-prime problem has literally put the global economy on the verge of depression which is on the lines of 1930's. It would therefore be interesting today to try and study what exactly it was that went wrong, and whether or not the claims in fact are true that it was in fact the war that came and rescued world economy. The following essay seeks to look at the difference in government policies and the response of the capitalist system to two problems that were diverse in their nature and yet one it seems was the solution to the other one. The two variables under the scanner here are the Great Depression that raged the world economy from the period of the late 1920s to the decade of the 1930s and how it has been argued that it was in fact men like Hitler and Mussolini in combination with the aggressive ambitions of Japan leading to World War II were actually responsible for bringing the world out of one big problem only to be plunged into another. The basic theoretical question stands…Is War an Antidote to Depression? If so how can one prove it? The Great Depression of the 1930s was an economic catastrophe that severely affected most nations of the world, and Australia was not immune. In fact, Australia, with its extreme dependence on exports, particularly primary products such as wool and wheat, is thought to have been one of the hardest-hit countries in the Western world along with Canada and Germany. Unemployment reached a record high of 29% in 1932 and gross domestic product declined by 10% between 1929 and 1931. There were also incidents of civil unrest, particularly in Australia's largest city, Sydney. What would be interesting to note at this juncture is the fact that it has been stated by many scholars that economic depression in Australia did not really have a distinct beginning or an end as it did in many of the other countries of the world (Lowenstein, 1983). If this is to be the case in point then one will need to establish the above mentioned statement by Fox in the light of the economic policies that were followed in Australia from the dawn of the 20th century and the three decades that led up to the crash in 1929. Australia, in the early part of the 1990s went from being an economy dependent largely on agricultural to being largely manufacture based. This happened by virtue of the fact that the government ensured the transfer of a big part of the resources from the rural to the urban sector by following the policy of protectionism and import replacement (Snooks, 2008). Agricultural share in the GDP dropped from being 23 to being 19% by 1910. Contemporary accounts of Australia’s entry and recovery from the Great Depression seem to suggest that Australia like any other globalized export trade dependent economy was simply suffering from the effects of recession exporter from abroad (Gregory and Butlin, 2002). Australia in the 1920s was in fact a country that devoted 30 per cent of its resources for the production of export items, thus like any other nation given to a trade based economy it could not but help feel the ripples that arose from declines in income and the decline in import demands from its trading partners (Fisher, 1934). As a nation that was reliant heavily on the export of two basic commodities- wool and wheat, Australia like any other primary producer was affected by the slump in the international commodity market. There was also in place a government-led shift of attention from natural resource exploitation to urban innovation through tariff protection. What these policies ensured in doing was that they were able to put in place a system of growth that was neither fast nor effective. A basic reason for this was the fact that first, external demand for primary products did not grow as rapidly or as persistently after the 1890s as it did before, even collapsing in the early 1930s; second, the scale of the Australian economy was not yet great enough for the generation of endogenous self-sustained economic growth in the larger urban areas that would be required to off-set the costs of a major, if relative, shift of resources from high-productivity rural industries to lower-productivity urban industries. Hence, GDP per capita grew more slowly than might otherwise have been expected. These dynamic arguments and consequences were totally overlooked by the simplistic comparative-static and marginal analysis of scholars who seek to look at the picture superficially (Brigden, 1929) and (Samuelson, 1939). There are however certain nuances to this discussion that need further looking into because it has been stated by some that the fundamentals of the Australian case were in essence different from those of other countries. Australian wage determination was highly centralized and regulated by a Commonwealth Wage Determination Court together with state tribunals. All foreign borrowing and loans were strictly controlled by a centralized loan council. Although as late as the 1930s, Australia remained faithful to the gold Standard and the principle of convertibility, for a while preceding the official devaluation of the Australian Pound, foreign exchange was effectively controlled by a cartel of trading with basically amounted to exchange practice (Eichengreen and Sachs, 1985). At the end of it all Australia was one of the first Gold Standard countries to devalue. The free market mechanism in the meantime was unable to sustain or provide for the opportunities to the rapidly growing and continuously developing population during a period in which: sound natural resource margins had been exceeded. The problem was further multiplied by the fact that exports and imports were no longer successful organs of growth by virtue of the instable nature of world economy at the time. ‘Protection all round’ raised the costs of trade with the rest of the world; and economic expansion was badly hindered by the first world war, an ineffective governmental management machinery and the policy of an