The Great Depression/1930s Depression had multiple causes and similar mistakes can be seen today. The biggest mistake was globalisation which removed the essential diversity of economies. A degree of separateness of economies means that one economy can fail without the rest collapsing and nations do not mindlessly copy each others mistakes or, worse still, enter into international agreements to ensure that the mistakes are copied.
Globalisation
The economies of the late 1920s were highly globalised, perhaps more so than today. Although, after the Great War the banks were deregulated to trigger the 1920s boom the money supply was subsequently controlled by a return to the gold standard. The gold standard was largely managed by Great Britain and the USA and conversion rates between currencies and gold were regulated. Large companies controlled shipping, mining and steel production on a global basis. Banks lent to each other across frontiers, secure in the gold standard. International trade was lubricated by export guarantees. The English language, Western dress, American films and western manufacturing and financial methods were spreading across the world. The European Empires ensured that this influence spread even to the furthest reaches of Africa, India and SE Asia. Vast steam ships ferried people and products to every corner of the globe. It was truly a new world order that was making everyone more prosperous. Money was flowing freely around the globe. The crazy Economists and newspaper pundits were extolling the virtues and inevitability of globalisation. Once everything had been become sufficiently interconnected and interdependent it was ready for collapse. (See Lessons from the Great Depression. Economist Sept 2001, although it is extraordinary that the author of this work considers that the ills caused by globalisation that caused its own demise were somehow an attack on globalisation.)
The modern Sub Prime Crisis and Stock Market Collapse of 1929
In the late 1920s banks loaned huge amounts of money for investments in the stock markets that fuelled the stock market booms. Eventually it was obvious that stocks were overvalued and the banks could no longer support their loans and called them in. Investors sold their shares to pay off their loans and stock markets across the world collapsed so the banks could not get their money back and some banks collapsed. Public confidence in banks fell and depositors withdrew their savings to invest in gold. This, coupled with a decline in interbank lending, put the banks under pressure and yet more banks collapsed. In modern times the banks lent huge sums of money on property investments, the properties became overvalued and some banks collapsed, interbank lending created a domino effect placing banks everywhere under stress. In both cases rash bank lending caused bank failure. There was also a considerable amount of white collar crime in both periods.
The Euro Zone and Gold Standard
In the late 1920's most currencies in the world were backed by gold, each unit of currency being backed by a fixed amount of gold held as bullion. Some countries horded gold, especially France, and traded their goods at a discount. This led to an inflow of gold into France. Other countries experienced a gold shortage as a result and introduced austerity measures and raised interest rates to maintain the value of their currencies. This has echoes in the euro zone of today where the northern countries are producing large amounts of goods more cheaply than those in the south. Austerity measures and higher bond interest rates are required for these southern countries to obtain euros in the same way as they were needed for countries to obtain gold. Countries left the gold standard and eventually it was abandoned, this has not yet happened with the euro.
Recapitalisation of Banks
The poor state of the banks in the early 1930s meant that they needed to be recapitalised. By the mid thirties banks had large reserves and were not lending, this restricted the supply of business and personal loans so led to decreased economic activity. In the early days of the modern sub-prime crisis banks were at first re-capitalised by governments but now they are being re-capitalised by ultra cautious lending as in the 1930s so hindering recovery.
Competitive devaluations and Tariffs
The fall in global trade in the 1930s depression was partly due to tariffs and competitive devaluations. Contrary to the views of the Globalizing Tendency import tariffs can help national economies. It is when these get out of hand that world trade freezes up. In the modern crisis we are seeing competitive devaluations and may well see tariff barriers, hidden or otherwise.
Aftermath
The economic aftermath of the 1930s Depression was bank regulation to stop the crazy backing of gambling by banks, the end of a single currency (the Gold Standard), and a return to tariffs and import controls to disconnect countries from international calamities. The social consequence of the 1930s Depression was private poverty and probably war. Over the past thirty years crazy economists and media pundits have extolled the virtues and inevitability of globalisation until everyone began to believe. Many of the errors of the 1920s have been repeated.
Globalisation is an obvious mistake, we can only have stability if there are many economies each with some degree of independence.
