The Rise of the West: The Great Depression - Article Example

 The Rise of the West: The Great Depression The Great Depression was a momentous event almost eighty years ago. Arguably “the most traumatic episode in the history of capitalism” (Hobsbawm 1994), it began with the New York Stock Exchange Crash on October 29 1929 and nearly resulted in the total collapse of the capitalist world economy. The result was an international economic breakdown which impacted nearly every country in the world. Global economic implications of the Depression included an almost universal decline in national economic productivity and skyrocketing – as well as increasingly threatening – rates of mass unemployment. Seeking to understand the ramifications of the Great Depression, this essay seeks to provide a comprehensive analysis of the precursors to the worst economic crisis in American history. In addition to exploring the effects of the Great Depression on American society, we will explore the affects of this event on global trade, politics, the development of Nazism in Germany, and its effects on the Soviet Union. The terms “Great Depression” and “Great Crash” will be used synonymously throughout this essay since they refer simultaneously to the same event: the economic collapse of 1929 and the ensuing economic and social crises for much of the Western developed world (McNeill, 1963). In an attempt to provide a comprehensive summary of an event with international consequences and geopolitical reverberations, this essay be structured in the following manner: 1) the Great Depression of 1929 will be explained and analyzed on a global scale, looking at the tangible effects of this event on the United States and the countries of Europe (both democratic and authoritarian/capitalist and proto-communist); 2) parallels with this event and the modern economic crisis will be explored primarily through a prescriptive lens, employing the complete and definitive work on the subject, John Kenneth Galbraith’s The Great Crash. Reasons for the Great Crash/Depression will be discussed with reference to how we can learn from lessons from the past; 3) finally, we conclude with a synopsis of the research explored with an eye to the main causes of this event and their ramifications. Understanding that the Depression was an international event with global repercussions, the following will analyze the varied impact of this economic collapse on both the United States and the countries of Europe. The focus here will be on economic factors and our analysis of the Great Depression will be both descriptive and prescriptive with a focus on the economic underpinnings of the Depression. The Depression of 1929 In the first four years of the Great Depression, world trade fell by an astonishing 60%. As an example of the decline in economic productivity, automotive production in the United States decreased by 50% between 1929 and 1931 and American imports (as well as exports) fell by approximately 70% in the first three years of the Depression. Unemployment, during the worst period of this depression (1932-33), hit a high of 23% for the Belgian and British economies respectively, 24% for the Swedes, 27% for the Americans, 32% for the Danish and a shocking 44% for the German economy (Hobsbawm, 1994; McEvedy, 2002) What were the immediate precursors to the Great Crash of 1929? From a purely economic perspective, there were many causes of the Great Depression although a single cause for one of the most traumatic economic events in world history remains under debate. Economists today are not unanimous in describing the causes of the Great Depression but importantly there are a series of economic factors, which when put together can help explain the emergence of global depression. First and foremost, widespread deflation in both commodity and asset prices and rampant and unchecked market speculation were important contributors to the downturn which resulted in the Crash. Renowned American economist Milton Friedman emphatically argued that the US Federal Reserve did not produce correct policies to combat the effects of recession. Federal intervention could have offset the structural problems associated with the Depression and the collapse of the American monetary supply resulted in what was called a “Great Contraction” precipitated by a restricted supply of money. As unemployment increased, incomes fell and a restricted supply of money led to hoarding and contractive forces in the market. According to Friedman, the onus was on the government to react to these market forces but it unfortunately did not respond in time to stave off the depression. Thus, structural weaknesses in the American banking sector precipitated the Great Depression and the inability of the United States government to stave off the consequences of the Wall Street Crash of 1929 led directly to global economic depression among the capitalist countries of the Western world. These were some of the precipitants in the United States, what were the international antecedents to the Great Depression? Following the end of the First World War, many European countries were deeply in debt and chose to abandon the gold standard as an international reserve currency. The result was inflation coupled with tremendous post-war debt on the European peninsula led to an unbearable economic burden which was effectively shouldered by a handful of European countries, recently destroyed by war and with an already precarious economic situation to begin with. German, under the post-War Weimer Republic, in particular had to contend with rising inflationary pressures and a currency which was on the verge of becoming worthless. Deflation eroded the prices of commodities while at the same time increasing national debt which invariably led to the New York Stock Market Crash of 1929. This led to near total economic collapse