In the last article I discussed what are the causes behind The Great Depression of 1929. In this article I will spread some light on why The Great Depression became a global phenomena rather than affecting only limited economies.
How Great Depression spreads worldwide
The Gold Standard
Most money was paper based, as it is today, but governments were obligated, if requested, to redeem that paper for gold (Principal on which gold standard is based). This “convertibility” put an upper limit on the amount of paper currency a government could print, and thus able to prevent inflation. There was no tradition of continuous, modest inflation in those times. Most countries went off from the gold standard during World War I, and restoring it afterward became a major postwar aim .
Britain, returned to gold in 1925. Other countries followed soon and those which don’t back their paper money with gold, started backing it with currencies-mainly U.S. dollars and British pounds-that were convertible into gold. As a result flexibility of governments was limited. A loss of gold often forced governments to raise interest rates. The higher interest rates discouraged conversion of interest-bearing deposits into gold and bolstered confidence that inflation would not break the commitment to gold.
World War I
Wartime inflation, when the gold standard was suspended, raised prices and prompted fears that gold stocks were inadequate to provide backing for enlarged money supplies at the new, higher price level. This was one reason that convertible currencies, such as the dollar and pound, were used as gold substitutes.
The war weakened Britain, left Germany with massive payments, and split the Austro-Hungarian Empire into many countries. These countries, plus Germany, depended on foreign loans to pay for their imports. The arrangement was unstable because any withdrawal of short-term loans would force the borrowing countries to retrench, which could cripple world trade. It was the first taste of globalisation and inter-dependence in world economies.
Smoot-Hawley Tariff Act
Most historians and economists blame the Smoot-Hawley Tariff Act of 1930 part of the blame for worsening the depression by reducing international trade and causing retaliation. As for the United States, foreign trade was a small part of overall economic activity; it was a much larger factor in most other countries. The average ad valorem rate of duties on dutiable imports for 1921-1925 was 25.9% but under the new tariff it jumped to 50.0% in 1931-1935.
The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually the entire industrialized world. The American economy do had few scares before it in 1830’s under President Martin Van Buren, in the 1850s under James Buchanan, during Ulysses Grant’s term in the 1870s and, most notably, under Grover Cleveland in the 1890s but the Great Depression first time raised the serious question regarding the sustainability of our financial institutions. Though we have came a long way in making them fool proof, the Asian crisis and the Latin American crisis still take us back to the high school answer “It all left to the human greed”.
You can read the previous article ‘The Great Depression : Causes and Effects’ on EzineArticles.