See also:
The advantages of globalizationSource URL: https://indahrahmadewi.blogspot.com/2011/11/globalisation-and-great-depressions.html
Visit Indah Rahma Dewi for Daily Updated Hairstyles Collection
Globalisation
The economies of the late 1920s were highly globalised, perhaps more so than today. Although, after the Great War the banks were deregulated to trigger the 1920s boom the money supply was subsequently controlled by a return to the gold standard. The gold standard was largely managed by Great Britain and the USA and conversion rates between currencies and gold were regulated. Large companies controlled shipping, mining and steel production on a global basis. Banks lent to each other across frontiers, secure in the gold standard. International trade was lubricated by export guarantees. The English language, Western dress, American films and western manufacturing and financial methods were spreading across the world. The European Empires ensured that this influence spread even to the furthest reaches of Africa, India and SE Asia. Vast steam ships ferried people and products to every corner of the globe. It was truly a new world order that was making everyone more prosperous. Money was flowing freely around the globe. The crazy Economists and newspaper pundits were extolling the virtues and inevitability of globalisation. Once everything had been become sufficiently interconnected and interdependent it was ready for collapse. (See Lessons from the Great Depression. Economist Sept 2001, although it is extraordinary that the author of this work considers that the ills caused by globalisation that caused its own demise were somehow an attack on globalisation.)
The modern Sub Prime Crisis and Stock Market Collapse of 1929
In the late 1920s banks loaned huge amounts of money for investments in the stock markets that fuelled the stock market booms. Eventually it was obvious that stocks were overvalued and the banks could no longer support their loans and called them in. Investors sold their shares to pay off their loans and stock markets across the world collapsed so the banks could not get their money back and some banks collapsed. Public confidence in banks fell and depositors withdrew their savings to invest in gold. This, coupled with a decline in interbank lending, put the banks under pressure and yet more banks collapsed. In modern times the banks lent huge sums of money on property investments, the properties became overvalued and some banks collapsed, interbank lending created a domino effect placing banks everywhere under stress. In both cases rash bank lending caused bank failure. There was also a considerable amount of white collar crime in both periods.
The Euro Zone and Gold Standard
In the late 1920's most currencies in the world were backed by gold, each unit of currency being backed by a fixed amount of gold held as bullion. Some countries horded gold, especially France, and traded their goods at a discount. This led to an inflow of gold into France. Other countries experienced a gold shortage as a result and introduced austerity measures and raised interest rates to maintain the value of their currencies. This has echoes in the euro zone of today where the northern countries are producing large amounts of goods more cheaply than those in the south. Austerity measures and higher bond interest rates are required for these southern countries to obtain euros in the same way as they were needed for countries to obtain gold. Countries left the gold standard and eventually it was abandoned, this has not yet happened with the euro.
Recapitalisation of Banks
The poor state of the banks in the early 1930s meant that they needed to be recapitalised. By the mid thirties banks had large reserves and were not lending, this restricted the supply of business and personal loans so led to decreased economic activity. In the early days of the modern sub-prime crisis banks were at first re-capitalised by governments but now they are being re-capitalised by ultra cautious lending as in the 1930s so hindering recovery.
Competitive devaluations and Tariffs
The fall in global trade in the 1930s depression was partly due to tariffs and competitive devaluations. Contrary to the views of the Globalizing Tendency import tariffs can help national economies. It is when these get out of hand that world trade freezes up. In the modern crisis we are seeing competitive devaluations and may well see tariff barriers, hidden or otherwise.
Aftermath
The economic aftermath of the 1930s Depression was bank regulation to stop the crazy backing of gambling by banks, the end of a single currency (the Gold Standard), and a return to tariffs and import controls to disconnect countries from international calamities. The social consequence of the 1930s Depression was private poverty and probably war. Over the past thirty years crazy economists and media pundits have extolled the virtues and inevitability of globalisation until everyone began to believe. Many of the errors of the 1920s have been repeated.
Globalisation is an obvious mistake, we can only have stability if there are many economies each with some degree of independence.
See also:
The advantages of globalizationSource URL: https://indahrahmadewi.blogspot.com/2011/11/globalisation-and-great-depressions.html
Visit Indah Rahma Dewi for Daily Updated Hairstyles Collection
