Global Economy during the Great Depression Period - Case Study Example

Global Economy during the Great Depression Period Name: Institution: Course: Instructor: Date of submission: The 1930s great depression period marked the beginning of the protectionism outbreak. The period lasted for about five years (1929 t0 1933), but its impact was felt for about ten years. Although this period greatly affected the U.S, all other parts of the globe felt its impact. Unlike other depression that had occurred previously such as the 1970s and 1890s, where the GDP returned to normalcy after about five years, it took over one decade for the GDP to come back to normal. In 1929, the economic activity began to experience a decline and by 1933, GDP had fallen by over 25%, erasing of the growth of the economy witnessed in the previous century. The hardest hit sector was the industrial production which saw a fall of about 50 %. This was unlike 1870 where the fall was only 7% and 1890s that had witnessed a 13% fall. From the depression depth in 1933, the economy did not recover until 1939. Severe recession followed this for a short time and eventually a period of growth of the global economy. Many scholars have highlighted the rate of unemployment witnessed during this period and according to them, the rate was very high (Kindleberger & Charles, 2009). Many have widely accepted the level of unemployment to have been more than 25% in 1933 and stood at 14% through the 1940s. The period witnessed so many hardships and among them included the panic seen in the banking system since many depositors withdrew their money since rumors were spreading that the banks were in trouble. While some banked were forced to merge, others terribly failed and in the US alone, there was 35 percent fall of the banks from 1929 to 1933. Although the recession than others hard hit some economic sectors, all regions as well as areas of the globe experienced a severe decline as well as sharp output decline. Millions of people went unemployed. Farmers were also significantly affected by the prices of their produce sharply fell by about a half (Maddison & Angus, 2010). According to historians, several economic factors led to the origin of a great depression and these include weakness and imbalance of the global economy, the decline in demand, faltering housing needs, and a reduced production rate. Foreign loans to nations following the First World War faced difficulties in the 1920s as many countries in Europe did not have the means to back the loans they had borrowed from the US. This eventually led to the destabilization of the US debt market. Other factors that made the market be unstable included "buying on margin", where shared were bought on credit while loans were utilized to pay-off shares. After the 1929 market crash, banks started to witness a failure in 1930, and this caused many people to make the withdrawal. Banking system's collapse led to the closure of many factories (Kindleberger & Charles, 2009). The great depression was the most severe form of depression to have occurred in the developed world. Although the origin of the depression was in the U.S, its results were felt in many parts of the globe. It is the second gravest crisis to have been witnessed in the world. Nations across the world had varied timing as well as the severity of the great depression. The US as well as many European countries had a prolonged as well as severe depression period. In Latin America and Japan, the time was milder (Maddison & Angus, 2010). Several factors including misguided policies by the government, financial panic, and decline in demand by the consumers significantly contributed to the occurrence of the great depression. The gold standard that ensure the linking of the global rate of exchange played an essential role in transmitting the US' downturn to other parts of the globe. Efforts to recover from depression were mainly boosted by ensuring the expansion of money and the abandonment of the golden standard. This period brought a lot of fundamental changes in the macroeconomic policy, economic institutions, and economic theory. The real output, as well as prices, witnessed a sharp fall. The index of the wholesale price decreased by about 33% (Nystrom, 2010). There was the struggle of the Great Britain in 1920s, partly contributed to its decision to bring about the gold standard sing the overvalued pound. England witnessed great depression as from the 1930s and its industrial production decline was about one-third of that of the US. France was also affected by the great depression for a short period, mainly from 1932 to 1933 (Madsen & Jacob, 2011). The industrial production of France witnessed a substantial fall from 1933 to 1936. The economy of Germany saw a slip in early 1928 and the last three months of 1929. The decline in industrial production of Germany almost equaled that of the US. Several nations in the Latin America witnessed depression towards the end of 1928 as well as early 1929. Less developed countries suffered severely due to the great depression. The general deflation of prices seen in the US was also present in several other nations. Almost all the industrialized nations