User:GabbieC/sandbox

Keynesian
Keynes argued that if the national government spent more money to recover the money spent by consumers and business firms, unemployment rates would fall. The solution was for the Federal Reserve System to “create new money for the national government to borrow and spend” and to cut taxes rather than raising them, in order for consumers to spend more, and other beneficial factors. Hoover chose to do the opposite of what Keynes sought to be the solution and allowed the federal government to raise taxes exceedingly to reduce the budget shortage brought upon by the depression. Keynes proclaimed that more workers could be employed by decreasing interest rates, encouraging firm to borrow more money and make more products. Employment would prevent the government from having to spend any more money by increasing the amount at which consumers would spend. Keynes’ theory was then confirmed by the length of the Great Depression within the United States and the constant unemployment rate. Employment rates began to rise in preparation for World War II by increasing government spending. “In light of these developments, the Keynesian explanation of the Great Depression was increasing accepted by economists, historians, and politicians”.

Productivity shock
Corporations decided to lay off workers and reduced the amount of raw materials they purchased to manufacture their products. This decision was made to cut the production of goods because of the amount of products that were not being sold.

Disparities in wealth and income
The stock market crash made it evident that banking systems Americans were relying on were not dependable. Americans looked towards insubstantial banking units for their own liquidity supply. As the economy began to fail, these banks were no longer able to support those who depended on their assets – they did not hold as much power as the larger banks. During the depression, “three waves of bank failures shook the economy.” The first wave came just when the economy was heading in the direction of recovery at the end of 1930 and the beginning of 1931. The second wave of bank failure occurred “after the Federal Reserve System raised the rediscount rate to staunch an outflow of gold” around the end of 1931. The last wave was the worst and most effective. It began in the middle of 1932 but “continued almost to the point of a total breakdown of the banking system in the winter of 1932-1933” The reserve banks led the United States into an even deeper depression between 1931 and 1933, due to their failure to appreciate and put to use the powers they withheld – capable of creating money – as well as the “inappropriate monetary policies pursued by them during these years”.

Financial institution structures
The idea of owning government bonds initially became ideal to investors when Liberty Loan drives encouraged this possession in America during World War I. This strive for dominion persisted into the 1920s. After World War I, the United States became the world’s creditor and was depended upon by many foreign nations. “Governments from around the globe looked to Wall Street for loans”. Investors then started to depend on these loans for further investments. Chief counsel of the Senate Bank Committee, Ferdinand Pecora, disclosed that National City executives were also dependent on loans from a special bank fund as a safety net for their stock losses while American banker, Albert Wiggin, “made millions selling short his own bank shares”.

Economist David Hume stated that the economy became imbalanced as the recession spread on an international scale. The cost of goods remained too high for too long during a time where there was less international trade. Policies set in selected countries to “maintain the value of their currency” resulted in an outcome of bank failures. Governments that continued to follow the gold standard were led into bank failure, meaning that it was the governments and central bankers that contributed as a stepping stool into the depression.

Protectionism
Governments around the world took various steps into spending less money on foreign goods such as: “imposing tariffs, import quotas, and exchange controls” (Eichengreen, B.). These restrictions formed a lot of tension between trade nations, causing a major deduction during the depression. Not all countries enforced the same measures of protectionism. Some countries raised tariffs drastically and enforced severe restrictions on foreign exchange transactions, while other countries condensed “trade and exchange restrictions only marginally”.

“Countries that remained on the gold standard, keeping currencies fixed, were more likely to restrict foreign trade.” These countries became more competitive and “resorted to protectionist policies to strengthen the balance of payments and limit gold losses.” They hoped that these restrictions and depletions would lead them towards economic recovery. On the other hand, countries that chose to alleviate the gold standard, allowing fluidity in their currencies, experienced economic recovery and “benefited from gold inflows”.

There were three options left that could lead economies back to recovery. These options were: “wage and price deflation to restore external and internal balance at the current gold parity; trade and payments restrictions to limit spending on imports and reduce gold outflows; or abandoning the gold standard and allowing the exchange rate to depreciate”.

International Debt Structure
The Smoot-Hawley Tariff Act was instituted by Senator Reed and Representative Willis C. Hawley, and signed into law by President Hoover, to raise taxes on American imports by about 20 percent during June of1930. This tax, which aided towards the exceedingly damaged American income and overproduction, was only beneficial towards the Americans in having to spend less on foreign goods. In contrast, European trading nations frowned upon this tax increase, particularly since the “United States was an international creditor and exports to the U.S. market were already declining”. In response to the Smoot-Hawley Tariff Act, some of America’s primary producers and largest trading partner, Canada, chose to seek retribution by increasing the financial value of imported goods favoured by the Americans.

Population dynamics
Factors that majorly contributed to the failing of the economy since 1925, was a decrease in both residential and non-residential buildings being constructed. It was the debt as a result of the war, less families being formed, and an imbalance of mortgage payments and loans in 1928-1929 that mainly contributed to the decline in the amount of houses being built. This caused the populate growth rate to decelerate. Though non-residential units continued to be built “at a high rate throughout the decade”, the demands for such units were actually very low

Non-Austrian perspective
Uncertainty was a major factor, argued by several economists, that contributed to the worsening and length of the depression. It was also said to be responsible “for the initial decline in consumption that marks the” beginning of the Great Depression by economists Paul R. Flacco and Randall E. Parker. Economist Ludwig Lachmann argues that it was pessimism that prevented the recovery and worsening of the depression President Hoover is said to have been blinded from what was right in front of him.

Economist, James Deusenberry, argues that economic imbalance was not only a result of World War I, but also a result of the structural changes made to the system during the first quarter of the twentieth century. He also states that the branches of the nation’s economy became smaller, there was not much demand for housing, and the stock market crash “had a more direct impact on consumption than any previous financial panic”

Economist William A. Lewis mentions the conflict between America and its primary producers in his Economic Survey, 1919-1939, stating:

Misfortunes (of the 1930’s) were due principally to the fact that the production of primary commodities after the war was somewhat in excess of demand. It was this which, by keeping the terms of trade unfavourable to primary producers, kept the trade in manufactures so low, to the detriment of some countries as the United Kingdom, even in the twenties, and it was this which pulled the world economy down in the early thirties….If primary commodity markets had not been so insecure the crisis of 1929 would not have become a great depression....It was the violent fall of prices that was deflationary.

The stock market crash was not the first sign of the Great Depression. “Long before the crash, community banks were failing at the rate of one per day”. It was the development of the Federal Reserve System that misled investors in the ‘20s into relying on federal banks as a safety net. They were encouraged to continue buying stocks and to overlook any of the fluctuations. Economist Roger Babson tried to warn the investors of the deficiency to come, but was ridiculed even as the economy began to deteriorate during the summer of 1929. While England and Germany struggled under the strain on gold currencies after the war, economists were blinded by an unsustainable ‘new economy' they sought to be considerably stable and successful.

Since the United States decided to no longer comply with the gold standard, “the value of the dollar could change freely from day to day”. Although this imbalance on an international scale led to crisis, the economy within the nation remained stable.

The depression then affected all nations on an international scale. “The German mark collapsed when the chancellor put domestic politics ahead of sensible finance; the bank of England abandoned the gold standard after a subsequent speculative attack; and the U.S. Federal Reserve raised its discount rate dramatically in in October 1931 to preserve the value of the dollar”. The Federal Reserve drove the American economy into an even deeper depression.