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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 

 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 had provided additional funds to the banking sector after 
1930, bank failure would not have been so numerous and the decrease in
the attack of ???? would have been (at least) slowed down.

 Still, it would not be accurate to make the Federal Reserve 
responsible for all these problems. Other factors contributed to the
precipitation of what began as a cyclical recession into what we now 
know as the Great Depression. One of those is the Hawley Smoot tariff 
of 1930 which in essence made America more protectionist than ever, 
sending import duties to record highs. Evidently, retaliation from 
other countries was quick to come. The new tariff act accelerated the 
downfall of American trade volume, which was probably the last thing 
the U.S. needed at that stage. President Hoover had always been in 
favor of protective tariffs which he considered a strictly domestic 
issue and he supported the Howley Smoot Act. Therefore, he clearly
failed to see the implications of such a move.

 Soon, the Depression was spreading to the rest of the world, 
especially to Europe. There, the single country that was most affected 
was Germany whose very weak economy could not cope with the slow 
disappearance of American capital. Let us mention that Germany was 
still paying reparations (for World War I), which made its situation 
even more delicate. Germany was forced to borrow from Great Britain 
and France which could not compensate for the decline in U.S. 
lending.5 The trap in which Germany found itself was quite 
disconcerting: she had to pursue deficienary policies to gain the 
confidence of investors in order to attract foreign funds. At the same 
time, devaluaton posed a major problem. It increased the burden of the 
external debt (through the exchange rate mechanism) which was payable 
in foreign currencies.

 The United Kingdom represented another major force on the 
global economic scene. The British economy was not hit immediately as 
violently as Germany's. However, as the repercussions of the world 
crisis became increasingly clear, Great Britain experienced a notable 
decline in its exports which was even greater than the decrease in its 
imports. Those two factors contributed to generate a deficit in its 
balance of payments.

 Still, compared to most other industrialized countries, the 
U.K. got through the Depression in better economic health.6 In the 
case of France, things went a significantly different way. First of 
all, out of the four biggest industrialized countries of the time 
(U.S., Germany, U.K. and France), France was the last to be hit by the 
Depression. Many possible reasons are hypothesized to explain that 
fact, but the one that is most often heard is the undervaluation of 
the French franc.

 The French economy began to feel the effects of the world 
crisis in 1932. Around that time the Depression caught up with the
French economy through an important decrease in its exports (due 
impart to the shear downsizing trend in the volume of world trade), 
combined to an increase in imports. The problems faced by France were 
also worsened by the fact that it still was maintaining the gold 
standard long after all of the other industrialized countries-starting 
with Great Britain in 1931--had switched to fleeting exchange rates.

 As for Japan, we can safely say that it is the one country 
among today's industrialized nations that got through the Great
Depression with the least damage to its economy.7 Now that we have 
illustrated how the world crisis affected various nations in different 
ways, it seems only logical that they would put together solutions 
that were adapted to their individual problems.

 In the United States, Hoover had failed to bring a solution to 
the Depression, and he was replaced by Roosevelt in 1932. The new 
president brought with him the New Deal, which can be qualified as a 
collection of programs aimed at stimulating different sectors of the 
economy (like the Agricultural Adjustment Act and the National 
Industrial Recovery Act). As it turned out, the New Deal was not a 
particularly successful economic initiative, but it was definitely a 
political success, probably because its goal was to help the American 
people (even though the means used to accomplish that were never very 
clear). What proved more effective at bringing economic solutions to 
what was really an economic problem was the "Keynesian theory". In 
1938, Roosevelt, facing the semi-failure of his New Deal, finally gave 
in to an increasing number of his close advisors who were confident 
that Keynes' ideas would be more successful.8 The underlying theory to 
Keynes' ideas was that recovery could only come through fiscal 
expansion--in other words, running a bigger budgetary deficit. The 
additional expenditures were pumped into the economy through a variety 
of government actions--like major public works--in order to stimulate 
demand by providing people with income.

 In Germany, the Nazis' victory at the 1933 elections was a 
major accelerating factor on the road to recovery. The Nazi program 
aimed first and foremost at the reduction of unemployment and it did 
accomplish at least that. However, the realization of the plans was 
conditioned by an omnipotent government which was best described by 
Peter Hayes' analogy (1987): "It is perhaps accurate to say that, to 
German industry, the emergent economic system was stiff capitalism, 
but only in the same sense that for a professional gambler poker 
remains poker, even when the house shuffles, deals, determines the 
suite and the wild cards, and can change them at will, even when there 
is a ceiling on winnings, which may be spent only as the census
permits and for the most part only on the promises."9

 One other essential vector that Nazis used toward recovery was 
rearmament, starting in 1936. Hitler used the defense industry to 
satisfy two of his im???: recreate a strong Germany while giving 
people work.

 The case of Great Britain is different. We have mentioned 
earlier how well (relatively to other nations) the U.K. got through 
the Depression years. Let us now attempt to explain why. Three 
elements are often mentioned in the British recovery: the abandoning 
of the gold standard in 1931, the adoption of higher tariffs and the 
devaluation of the pound. When the U.K. abandoned the gold standard, 
it gave itself a competitive advantage via-a-vis those countries which 
did not. The new tariff laws helped by protecting domestic industries 
and the 30 percent devaluation of the pound added to the competitive 
edge of the U.K by making British products cheaper to the rest of the 

 In the face of Depression, France reacted quite differently 
from the other industrialized countries. Confident in its strong
economy until 1932, France did not abandon the gold standard until 
June 1937 and did not devalue the franc until October 1936. Those two 
factors made France rather uncompetitive for most of the 1930's, given 
the actions taken by the U.S., the U.K., and Germany. Those measures, 
in time, helped lift France out of the Depression but the recovery 
there might have occurred a few years earlier if the French had only 
signed their policies to that of the United States and Great Britain 
in particular.10

 When it comes to Japan, two reasons are proposed to explain 
its good economic performance through the Depression: the fact that it 
had a planned economy, and the early understanding of the advantages 
of devaluating the yen. Japan improved its competitive position that 
way and it reacted very soon after the Depression hit. As a result, 
the effects of the crisis were greatly reduced from the start. 


1"The origins and nature of the Great Slump," Fearn.

2"The origins and nature of the Great Slump," Fearn.

3"Capitalism in Crisis,"edited by Garside.

4"La Crise economique dans le monde el en France," Nogaro.

5"The origins and nature of the Great Slump," Fearn.

6"The Great Depression, 1929-1938," Saint Etienna.

7"The Origins and Nature of the Great Slump," Fearn.

8"Capitalism in Crisis,"edited by Garside.

9"Capitalism in Crisis,"edited by Garside.

10"Capitalism in Crisis,"edited by Garside.



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