The Great Depression of the 1930s - Case Study Example

During the 1930s the world economy experienced a great downfall. It was hit by The Great Depression and it was very different from the normal depression that the world had experienced till date. The Great Depression had a larger magnitude as there was around 30-50% drop in global production levels, unemployment rate was around 25%in powerful countries like Britain and United States and as high as 40%in Germany. The effects were so large that it lasted roughly around 10 years from 1929 to 1939. The Great Depression is also regarded as one of the major reason for World War-2 as governments became ineffective and people were left to despair (Hamilton, 2007, p. 18). This assignment highlights on the major reasons or causes for The Great Depression in the World economy and special emphasis had been given to its severe effects on Germany in contrast to other nations of the world. The same has been discussed as under. The Great Depression showed its footprints in the year 1929 and lasted roughly till 1939. Its impact was more severe in the United States and Europe, while it had lesser effects in Japan and Latin America. Industrial Production of United States declined by 47% and GDP by 30% while unemployment rate rose to 20%. Similarly, Great Britain struggled with low growth rate and high unemployment rate as well. However, it stopped declining after its abandonment of The Gold Standard in 1931. The impact of The Great Depression was severe on Germany as its industrial production suffered almost equal to United States and unemployment rate rose to a massive 40% (Hamilton, 2007, p. 12) It is to be noted that there is no single major cause of The Great Depression but it was a result of combination of some economical factors, some political factors and some social factors. Some of the major reasons or causes for the same had been discussed as under. THE IMPACT OF THE GREAT WORLD WAR-1 The First World War lasted for almost four years and involved many nations, technology, lost of lives and off course drained off huge funds. The war caused widespread destruction in the European countries and nations in order to win the war spend huge funds and its gold reserves to print currency notes. European countries struggled to pay their war debts and reparations and finally decided to go off from the Gold Standard and printed higher currency to pay off their debts which led to higher inflation, lower purchasing power and economic instability which led to the foundation for occurrence of The Great Depression (Koliopoulos & Veremis, 2002, p. 45). THE COLLAPSE OF THE GOLD STANDARD: During the war period, countries suspended the movement of gold and for further financing the war it required suspension of gold standard and going back to the gold standard was a difficult task as it required prices to be brought down to pre-war level for which the countries had to deflate their price levels by lowering the prices. Doing the same resulted in deflationary set of economic policies which further led to a downward economic pressure on the economy (Koliopoulos & Veremis, 2002, p. 48). As a result British economy felt a much higher pressure than other countries and its government almost went to starvation so it finally abandoned The Gold Standard which allowed countries to print new currency notes without backing it with gold reserves which led to very high inflation, unemployment and economic instability in the economy. STOCK MARKET CRASH OF 1929: The real winner that emerged from the First World War was United States of America, it grew tremendously as European countries purchased more goods from U.S.A. and its gold reserves increased at a rapid pace and finally U.S became the creditor nation. United States soon became the financial pillar on which the whole world economy depended. People in United States started flocking towards the share market to gain more and more. People started betting on the stock market and earning with the increase stock prise without actually investing on the worth of the corporations. The U.S. stock became a bubble and to cool down the same The Federal Bank started raising interest rates which ultimately led to collapse of the U.S. stock market on 24th October, 1929 and these led to insolvency of many firms. Capital was pulled out of Europe to repair the American Economy which further worsened the globalsituation (Koliopoulos & Veremis, 2002, p. 53). BANK FAUILURE: It is indeed a point to be noted that around 9000 numbers of banks collapsed and were completely shut down during the 1930s. Further banks which did not failed suffered to survive. The banking system was not at all prepared to absorb such a larger shock in the global economy and government failed to gain confidence in the people to reinvest in bank who feared bank failure as bank deposits were uninsured and thus as bank collapsed it led to a direct loss to its investors. Banks which had survived feared to create new loans that majorly impacted the economic stability and led to financial crunch in the global economy (Koliopoulos & Veremis, 2010, p. 34). INTERNATIONAL DEBT: America which had emerged as a strong lender during the World War started calling to pay off its debts which it had given. European countries owned a lot of money to U.S. the debts were so high that they could not pay off the same and started borrowing more to pay off their earlier debts. America was on no condition agreeing to lower the debt rates and its tariff rates kept rising which did not allowed the European countries to sell their products in U.S. Further, after the stock market crash of 1929, U.S. began to recall their loans at a faster rate which led to more drainage of fund from European countries and a complete dismay situation in the global world (Koliopoulos & Veremis, 2010, p. 38). Thus, we see that there were many causes for The Great Depression which had already been discussed in the above paragraphs. However, apart from the points discussed there were other causes which also contributed to the Great Depression like. Severe drought conditions that occurred in the Mississippi valley in 1930. To stabilise the economy production was triggered thus the market had more production than consumption scenario. There were huge farm failures in United States as farmers had bulk production and the prices of the farm products were too low to make any profits. There