increasing level of appeasement by following the British model(Schedvin 1970; Snooks 1974; Sinclair 1976). Dealing with the Great Depression required a test of strength for the Australian Governments that most of them sadly seemed to lack. The fact was that the depression was indeed a dramatic event and therefore required dramatic efforts to successfully handle it. The period has been described by many as being the Long Trough, during which the restructuring of the economy took place (Wilson, 1977). The Great Depression is now held as the benchmark for citing the failure of the great capitalism regime. It is indeed apart of the process of the free market mechanism cycle, which states that after every boom there will be a bust. Australia, because of its dependence on imports and foreign trade along with its need for foreign capital to finance its infrastructure program, fell as roughly as any of the other countries in the Western hemisphere. It was not alone in its fall although it was the nature of its fall that set it apart from the US and the UK and put in the bracket of primary commodities exporting nations like Germany and Canada. The result was that there was an extremely large downward thrust in wages, unemployment reached unprecedented numbers of almost 32 per cent and there were common incidents of civil unrest. The crisis was worsened when the 1925 the British government decided to put the pound sterling back onto the Gold Standard at pre-1913 parity. which had immediate effects making the Australian products much less competitive in the international market (Buckley and Wheelright, 1998).  Some blame for the continuing of the recessionist trends in Australia and further plunging the country into the depth of crisis can be attributed to the reign of Scullin and Lang. Scullin came to office as Prime Minister after defeating Stanley Bruce a conservative on the strength of the radical agenda of the Labor Party. Three days after he assumed office, the great crash happened at the Wall Street, also known as Black Tuesday. The period which Scullin occupied in office can be said to be the period when the roots of the crisis strengthened and the country went deeper into recession by virtue of his faulty policies, incorrect decision making and internal conflicts of the Labor Party itself (McCalman, 1984). The period was characterized by a continuous fall in the commodity prices, rise of unemployment, and a depopulation of cities (Lowenstein, 1983). Most of Australia’s unemployed took to the countryside in search of menial agricultural work. Tax revenues fell but these were not commensurate with a fall in government spending. There was in fact a very real threat that the country would default on its foreign debt accumulated in the frenzy of manufacturing backed growth in the early part of the 1920s. This prompted a delegation from UK headed by a Mr. Niemeyer from the Bank of England trying to get the Australians to cut back on public spending. The mission of the delegation was successful and in what is now known as the Melbourne Agreement of 1930, the Australian government disregarded all rules of economics which are supposed to guide recession rescue policies and agreed to slash government spending, cancel public works, cut public service salaries and decrease welfare benefits. It was on the strength of criticizing Scullin’s action and the signing of the Melbourne agreement that Lang got elected in 1931 to the NSW state elections. He devised what is now known as the ‘Lang Plan’, (Giblin, 1930). The plan advocated the repudiation of interest payments to overseas creditors until domestic conditions improved, the abolition of the Gold Standard to be replaced by a "Goods Standard" where the amount of money in circulation was linked to the amount of goods produced, and the immediate injection of £18 million of new money into the economy in the form of Commonwealth Bank of Australia credit. The Prime Minister and all other state Premiers refused. There was a slow recovery by the economy from the period of 1932, despite the fact that there was no institutionalized or formal plan in place to deal with the breakdown the economic order. Unlike the US where the New Deal was formulated or England where rearmament gave the required impetus to the economy, there were no real steps taken to deal with any inflation inducing measures or the rate of unemployment which had by then reached almost 32 per cent. The country however, did witness revival on the basis of the stimulation of the economy in the United Kingdom, as well as the devaluation of the Australian pound, the abandonment of the Gold Standard and the 10% cut to award wages. The change in approach and in effect can be traced back to the Ottawa agreement signed in 1932, by which each year after 1932 at least half by value of the goods sent to Britain avoided the tariffs paid by non Empire competitors, a margin averaging about 17 per cent under the competitor’s prices. There were a number of other treaties and agreements that were signed between the period of 1932 and 1938 but it was about this period that the full impact of the revival of the economy began to set in. in march 1938, the Federal Cabinet prohibited the export of iron ore to anywhere in the world, an embargo that lasted until 1960. In part this was an attempt to preserve a limited resource for domestic use but in hindsight it was the direct manifestation of an attempt at excluding Japan without jeopardizing the delicate balance that had been achieved as a result of trade diversification (Meredith and Dysler, 1999). In a way then the war started touching the Aussie shores and irrespective of whether or not the plan was intentional, the embargo was a small act of resistance to Japanese Militarism. Although exporters ironically, experienced trade diversification as a boomerang, manufacturing did benefit directly to a large extent. The steel industry served as the revival tool for the local