History of globalization Great Depression

Topics: Great Depression, Milton Friedman, Federal Reserve System Pages: 8 (2442 words) Published: November 11, 2014
Contemporary economic history has been marked by both prosperity periods and systemic disruptions, which led to several international crisis. Preceded by the 1920's economic expansion, the Great Depression remains the most important crisis of the 20th century in terms of consequences and trauma. With the benefit of hindsight, contemporary economics researchers have put many theories forward to explain the mechanisms that caused the depression. It is however necessary to test the validity of these modern macroeconomic views by looking at them through the prism of history. The consensus about the causes of the Great Depression remains today very little. Through empirical testing, Fackler and Parker (1994) considered the main mono-causal theories and showed that none of them could explain on their own the depth, the length and the consequences of the Great Depression. This international crisis was a complex phenomenon which resulted from the combination of different occurrences. We shall then consider each of these parameters and evaluate the extent to which they contributed to cause the Great Depression.

The Great Depression may firstly be considered as the result of structural issues of the inter-war economy induced by World War I. Both political and economic structures were indeed deeply disrupted by the international conflict which tore the whole world up. Disruption of production during the war had permanent effects on trade patterns, trade politics and policy preferences. World War I may be an indirect cause of the Great Depression to the extent that it had profound consequences on international trade and investment flows.

First of all, “war-induced diversion of production”(Horowitz, 2004, 33) logically created a propitious context to the rise of protectionist measures. As a matter of fact, World War I had a deep impact on the inter-war real economy. The inter-war period was marked by excess supply issues due to two main mechanisms. Firstly, non-European primary production highly expanded owing to trade restrictions during the war. As the world economy returned progressively to freer trade after 1918, these new sources of supply induced an extra-offer and a downward pressure on prices. This harder competition reawakened a real demand for protectionist policies. Secondly, European heavy-industry over-expanded in order to sustain the war effort. This over-expansion led to post-war excess supply and contributed to the development of protectionist forces. This protectionist tendency is confirmed by the increase of post-war tariffs across the major trading countries. Protectionist measures depend on the scarcity of productive factors; that is to say that governments protect sectors for which the main factor of production is scarce. For example, Britain and France implemented high tariffs on capital-intensive manufacturing industries, whereas the United States of America set protective tariffs on labour-intensive manufactures. This shift in trade policy preferences may have favoured the Great Depression. The rise of barriers and the increase of trade costs both led indeed to market disintegration, both in terms of volume of trade and international capital flows (Hynes, Jacks and O'Rourke, 2009). Market disintegration is undeniably harmful to economic growth and global competitiveness, owing to the fact that it implies a strong tightening of outlets and a growing uncertainty in the global economy.

In this way, World War I deeply affected the structures of trade policy preferences and entailed a shift in international cooperation. These consequences described above may have contributed to cause the Great Depression. Nevertheless, it seems that the 1930's global crisis resulted not only from this international context but a greater number of economic parameters.

Many scholars studied the Great Depression and its origins in the late 20th century. Certainly useful to understand current economic phenomena, the...

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