was a sharp rise in the people below poverty line as a consequence of war, most of the wealth was much enjoyed by relatively fewer Americans which led to complete wealth mismatch in the economy. There was lack of Global Financial Leader and many errors were made in the economic policies which worsened the situation. The end of World War-1 led to geopolitical instability in the economy due to dissolution of larger empires into many smaller states. All these factors in combination led to a complete economic instability and resulted in adverse effects on the global economy which took a much longer time to come out of it. The Great Depression had a global impact and mostly European countries suffered the major hit of the same. However, Germany had severe consequences as a result of the depression. After the World War-1, the Treaty of Versailles imposed huge restriction on Germany and imposed huge payments on Germany as war reparations. Germany and Austria experienced depletion in their treasuries and were reduced in size and economic stability. The German Economy was is in no condition to pay off this disproportional debts and when the global economy was hit by The Great Depression it had a major impact on the German Economy which was left to complete dismay and disorder. Another important factor which contributed to the German economy collapse during the Great Depression was its international trade being regulated by the Smoot-Hawley Tariff Act .This prevented many German industries to sell goods in the foreign market which affected the international Balance of Payments and led to deficit in the international liquidity of Germany. Further to pay off its huge debts as per Treaty of Versailles, German Economy had no option apart to engage in hyperinflation of its currency, printing more of paper marks until 1923 when they became worthless which wiped off huge savings of German people and the country had very little capital available for the years to come. In the year 1923, France occupied the Ruhr Valley, which was regarded as the heartland of the German Industry as Germany failed to pay off its debts for reparations demanded by The Treaty of Versailles and finally had to take huge loans from the American Economy which the United States Demanded after its stock market collapsed in 1929 and simultaneously the world hit by The Great Depression worsened the situation. This led to businesses closed in Germany, huge unemployment and inflation was rampart in the German Economy (Aldcroft, 2006, p. 23). It is because of all the above reasons discussed that Germany which was already at the knife-edge before The Great Depression was badly struck by the global depression and had severe consequences in its economy then the other countries of the world. Some of the major effects of The Great Depression are as follows. German economy had already fell apart after the world war-1 and disproportional debts levied on it by The Treaty of Versailles, by 1932 its industrial output production fell to 40% of the level which it was in the year 1929 (Aldcroft, 2006, p. 27) Unemployment rate rose drastically and was around 40% which was around 8 million people went jobless (Aldcroft, 2006, p.27) As the country was hit by high prices, high inflation, low purchasing power, economic instability, huge unemployment etc people took to criminal activities to live for their survival which further worsened the situation and left the county with no proper government regulations and complete disorder in the German economy (Aldcroft, 2006, p. 27) The Nazi party which was no more than a conspiratorial group became a mass movement and saw the rise of the great Adolf Hitler and establishment of dictatorship in the German economy (Aldcroft, 2006, p. 28) Thus, we see that the major reason of higher effects of The Great Depression on German Economy was because of the huge restrictions which was imposed by Allied nations of the world on Germany to make Germany break into smaller fragments in the Treaty Of Versailles and further the only support of German Economy which was the American financial support to pay off its debts which was badly affected after the collapse of the American Stock market and it started demanding its loans at a quicker rate which further added to complete breakdown of the German Economy (Raupach, 2006, p. 77). In this assignment we see how different factors contributed towards The Great Depression and one can definitely not conclude which factor was the most important reason for the same since each factor contributed equally and a mix or combination of the same in different parts of the globe led to The Great Depression. The most important aspect of The Great Depression was human suffering. World output and standard of living saw a serious setback. People in every round the globe was affected by the Great Depression. The Great Depression ultimately led to a complete abandonment of The Traditional Gold Standard and there was no definite monetary standard during the depression period. However a fixed exchange system was developed in the Bretton Woods System after the World War-2 but today the economy experiences a Flexible Rate of exchange system. On the other hand The Great Depression also played a crucial role in development of macroeconomic policies which included both monetary and fiscal policy and showed the entire world the adverse effect that a recession can have globally. Further different countries learnt to develop correct macroeconomic policies to fight against economic downturns and upturns. Further, Germany saw the rise of dictatorship under the name of Adolf Hitler who within six years of taking powers worked economic miracles in German economy and transformed Germany into a complete super power once again in the global upfront. References Aldcroft, D. (2006). Europe’s Third world. The European Periphery in the Interwar Years. Aldershot: Ashgate Publishing Limited Hamilton, J. D. (2007). Monetary Factors in the Great Depression. Journal of Monetary Economics, 13, 1-25 Koliopoulos, J. S. & Veremis, T. M. (2002). Germany – The Modern Sequel. From 1831 to the present. London: Hurst & Company Koliopoulos, J. S. & Veremis, T. M. (2010). Modern Germany. A History since 1821. Chichester: John Wiley & Sons Ltd Raupach, H. (2006). The impact of Great Depression on Eastern European states. Journal of Contemporary History, 4 (4), The Great Depression, 75-86 Read More