Causes of Economic Depression
Causes of Economic Depression: Aftermath of World War-I
The World War-I proved to be disastrous for Germany. According to Treaty of Versailles, Germany was asked to pay the war reparations. But this war proved harmful for the victor’s allies too. The economy of Britain and France shattered. In Russia, there was a Russian Revolution, which changed the political power centre in Russia. Though the establishment of League of Nations provided a certain time of peace to the world, after World War-I, but in long term, it could not resist the outbreak of another World War.
In a whole world was facing difficulties after the World War-I. The defeated countries in whole and particularly Germany was badly hit by the post-war conditions. This led to the Collapse of German Currency ruining their middle classes. Though the Britain and France as victor powers were in better condition but they too were under the debt of America.
Causes of Economic Depression: Vicious Cycle of Debts
The victor powers set the conditions of Treaty of Versailles as such that Germany was not able to pay the war reparations. The victor powers were repaying their debts after getting money from the Germany as Reparations. Whereas the Germany was borrowing money from the America for this war Reparations.
In a real sense, it was a cycle in which money of America was first going to the Europe in terms of lending to Germany, who then paid Britain and France etc. Then, Britain and France in their return paid America part of their debts.
It seemed that the America was the only country after the first decade of war, that was prosperous. America Seemed to be overflowing with money. The general impression of the capitalist world is the alteration period of prosperity and crisis.
Causes of Economic Depression: Economic Boom Over-production
World War-I proved to be important for the American economy. Because it led to the economic boom in America. After World War-I, for many decades America was the only bank for the other previous champions of the world. As the prosperity in American industries had shown to the world.
This prosperity in the industry led to a boom period. It increased the production in the America because everyone wanted to produce as much as possible to take advantage of this period.
Though the production in America was increasing at a great pace but the purchasing power of common people was not on the same pace. More was produced than could be sold. This was a loss of internal wealth or market for American capitalists and industrialists.
Causes of Economic Depression: Stagnation
When the stocks of the industries were piling up and up, there was no market to sell this stock. There were a crisis and industries started slowing down. After a period of stagnation, the accumulated stocks were disposed of gradually. Now industries woke up again. Soon there was an another period of prosperity. This was a usual cycle and people did not see any threat in it.
America Stopped Lending
In 1929, America suddenly stopped lending money to Germany. It was pretty obvious because America capitalists and industrialists would not go on lending money forever. Because at that time Germany was not able to repay the principal amount of the borrowed money, so it was certainly impossible for the Germany to pay the total amount of the loan.
The stoppage of the American lending to the Germany immediately blocked the vicious cycle of money flow. The German Banks Failed. The Britain and France failed to pay back to the American institutions. Gradually the circle of payments of reparations and debts stopped.
Economic Depression: Collapse of Newyork Stock Exchange
In October 1929, the gambling on the Newyork Stock Exchange led to ridiculously high prices of shares etc. and suddenly the Newyork Stock Exchange collapsed. This proved to be “Heart Attack” to the American economy. The America too came into the line of the countries who were suffering from the economic crisis. Soon, this economic crisis turned into the Great Economic Depression of 1929.
The very interdependence of the countries made this Economic Depression worldwide. The collapse of Newyork Stock Exchange ended the supply of money to the American industries. Though of all the great industrial countries, America was hit last by the depression, but the reaction there was greater than elsewhere. The American people were not used to long-continuing Economic Depression and hardship.
So, proud America was shocked by this Economic Depression. The number of unemployed increased, million after million, hunger and slow starvation became a common sight, the morale of the nation began to crack up.
Solution to Economic Depression
As we know that the crisis always gives birth to the genius. Same was true in the case of Economic Depression. American President Franklin D. Roosevelt smartly handled this crisis. He came out with his New Deal Policy and sailed the boat out of the disaster.
Important steps under this policy were,
- Deficit Financing: Borrowing from financial institutions like Japan.
- Promotion to public works to handle unemployment. The formula of Cannes “Dig the well then fill the well”.
- Emphasis on the principle of welfare. In which private sectors asked to invest in welfare programmes like health, education etc. For all these services private sectors were given all the expected support from the government.
- Emphasis on cooperation instead of competition.
In this way, Roosevelt was successful in bringing American economy on the track.
Though the Roosevelt, successfully drove the American Economy from the Economic Depression, but European countries were still struggling for their revival. The British national debt after the World War-I amounted to the £6,500,000,000. Even to pay interest on such debts was a great burden. So, British Government went for very heavy taxation.
Whereas Germany wiped off her big internal debt by the inflation, which put an end to the old mark. So, in this respect, Germany escaped a burden at the expense of the people which had lent Germany money. France too adopted the same method of inflation. So, the European countries were facing hyperinflation. Hyperinflation is the worst economic malady that can befall a nation. As it wipes out the value of money, it robs what an economy have i.e. savings.
It was not the Economic Depression but rather a hyperinflation that brought the Nazis to power in Germany, which destroyed the middle class by making its savings worthless. So, the Europe was once again in trouble because of the rise of extreme nationalistic ideologies i.e. Nazism in Germany and Fascism in Italy.
We will discuss Nazism in next coming post. Till then have a wonderful day.
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