analyze the causes of the great depression of the 1930

8/3/2019 Analyze the Causes of the Great Depression of the 1930

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Kaushalendra Basnet

Ryerson University, Canada (2011)

THEGREAT

DEPRESSIONUnited States vs. Structural weakness in the

international economy

Many economists around the world might argue with the different

views and ideas about the causes of Great depression with valid

arguments and data. It seems unclear of the primary cause and the

root of the Great Depression but with factual evidence gathered we

can conclude that the primary cause for the Great Depression is

through the structural weakness in the international economy. In this

essay, we will look at the European economic structure: the changes in

the production market, labor market, operation of international

monetary system, and the pattern of international settlements.

(Eichengreen, B.)

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It was not just in the U.S, the question of consumer durables revolution

can be traced to England as the consumption of costly goods were

being purchased and the debts that was being accumulated increased

after the war ended. Adoptions of household goods amongst families

were an increasing trend, which later became a societal norm. Use of

fridge, radios, cars, heaters were highly priced, therefore the people

were being forced to get a loan to purchases these items. Poor

regulations towards method of purchasing these durables had a direct

correlation in the fluctuation in the economy. Losing all previous

payments if a installment fee was to be missed presented a great

weakness in trust factor of the economy as consumers felt the danger

to lose their investments if the job market had even the slightest

decrease. This slowed down the money circulation in the economy, and

the pressure on the credit system was rising due the increased loan

use by consumers to attain durables. Thus, this created a fear and

increased sense of vulnerability in the economy in many industrialized

nations, affecting the structural weakness of the international

economy.

High unemployment in industrialized countries after the war created

various problems for the economy. In an era where 2.5%

unemployment rate was defined to be satisfactory, unemployment

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after the war rose up to 25% in the Great Britain, during the fiscal year

of 1935.1 The money circulation was decreasing and the unionization of

labors was increasing drastically. Labor unions in Germany, Britain and

the U.S, and other industrialized nations put a pressure on the

employers to increase the wages. Due to the high unemployment rate,

the global economy was in a pre-position of the downturn before the

U.S market crash. Weak economies suffered more who were already

facing issues to reduce their unemployment rate felt the structural

unbalance in their own individual economies, alternatively on a global

scale. From this one can conclude that, the Great Depression which

occurred in the world had the roots from the structural weakness found

in the economy, labor market being one of the more important factors.

The return to the Gold Standard after the War offered various issues to

the already vulnerable global economy. The issues remained mostly to

Britain and the U.S of the balance of payments as the confidence in the

Sterling pound and the U.S dollars were decreasing. The idea of saving

each individual economy didn’t help the individual economy as well as

the global economy. Due to the individual framework of each

economy, the international disputes, and constraints in the individual

economy itself made it difficult for international cooperation. Countries

1 Information extracted from:

http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom

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restricted credits domestically and increased their interest rates in

order to obtain gold reserves. Seemingly, other nations were forced to

do the same. Like today where various organizations and meetings

amongst the political leaders discuss current global problems and

issues and collectively work to come up with a solution, this sort of co-

operation was rare in the early 1900’s. In Europe, the issue over war

debts and reparation led each nation to understand their own problem

but failed to come together and come up with a collective decision to

understand the needs of global economy as a whole. The idea of self-

interest lead to each nation to work towards its own benefit, ignoring

the problems that were occurring globally influenced further weakness

in the global economy.

Various factors that presented a weakness in the international

economy can also be related back to the use of the Gold Standard,

before the World War and after. During the war, the supply of

demanded goods to Latin America was taken over by the U.S from the

European nations, which lead to a substantial decrease in the

European export. Across the globe, Japan was doing the same; creating

market infrastructure for long-term export, resulting in more decrease

in European goods.

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The creation of the new financial centers also fashioned a problem in

the economy. The new financial center, New York and Paris lead to the

increased capital flight in a global scale as countries were

implementing new policies and as investors were jumping from one

economy to another to save a loss. This highlighted the poor stability

of any economy, and the sustained market trust decreased further

more. The dependence of other economies towards the U.S also

caused a great weakness in the economies. If economies around the

world weren’t tied to the U.S (loans, services, and imports) the crash in

the U.S market wouldn’t have had a ripple effect or lesser impact on

the world economy.

The process of reparation held on German also created a structural

weakness in the economy. U.S found itself to be the world’s creditor.

U.S dollars being used my Germany to pay off the debts to the Allied

nations, who paid the U.S same dollars Germany had used to pay

earlier. Due to this economic flow, New York became the leading

international center, leaving London behind. This un-stabilized practice

in the global economy presented a great danger in the economy, which

resulted in nations depending on the U.S loan; practically clinging on to

U.S in both their fall and rise.

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In conclusion, the rise in demand of the consumer goods, labor market

crisis, causes of gold standard, and the global money flow changed the

structure of the economy, creating a great danger. If the world

economy was at a stronger stance, the crash in the U.S economy

wouldn’t have had such a great impact on the world. For a dynamic

global economy, each economy should be progressive and should be

able to function freely without depending in another economy. The

others economies depending in the U.S economies through various

factors was the initial weakness in the structure of global economy.

From this we can conclude that the roots were the leading cause of the

great depression if U.S market crash was thus preventable.

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Bibliography:Eichengreen, B., The Origins and Nature of the Great Slump Revisited,

Economic History Review, XLC (1992)

Galbraith, J.K., The Great Crash, Cambridge, Mass.: Riverside Press,

1961, chapter X.

Smiley, G., Rethinking the Great Depression, Chicago: Ivan R. Dee,

2002, chapter 2.

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analyze the causes of the great depression of the 1930

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