Econ 224

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FINAL 224

Chapter 3: Economic Crisis & Recovery 1929-1939

Europe in a Depression(1929 till 1932-33)

• Origin of the 1929 Downturn

- The real origin of the slump had to be located with the US. This does not mean that there were no cyclical weaknesses elsewhere but it is mainly US bcz it had a major influence on the world economy.

- The US witnessed 2 major shocks: 1- decrease (Curtailment) of foreign lending 1928-29 which had a deflation impact on the world economy:

capital imports of European countries declined. They used to use it to offset BOP. When this became limited, the only way to balance BOP was to draw upon their limited reserves of Gold. So we have deflation. Also, no capital inflow means that debtor countries have a tailing off in domestic economic activity.

2- the peaking of the boom in 1929.

- Sharp decline in business following the crash of the American stock market in October 1929. This led to further reduction in foreign lending and a contraction in import demand. So the flow of dollars to Europe fell and commodity prices fell dramatically.

- Misguided government policies.

• Deepening Depression and Financial Crisis

- By 1930 most countries were in depression.

- Incomes fell, budgets were unbalanced, governments introduced deflationary policies which made things worse, sufficient funds were not available to debtor countries.

- The European crisis can be seen as a general failure on part of the creditor countries.

- The chief creditors began to experience severe monetary problems.

- The US suffered from 1000s of bank failures after the stock market crash,

- The increasing demand for liquidity in 1930-31 led to bank failures throughout Europe.

- Fall of the Austrian credit Anstalt

Aftermath of the Crisis

- Production reached its lowest point in 1932.

- In 1932, the value of the world trade was less than 35% of the year 1929.

- Most countries abandoned the gold standard and devalued their currency. By 1932 more than half of the countries abandoned the system. (Nationalists and managed currencies become the order of the day).

The Extent of Recovery

A. General Comments:

- By the middle of the 1930’s most countries were having modest gains in economic activity.

- By the end of the decade, recovery from the slump was only partly complete bcz still unemployment was high.

- Recovery owed nothing to international action.

- Government policies contributed very little to recovery. The only exceptions are maybe Germany and Sweden where gov tried to promote industrialization

- Recovery was not at all due to international actions. International attempts to provide a solution were rare and unsuccessful.

B. Recovery in Industrialized Countries:

- Britain: strong growth based on the domestic market and rising demand which led to growth in housing and consumer industries, devaluation, and tariff protection with gov contributing very little to recovery.

- France: misguided policy measures, aborted recovery. Its policy failed to revive the economy, France maintained the gold standard and high IR and cuts in gov spending and wages

- Sweden: avoided the mistakes of many other countries. It neither resorted to extreme measures of protection nor followed the deflationary course of the gold bloc countries. It imposed some deflationary measure like wage cuts and currency devaluation but left public spending high

- Germany: great success but a social and political price. One of the strongest recoveries. High degree...
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