experienced a decline in the prices of the wholesale of about 30% from 1929 to 1933. This prompt deflation may have been the key to ensuring that Japan witnessed a mild form of depression. Primary commodities' prices saw a decline during this period. For instance, prices of cotton, coffee, rubber, and silk dropped by about a half four months before the end of 1929 and towards the end of 1930. Owing to this, the trade terms declined precipitously for primary commodities' producers (Maddison & Angus, 2010). The recovery of the US begun in 1933 during this period there was a rapid growth of the output. The average growth of the GDP was 9% following the great depression period. From 1937 t0 1938, the US witnessed another economic downturn for one year. However, the economy started to grow rapidly in mid-1938. There was a variation of the recovery from the great depression in other nations across the globe. The decline in Britain stopped once it abandoned the gold standard plan in 1933. Genuine recovery, however, started occurring in 1932. Many countries in Latin America witnessed a recovery in 1931as well as 1932. In the 1932's fall, Japan and Germany began to see the economic recovery. Australia, Canada, as well as other small nations in Europe started to attain improvement during the same period as the US. It was until 1938 that France witnessed the full recovery (Kindleberger & Charles, 2009). Australia was among the nations severely affected by the great depression. Similar to other countries, Australia witnessed several years of poverty, unemployment, deflation, low profit, lost opportunities, and plunging income. The collapse of the global demand for various products significantly affected many nations economically since many products were sold at a very low price. Major cities such as Sydney witnessed civil unrest. The country's recovery from the great depression's economic turmoil begun in 1932. One of the features of the great depression was severe protectionist trade outbreak. But centrally to the belief that many countries scrambled to raise the barriers to trade, many nations had variation regarding movement towards protectionism. Nations that did not abandon gold standard introduced import quotas, tariffs, and exchange controls at a higher rate compared to those who had left the gold standard. The barriers to trade led to sharp world shrinkage at the start of 1930s beyond the collapse of the global economy itself (Madsen & Jacob, 2011). Protectionism rise is well documented, and many scholars suggest that the policy of trade was chaotic everywhere with all nations imposing higher barriers to trade. However, nations had a variation concerning how they imposed the measures of protectionism (World Trade Organization, 2013). With some nations having a sharp rise in the tariffs as well as have a strict control on international trades, others did not impose tough measures on exchange restrictions and trade. The regime of the exchange rate as well as the associated economic policies substantially determined trade policies at the start of the 1930s. Countries that retained gold standard had a high likelihood of restricting foreign trade. With other nations gaining and devaluing competitiveness at their expense, they ended up embracing protectionist policies to add strength to the payments balance as well as limit gold losses (Eichengreen, 2010). These nations are utilized trade restrictions to ensure a shift in demand towards goods produced locally with the hope of stemming the declining output. In contrast, countries which did away with gold standard experienced a strengthened payments balance and at the same time benefited from the inflows of gold (Chernyshoff, Natalia, Jacks, & Taylor, 2010). Deserting the gold standard also ensured the freeing of monetary policy to cut down the interest rate. No longer controlled by gold standard, more freedom was experienced by the central bank to act as the last resort lender. Since they had other policy instruments to ameliorate the depression, they did not result in the protection of trade as a macroeconomic tool. Nations which exited the gold standard early had a relatively mild recession as well as soon recovery. On the other hand, countries which retained the gold standard experienced a prolonged great depression. This is because these nations were hindered from utilizing their monetary policies to ensure a stimulation of their economies and as a result ended up restricting their trade (World Trade Organization, 2013). Clinging to the gold standard by several nation explain why the outbreak of protectionism led to the falling of the world trade system. The gold standard which was present from around 1870 to around 1913 linked the economies of the globe thru a de facto attached exchange rates system. Due to post-war monetary and economic dislocations, gold standards was still present in late1920s. While all nations were able to return to their parities of the pre-war, the prewar global monetary system's basics were now in place. The reconstruction of the gold standard was reestablished to address the postwar gold shortage (Eichengreen, 2010). Several reasons explain why Britain did away