Effects of the Great Sepression

Effects of the Great Depression

The introduction of the discussion will focus on the origins of

the Great Depression and the escalating events that led to it. This

will provide adequate foundations to bring up questions and attempt to

answer them in an objective fashion as to why and how the Depression

affected different industrialized countries in different ways.

The core of the debate will consist of detailed comparable

analyses of the consequences of the Depression with an emphasis on

the economic aspects. The conclusion will provide a brief overview of

the ways used by the different governments to get out of that dark

episode of world economic history.

When studying the Great Depression and it's effects, it is not

unusual for historians to choose World War I as a starting point for

their investigation. The reason for that is the importance of the

repercussions the conflict had on the economies of all the countries

that were involved in it.

First of all, the War made it impossible for Europe to

maintain previous levels of production. For example, before the War,

France, the U.K. and Germany accounted for about 60 percent1 of the

world's exports of manufactured goods, a share of the market which

they could not sustain during the conflict. Consequently, Europe took

many of its markets to the U.S. and Japan. The stunted growth of the

European economies meant a lower demand for raw materials, which in

turn lowered the demand for European exports.

In agriculture, things didn't look any better, as it was the

sector which employed the most people. At the end of World War I,

Europe was forced to import food from the U.S.. Moreover, these

transactions were conducted on a credit basis since Europe could not

afford to pay for its purchase at that time.

Clearly, the U.S. was going from being a traditional debtor of

Europe before World War I to becoming its creditor: America had

financed the war and it was issuing loans for its reconstruction.

However, the attitudes in the U.S. were evolving in an unusual

direction: an increasing number of American financiers were starting

to literally seek ut potential borrowers which led to competition

among U.S. banks and the spreading of unsound lending.2 The main

object was to "do the most business", even at the expense of essential

caution.

What seemed like a beginning of recovery from the Great War,

was in fact an immense accumulation of debts, which made the

international economic order vulnerable to depression. Analyzing these

events with the insight we have today, they seem even more

unbelievably audacious given the high instability of the borrowing

nation. (i.e., Europe)

The triggering event was the crash of the Wall Street stock

market in October of 1929. The stock market collapsed after steady

declines in production, prices and incomes over three previous months

which forced the speculators to revise their expectations. Anxiety

soon gave place to panic which led to the crash. However, the

depression affected the different industrialized countries in various

ways and degrees of intensity.

The depression was of especially great magnitude in the U.S.

because there were not any welfare benefits for laid off workers. In

the period between 1929 and 1933, money income fell by 53 percent

(real income fell by 36 percent.)3 As a consequence, demand fell

significantly, which in turn led to lower production and more

layoffs-- up to a high of 25 percent rate of unemployment in 1933.

Despite the severity of the situation, the Federal Reserve did

not pursue a monetary expansion on policy which would have stimulated

the economy through lower interest rates and increased the stock of

money in circulation. This inaction is often attributed to the fact

that market interest rates in 1930-1931 fell to very low levels, much

lower than in the earlier recessions (of 1924 and 1927), and

therefore, the Federal Reserve Board wrongfully saw no need to pursue

an expansionary monetary policy.4 An indicator of that inaction is

that open market operations did not provide sufficient money reserves

for a banking system faced with depositors anxious for liquidity

(monetary expansion would have filled that need). If the Federal

Reserve