vehicle industry, that imposed a smaller proportion than before of chassia and sheet metal for bodies. Steel output at the end of the 1930s was three times the amount than at the beginning of the decade. The natural protection and government contracts of the First World War, rising tariffs in the decade of the 1920s, and import substitution during the depths of recession encouraged capital expansion and improvement in Australian steel that automatically served to strengthen all parts of the secondary industry that drew on its output. There was also in place a larger manufacturing complex that created an engineering capacity and culture that was invaluable after the official start of the war. The role that was played by the state government in South Australia needs to be put in perspective here as well. They endured the traditional role of agents of economic development. Diminishing returns in agriculture, poor returns on mining, and a collapse in the market for trucks had hit the economy hard. FMCG companies which normally do not bear the brunt of recession were threatened and there were strong steps that needed to be taken in order to avoid deindustrialization. Public housing was promoted in an aggressive manner; cost of shelter dropped and the cost of living fell lower than that of other areas. There was thus the establishment of a wage structure and a price structure lower than other areas, which helped in luring in industries, thereby holding on to the lure on both capital and labor so as to maintain and expand a large scale manufacturing base (Mitchell, 1962). Finally the setting in of the war had a real positive impact on the economy in terms of reviving it by virtue of the fact that many Australian primary products were purchased as could be produced, and secondary industries manufactured many new items for the Services. Rationing and restrictions meant that there were few consumer goods available, so personal savings rose. Man powering and essential industries also meant that there was near-full employment. The period saw the decline of British imperialism and the severance of the umbilical cord that had tied Australia to the UK since the 1890s. The mode of dependence now shifted to a few key sections including agriculture as manifested in rural export industries. There was also the growth of the mining sector that led to the creation of emergence of monopoly mining capitalists including BHP. In terms of numbers, it has been stated that “By far the largest percentage increase in Australian manufacturing products occurred during World war II. In the 28 years leading up to 1938-39 manufacturing product doubled, with an annual growth rate of about 2.7 per cent but in the following ten years the increase was over 60 percent or an annual growth arte of 4.7 per cent. The reason was simple (Haig, 1975). Over the period of the War, the long term growth industry of chemicals boomed ahead with an increase in product of 6.4 percent per annum, closely followed by the traditional industries of metal, engineering (5.9 per cent per annum), and food (4.7 percent per annum). The growth rates of other industries was unimpressive. Conclusion: In conclusion therefore it can be stated with a certain amount of confidence that while it may not be 100 per cent correct that it was the War which came and rescues Australian Capitalism from the grips of Depression, it certainly did have a big part to play in the overhauling of the Australian production system making it the manufacturing giant that it was destined to become after the end of the war and the ensuing years of the cold war. It is also true that the a war more than any other imitative can take the problem of unemployment away in a hurry, but this is not the correct, acceptable or indeed a desirable manner in which recession should be dealt with. In the contemporary era, if lessons have to be learnt and parallels be drawn with the Depression of the 1930s, there can be no justification found in the statement that war indeed is the answer to the problem today. Focus should instead be set on the devising of programmers and strategies that will help bring up consumer confidence, get manufacturing back on the line and over all correct the effects of a crisis that has been offset by sub prime mortgages that were sold off by a handful of a few greedy bankers. Reference: Lowenstein W, 1983, Weevils in the Flour, pp.19-33 Brigden, J.B. et al (1929) The Australian Tariff: An Economic Enquiry (Melbourne: Melbourne University Press) Samuelson, M.C. (1939) “The Australian Case for Protection Re-examined”, Quarterly Journal of Economics, 54, pp. 143–49. Schedvin, C.B. (1970) Australia and the Great Depression: A Study of Economic Development and Policy in the 1920s and 1930s (Sydney: Sydney University Press). Sinclair, W.A. (1976) The Process of Economic Development in Australia (Melbourne: Cheshire). Snooks, G.D. (1974) Depression and Recovery in Western Australia: A Study in Cyclical and Structural Change, 1928–1939 (Nedlands: UWA Press). Giblin L F, Chapter 6:The Great Depression and the fight for inflation, accessed May 20, 2009, < http://epress.anu.edu.au/gp/mobile_devices/ch06.html> Fox, Charlie, Fighting Back: The Poltics of Unemployed in the Great Depession, 2000, p1-9 McCalman, J, Struggletown: Portrait of an Australian Working-Class Community 1900-1965, Penguin Books, p.1984, pp. 181-212. Buckley, K. & Wheelwright, T., False Paradise: Australian Capitalism Revisited 1915-1955, Melbourne, 1998 Meredith and Dyster, 1999, Australia in the global economy: continuity and change, Edition: illustrated, Published by Cambridge University Press, p155-162 Haig B D, 1975, Manufacturing and Output Productivity, 1910-1948/49, Australian Economic History Review, Vol. 15, p136-161 Is war a solution to global recession, accessed May 20, 2009, < http://economictimes.indiatimes.com/News/PoliticsNation/Is_war_a_solution_to_global_recession/articleshow/3897164.cms> Read More