in the capitalist countries of the Western world and stranglehold on international trade. What were some of the economic and political consequences of this momentous event? (Rothbard, 2000) The Depression had both economic as well as the political consequences and was a catalyst for continued government intervention in the economic and social spheres. Importantly, each country responded to this global crisis in a different manner. On the left side of the political spectrum, Sweden began social-democratic rule with activist government intervention to offset economic disparities associated with modern capitalism. Accordingly, “the Swedish social-democratic policy after 1932 was a conscious reaction to the failures of the economic orthodoxy” (Hobsbawm 1994). The result was the establishment of a modern welfare state. The United States, under Theodore Roosevelt, also pursued a reformist strategy and responded to the Depression with the New Deal, a series of packages and aimed at giving relief to the poor and unemployed In fact, an important component of the New Deal was the Social Security Act of 1935, a direct response to the economic malaise of the era (Kindleberger, 1929). On the right side of the political spectrum, the Nazi Party in Germany benefited from the rise in unemployment and social upheaval caused by the Depression. In fact, mass unemployment in Germany led to increased popularity for the Nazi Party, which was also able to capitalize on German disillusion with the state of affairs following Versailles (reparations, “war-guilt clause”, and exorbitant inflation). It could be argued, in fact, that Nazi membership grew in tandem with that country’s economic misfortunes. Accordingly, fascism, as expressed in Nazi Germany, “mobilized the masses from below” (Hobsbawm 1994), using public theatre, racism and the use of nationalism as mobilizing tools. Once firmly in power, the Nazi government, through intense bureaucratic regulation and economic mobilization for the aims of the state, managed to alleviate unemployment in Germany between 1993-1938, but at future cost (Temin, 1989). The Soviet Union, itself another authoritarian political system, grew out of mass discontent associated with the First World War. Interestingly though, the Soviet Union’s centrist planning economy was largely immune to the Great Depression. The Bolsheviks, led by Vladimir Ilyich Lenin, viewed themselves as the shepherds of a new international communist order in necessary conflict with the old order, embodied by bourgeois liberal capitalism. A centrist planning economy necessitated activist governmental intervention in all aspects of the state’s social and economic growth. Because the Soviet Union removed itself from the global capitalist economic world system following the October Revolution, it was effectively immune to the crisis caused by the Depression. In spite of this, bureaucratic regulation and heavy governmental economic intervention were nonetheless used by the Soviets for another further aim: the establishment of a modern, communist utopia (Kindleberger, 1929; Hobsbawm, 1994). Turning back to the implications of the Great Depression on the United States, the Depression in fact paved the way foe increased government intervention in the economy. Accordingly, the functions of the state became more heavily involved in the economic sector, providing both stimuli and a guiding hand for the markets of the day (Sitkoff, 1985). As such, Economics and politics have always attracted one another and no event so inextricably wed the two together as the Great Depression. Economic catastrophe set in motion the political events that created the New Deal; New Deal reforms reorganized and regulated the American economy; and since then the government's role in assuring the performance of that economy has become the dominant political issue of the century. This intimate relationship between politics and economics had particular interest for the Roosevelt administration (Wallis, 1963). In addition to the establishment of the New Deal, large federal grants were used to finance the American government’s unemployment and agricultural relief programs. Accordingly, In 1927 non-military federal government expenditures accounted for 3.0% of GNP. By 1940 non-military federal expenditures were 8.5% of GNP.2 Such growth was unprecedented, indeed it is unique in American history. More- over, between 1932 and 1940, 75% of the growth in non-military federal expenditures came in programs administered under "cooperative arrangements" with the states. These grant programs grew from $250 million in 1932 to $3,922 million in 1940 (Wallis, 1963). The Great Depression and Today Does history repeat itself? The age old adage may ring true, especially when it comes to an analysis of the Great Depression, almost eighty years ago. The United States in presently in the worst financial crisis since the Depression of 1929. In the wake of the Cold War, the United States of America emerged as the dominant global economic and military power and ushered in a new world order of capitalist-inspired economic growth and prosperity. Virtually uncontested at the helm of the world’s strongest economy, the United States has recently witnessed ominous signs of an impending economic meltdown. A variety of factors precipitated the current economic crisis, an event which draws parallels with the Great Depression eighty years ago. Some of the precursors to the current financial crisis include the implosion of the American sub-prime lending market, a mortgage market in crisis and an induced credit crunch with global ramifications. Banks for foreclosing, people are losing their homes and the international economic situation is precarious as global lenders are closing their doors and filing for bankruptcy. The correlations with this financial crisis to the Great Crash of 1929 