Thought Archive

Thursday, October 09, 2008

The History Lesson?

Some mistakenly assume that the stockmarket crash of 1929 was the catalyst of the Great Depression. The crash in America came near the beginning of the Great Depression, a most devastating period of economic decline in the industrialized world.

Instead there were multiple causes for the first downturn , including the structural weaknesses and specific events that turned it into a major depression and like massive bank failures and the stock market crash, while economists - ironically - point to Britain's decision to return to the Gold Standard at pre-World War I parities. In reality, no one knows exactly why the crash has occured.

Ironically - like today - debt was one of the major factors of spreading the disease and deflation, not inflation was the plague. in the 1920s, American consumers and businesses relied on cheap credit. This fueled strong short-term growth but created consumer and commercial debt[ People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default.Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged. Massive layoffs occurred, resulting in US unemployment rates of over 25% by 1933.

Banks which had financed this debt began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits- enormous figures for the time. Economic activity in US declined by 45%!

This kind of spiralling may have turned a 1930 recession into a 1933 great depression. All hope was lost. Countries that suffered the most were the countries most integrated - USA, Britain and Germany depending on american post-war reconstruction loans managed by mostly Jewish bankers. Soon Germany was in turmoil (Hence, Hitler had an easy time: preaching to the choire). Britain was faltering, Latin America was in grip of revolutions. Communism of poor but rapidly industrializing Soviet Union suddenly became attractive for great variety of people in the West and in the future "Thirld World". This in turn increased fears of Communist revolution in the West, strengthening support for extreme anti-Communists, or other right-wing reactionary forces. The shaky liberal democracies were toppled in Central Europe one by one and the era of integralist dictators folloed.

THe crisis has eventually came to pass, however it had left indelible imprint on the political and economic models employed after it had passed. Among the conseuquences which was the abandonment of classic economic liberal approaches, which Roosevelt replaced in the United States with the New Deal. It was a main factor in the implementation of social democracy and planned economies in European countries after the war.

Ironically the massive rearmament policies of Nazi Germay and of other countriwa to counter the threat from Germany helped stimulate the economies of Europe in 1937-39. The preparation for total war provided a safe valve for the economies to stop their slide

By 1937, unemployment in Britain had fallen to 1.5 million. The
mobilization of manpower following the outbreak of war in 1939 finally ended unemployment.In the United States, the massive war spending doubled the
GNP, either masking the effects of the Depression or essentially ending the Depression. People accepted rationing and price
for the first time as a way of expressing their support for the war effort. Cost-plus pricing in munitions contracts guaranteed businesses a profit no matter how many mediocre workers they employed or how inefficient the techniques they used. The demand was for a vast quantity of war supplies as soon as possible, regardless of cost. Businesses hired every person in sight, even driving sound trucks up and down city streets begging people to apply for jobs.


Riri said...

Isn't deflation a sure consequence of inflation though? It seems to me everyone (but me) is looking at this from the wrong end of the stick.

Inflation is not a must, it is in fact an add-on of the government taking 'credit' from private money printing corporations.

Check this, I have no clue what the bloke is on about but I think this story illustrates the inherent root problems of the banking system quite well. I think it has an ethical dimension which is very much needed in the current system.

Appropriate Economics

NoolaBeulah said...

It's a good little story, but I must admit that extending the analogy into projects that require billions of dollars over many years is quite beyond me. There are probably tens of methods that would work on a small-scale over a limited time and space, but when it comes to the sort of projects that Nazim is engaged upon, they just don't work. Buying money with more money just allows things to work.

Riri said...

Buying money with more money just allows things to work.

That is the problem though, this conviction which has never been so obvious or obligatory until about 3 centuries ago. Nobody realizes that for ANY system to work, it needs the users' confidence and trust, and money is one such system which is a convention that is enirely founded on mutual trust and agreement. It is not an asset or a value by itself, what makes it so is the peculiar idea of charging interest on money itself. However this idea is not only unethical, but very harmful as well because it violates the foundation or the 'natural' definition or 'order' the concept of 'money' was based upon.

Eventually, I think that more people will wake up and smell the coffee. It may well be that the financial system will pass this crisis and may be even a few more. But people are losing trust and as more and more will seek alternative methods and attempt to understand what is going on, I think more will realize the illogical nature of 'interest' and will oppose it, not even on religious grounds.

When it is illegal to earn money by lending money, far from stagnating, money owners will be forced to find other ways to make money, this will be a good move towards a world where real equal opportunities exist.

The Origins of Modern Banking

NoolaBeulah said...

"It is not an asset or a value by itself, what makes it so is the peculiar idea of charging interest on money itself."

What is value but the meaning that people put on something? The same applies to gold, diamonds and that kinky sparkle you put on your eyelashes. I don't think you need interest to explain the allure of money; that was around long before.

Nor can I see that justice of that old Aristotelian objection to interest on ethical grounds. Interest is merely the payment of a service, the availability of a lump sum you would not otherwise be able to put together.

You will have to explain to me how abolishing interest will lead to greater equality. Studies of the distribution of wealth from as far back as ancient Egypt have shown that it has never changed greatly.

What has changed is the general level of wealth, which has improved markedly in the 300 or so years since interest became universal.

Riri said...

Noola - I'll answer your questions in a new post back in my blog.