with the gold standard and among them include that gold standard became a wholesale devaluation. Many nations followed suit after Britain announced its abandonment of the gold standard (Ernesto & Meissner, 2013). Despite the 1931 turmoil, several counties remained in the gold standard, and these included Germany, Belgium, Switzerland, and Netherlands. While foreseeing the control of the exchange, these countries tightened quotas as well as raised tariffs on imports as a way of insulating their economy from the recession as well as protect their reserves of gold. In the middle of a global depression, many countries which did not abandon gold standard were seeking t improve their payment balance as well as preserve their foreign and gold reserves (Chernyshoff, Natalia, Jacks, & Taylor, 2010). The achievement of this could be through controlling exchange (Germany) or trade restrictions to limit spending (France) The simplest indicator of tariff protection level is customs revenue as the value of imports' share. Average taxes were high from 1928 to 1935 among countries which retained exchange control and gold standard countries. The exchange control counties whose average tariff significantly escalated included Italy, Germany, and Austria (World Trade Organization, 2013). A good explanation to this is that tariffs can be substituted by administrative control on foreign exchange. Nations hosting global financial centers namely France, United States, Switzerland, and Netherlands were reluctant to leave gold standard because of the fear that they would lose financial business to other nations. Protectionist led to the collapse of the global trade since many countries imposed trade restrictions. Some countries would impose these restrictions to stem unemployment as well as a decline in output (Ernesto & Meissner, 2013). The rising of the trading system of the globe occurred at the beginning of the industrial revolution. Germany and Italy unification placed pressure on the non-discriminatory trade relations system of Europe as the two nations were determined to amalgamate internal unity by rising external barriers of tariffs. The 1873 to 1877 depression which almost had a similar impact like the great depression of 1929-1933 piled pressure for a domestic protection and at the same time weakened foreign market's access (Eichengreen, 2010). A growing strain in the global trade system also occurred as a result of the failure by the US to lower its tariffs despite being a major manufacturing and agricultural exporter. The free trade imperialism spearheaded by Britain was vanishing as indicated by the move made by several European countries to scramble for Africa and other parts of the globe (Chernyshoff, Natalia, Jacks, & Taylor, 2010). The free trade Orthodox also faced resistance within Britain as many politicians called for the nation to strengthen as well as protect its empire mainly thru trade preference. In 1930s, the Democratic Party played a key role in ensuring that the US is becoming a free trade bloc, and this was thru the 1934's Reciprocal Trade Agreement Act. The free trade idea was essential in a nation which had previously embrace protectionist measures thru the Republican government. Protectionism uses tariffs (taxes on imports), subsidies, and quota on imports to ensure the shielding of the economy from the competition oversee (Wandschneider & Kirsten, 2008). The US and a host of nations made a bold move by introducing free trade in the place of protectionism since it (free trade) was vital in increasing real income. Free trade was proposed in response to the great depression which had adverse effects on the global economy. Free trade is characterized by free markets, the natural flow of commerce, as well as capitalism. The introduction of free trade significantly contributed to the global economic recovery (Ernesto & Meissner, 2013). References Chernyshoff, Natalia, David S. Jacks, and Alan M. Taylor. (2010). “Stuck on Gold: Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard, 1875–1939.” Journal of International Economics 77, no. 2. Eichengreen, B. (2010). The slide to protectionist in the Great depression: who succumbed and Why? The Journal of Economic History, Vol. 70, No. 4. Kindleberger, Charles P. 2009.The World in Depression, 1929–1939. Revised edition. Berkeley: University of California Press. Lopez-Cordova, J. Ernesto, and Christopher M. Meissner. 2013. “Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era.” American Economic Review 93, no. 1. Maddison, Angus. (2010). Historical Statistics on the World Economy, 1–2008AD. Available at http://www.ggdc.net/maddison/Historical_Statistics/vertical-file_02-2010.xls. Madsen, Jakob B. (2011). “Trade Barriers and the Collapse of World Trade During the Great Depression.” Southern Economic Journal 67, no. 4. Nystrom, S. M. (2010). Free trade and new deal: the United States and the International economy of the 1930s. Iowa: Iowa State University. Wandschneider, Kirsten. (2008). “The Stability of the Interwar Gold Standard: Did Politics Matter?” The Journal of Economic History 68, no. 1. World Trade Organization. (2013). Trends in international trade. World Trade Report. Read More