Industrial Nations With Market Economies example essay topic

... rowing, started in earnest. In order to keep down inflation, consumption was restricted by rationing and trade controls. By 1939 the Germans' Gross National Product was 51 per cent higher than in 1929 - an increase due mainly to the manufacture of armaments and machinery". (web) At least in part, the Great Depression was caused by underlying weaknesses and imbalances within the U.S. economy that had been obscured by the boom psychology and speculative euphoria of the 1920's. The Depression exposed those weaknesses, as it did the inability of the nation's political and financial institutions to cope with the vicious downward economic cycle that had set in by 1930 (web).

The business cycle had long had its ups and downs. If this downswing turned out to be words than any previous one, the reason must be sought in the profound structural changes heaped on top of a normal cycle. Fulcrum of the world economy, the United States had not yet learned how to play that part, as its erratic financial policies and high protective tariffs indicated. Deeper changes were going on in the world. Policies of 'autarchy' had developed after the war an were to be perpetuated during the Great Depression; that is, countries that were no longer prepared to trust the international order tried to insulate their economies by tariffs, import quotas, or a managed currency. During the 1920's, while sometimes readjusting the rate at which their currencies were exchanged for gold, most nations clung to the gold standard, which facilitated international trade by permitting currencies to be freely exchanged in terms of gold.

But beginning in 1931, when Great Britain was driven off the gold standard, country after country left it in order to protect themselves against a flight of gold leading to deflation and unemployment. The flight from gold was followed by all kinds of nationalist economic policies - exchange controls, import quotas, tariffs. International trade was thus further impaired (web). (web) states that prior to the Great Depression, governments traditionally took little or no action in times of business downturn, relying instead on impersonal market forces to achieve the necessary economic correction. But market forces alone proved unable to achieve the desired recovery in the early years of the Great Depression, and this painful discovery eventually inspired some fundamental changes in the United States' economic structure. After the Great Depression, government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services, or deficit spending, came to assume a principal role in ensuring economic stability in most industrial nations with market economies.

In October 1929 the stock market crashed, wiping out 40 percent of the paper values of common stock. Even after the stock market collapse, however, politicians and industry leaders continued to issue optimistic predictions for the nation's economy. But the Depression deepened, confidence evaporated and many lost their life savings. By 1933 the value of stock on the New York Stock Exchange was less than a fifth of what it had been at its peak in 1929. Business houses closed their doors, factories shut down and banks failed. Farm income fell some 50 percent.

By 1932 approximately one out of every four Americans was unemployed. The core of the problem was the immense disparity between the country's productive capacity and the ability of people to consume. Great innovations in productive techniques during and after the war raised the output of industry beyond the purchasing capacity of U.S. farmers and wage earners. The savings of the wealthy and middle class, increasing far beyond the possibilities of sound investment, had been drawn into frantic speculation in stocks or real estate. The stock market collapse, therefore, had been merely the first of several detonations in which a flimsy structure of speculation had been leveled to the ground. The presidential campaign of 1932 was chiefly a debate over the causes and possible remedies of the Great Depression.

Herbert Hoover, unlucky in entering The White House only eight months before the stock market crash, had struggled tirelessly, but ineffectively, to set the wheels of industry in motion again. His Democratic opponent, Franklin D. Roosevelt, already popular as the governor of New York during the developing crisis, argued that the Depression stemmed from the U.S. economy's underlying flaws, which had been aggravated by Republican policies during the 1920's. President Hoover replied that the economy was fundamentally sound, but had been shaken by the repercussions of a worldwide depression whose causes could be traced back to the war. Behind this argument lay a clear implication: Hoover had to depend largely on natural processes of recovery, while Roosevelt was prepared to use the federal government's authority for bold experimental remedies. The election resulted in a smashing victory for Roosevelt, who won 22,800,000 votes to Hoover's 15,700,000. The United States was about to enter a new era of economic and political change. (web) states that the causes of the Great Depression are hotly disputed by scholars even to this day.

No one knows the ultimate reason why the economy started plunging downhill in 1929. However, several things are certain: There was a variety of things wrong with the economy going into 1929, and they had been deteriorating throughout the decade; The conservative economic policies of the 1920's like low taxes, little regulation, lack of anti-trust enforcement all did nothing to stop the August recession and the October stock market crash; Hoover kept the Federal Reserve from expanding the money supply while bank panics and billions in lost deposits were contracting it; The Fed's inaction was the reason why the initial recession turned into a prolonged depression; The economy continually sank throughout Hoover's entire term. Under Roosevelt's New Deal, it rose five out of seven years. Attempts to blame Big Government for the Depression do not withstand serious scrutiny; The Smoot-Hawley Tariff had a minor impact because trade formed only 6 percent of the U.S. economy, and reducing trade gave Americans only that much more money to spend domestically.

Hoover's other attempts at government intervention came mostly during his last year in office, when the Depression was already at its depth; The first nations to come out of the Great Depression were Sweden, Germany, Great Britain, and then everyone else did so after they adopted the Keynesian solution of heavy deficit government spending and the Keynesian economic policies have eliminated the depression from the world's economies in the six decades that have followed.

Bibliography

web Cary Kennedy, David Freedom From Fear: The American People in Depression and War Oxford, New York 1999 Oxford University Press.