are so similar that it is eerie. Attempting to understand the reasons for the Great Depression, John Kenneth Galbraith analyzed the economic situation in the United States leading up to the Depression in a profound book entitled, The Great Crash. In this tome he outlined the preconditions for the crisis. Seeing the rise in speculation as perhaps the most important precondition for the Great Crash of 1929, Galbraith emphatically argues that an economy based upon speculation, such as through stocks, bonds, currencies, real estate, derivatives, and commodities is inherently unstable from a macroeconomic perspective and prone to a burst in the speculative bubble. Optimism is a characteristic of the speculative investor and Galbraith argues that an economic system with a speculative basis is liable to crash and subsequently a shaky basis for an economy. In addition to the risks caused by a speculative market, income inequality, so pervasive in the United States during the period further contributed to an unstable economy and this income distribution imbalance exacerbates instability. Accordingly, when “5 per cent of the population with the highest incomes in that year [1929] received approximately one third of all personal income", an economic crisis is sure to be on the horizon. Additional antecedents to the collapse include a weak banking structure, imbalance in foreign trade, weak economic intelligence and problems in the structure of US corporations. He argued that as economic actors, corporations in America were structured to contribute to the deflationary cycle as opposed to opposing it (Galbraith, 1992). Strategies outlined by Galbraith to limit the eventuality of a future economic crash are varied and provide lessons for the future to ensure that a crisis like the Crash of 1929 never occurs again. Lessons for the future include correcting the imbalance of foreign trade, restructuring the banking system to safeguard against inherent instability within the markets, the restructuring of US corporations to make them less predatory, proper income redistribution within the United States and a lessening of the dependence on speculation for the market to function (Galbraith, 1992). Concluding Remarks The Great Crash of 1929 is incredibly timely in light of the current global economic meltdown and it is obvious that forewarnings to a global economic crisis more than half a century ago have gone unheeded. Accordingly, when persistent income inequality is a feature of a domestic economy, the system itself will remain untenable and prone to implosion. Remembering the mistakes of the past is also an important strategic aim advanced by Galbraith and an understanding of what happened in 1929 is, according to this author, the best way to ensure that an event similar in magnitude to the Great Crash of 1929 never occurs again. In a lucid and concise analysis of the Great Depression, Murray Newton Rothbard provides a comprehensive account of the economic ramifications of the Crash of 1929: The Wall Street collapse of September-October 1929 and the Great Depression which followed it were among the most important events of the twentieth century. They made the Second World War possible, though not inevitable, and by undermining confidence in the efficacy of the market and the capitalist system, they helped explain why the absurdly inefficient and murderous system of Soviet communism survived for so long. Indeed, it could be argued that the ultimate emotional and intellectual consequences of the Great Depression were not finally erased from the mind of humanity until the end of the 1980s when the Soviet collectivist alternative to capitalism crumbled in hopeless ruin and the entire world accepted that there was no substitute for the market (Rothbard, 2000). As the paragraph above emphatically demonstrates, the Great Depression was an event of international proportions. The impact of this global economic crisis could be felt around the world from the United States to Europe. Interestingly, growing discontent may have led to the rise of Nazism in Germany. Even more importantly, the Soviet Union was effectively immune to the Depression due to the fact that, since the Bolshevik revolution of 1917, it had removed itself from the capitalist equation. The Soviet Union was an anomaly, however, and the United States responded to the Depression through increased government intervention and involvement in the economy. The New Deal represented government involvement in the private sphere and American cautiousness towards the forces of unfettered capitalism. With ramifications across the globe, the Great Depression of 1929 effectively changed the world forever (Freidel, 2003). References Freidel, Frank. 2003. Franklin D. Roosevelt: Launching the New Deal. Boston: Little, Brown. Galbraith, J.K. 1992. The Great Crash, 1929. New York: Penguin Books. Hobsbawm, Eric. 1994. Age of Extremes: The Short History of the Twentieth Century: 1914-1991. London: Abacus. Kindleberger, Charles Poor. 1929. The World in Depression, 1929-1939: Revised Edition Berkley: University of California Press. McEvedy, C. 2003. The New Penguin atlas of history: Revised edition (2nd ed.). New York: Penguin. McNeill, W. H. 1963. The rise of the West: The Great Depression . Chicago: University of Chicago Press. Rothbard, Murray Newton. 2000. America's Great Depression. London: Ludwig von Mises Institute. Sitkoff, Harvard. 1985. Fifty Years Later: The New Deal Evaluated. New York: Knopf. Temin, Peter. 1989. Lessons from the Great Depression: The Lionel Robbins Lectures for 1989. Boston: MIT Press. Temin, Peter. 1979. The Beginning of the Great Depression in Germany. Economic History Review 24 (August 1979): 240-248. Wallis, Joseph. 1987. Employment, Politics and Economic Recovery during the Great Depression. Review of Economics and Statistics 69(3): 516-520. Read More