The Super Summary of World History (57 page)

Britain experienced critical economic problems as well. In 1922 the Conservatives called for protective tariffs, a move which would surely damage international trade. This was contrary to England’s traditional free trade policy. At the urging of Winston Churchill, Chancellor of the Exchequer, Britain went back onto the Gold Standard in 1925, but this also failed to re-establish stability in the world’s money markets. As trade began to shrink more nations enacted protective tariffs further damaging international trade.

On the financial front, credit markets were getting tight because the money supply was lessening as the decade wore on, businesses were worried about getting loans, and the supply of investment capital was drying up. This was taking place worldwide, and some of the problems included the debts being carried from WWI. In Germany, super inflation was threatening European economic stability. When the economic future turns bleak people with investment money pull back; thus, investment capital was vanishing. Except for Germany’s inflation, most of the problems were sub-rosa and not a concern for the public—at least, that is what the elite leaders of the world believed.

Britain’s Empire also proceeded to give Britain trouble. Former colonies now wanted independence and nationhood. England responded by giving many colonies more independence, including a parliament and independence in foreign policy, while still maintaining a close relationship to the mother country. Those former colonies included Canada, Australia, New Zealand, and the Union of South Africa. Most notable in
not
gaining additional independence was India. The new nations often refused to follow Britain’s foreign policy, thus complicating matters for Britain in the 1930s.

Political problems erupted all over Europe because of growing radical leftist and rightist movements in several European nations. Adolf Hitler, a Germany radical rightist who led the
Nazi
party
, languished in prison in 1925 after a failed coup d’état. While there he wrote
Mien
Kampf
(
My
Battle
) detailing his thoughts about the future of Germany.
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Hitler’s radical ideas would eventually lead his Nazi party to winning elections in Germany, eventually gaining control of the nation itself. In his book he set out his future plans for conquest, however, few read the tome. Unfortunate, because Hitler adhered to this published plan after he assumed the office of Chancellor of Germany. Due to a good world economy during the early to mid-1920s neither the rightist nor the leftist movements made headway in Europe or Asia, but as the economic situation grew dire things changed. Communist movements gained ground with the result that rightist also attracted followers concerned about the Reds taking over. It was during the crisis of the Great Depression that men like Hitler gained power through the support of the common person who wanted a return to stability. The Great Depression brought on worldwide radical political changes, so please understand this unprecedented economic collapse was a globe changing event and a major reason for WWII.

In the 1920s, England and France were having money problems and sought loans from the United States, or loan extensions, to cover war debts and other matters. American bankers extended the loan payments and gave new loans to Europe keeping the nations economies afloat. It seemed to most these loans were good business because the future looked bright and money was being made everywhere. The banks thought that as the world economy continued improving the money would come flowing in. These assumptions of a bright future proved false.

Causes

We will now start an analysis of the Great Depression’s causes; however, they are still widely debated and unresolved. Many economists argue the 1920’s era displayed real growth, while others think it was an era of false prosperity—profitless prosperity—because business profits were weak even though the economy was booming. Raw data from the 1920’s indicate real profits and real growth, as manufacturing output rose over
23
percent
, but underneath it all something else was eating at the foundations. That something else was the money supply. The
Federal
Reserve
(Central Bank or Fed) was making money easy to get in the mid-1920s by increasing the money supply, and the Fed injected money into the credit markets. This, some say, created a boom economy based on money supply growth and easy loans, not business growth in real terms (whatever “real” means).

Economist
Milton
Friedman
says the Fed
reduced
the money supply and raised interest rates after the 1929 crash, thus making the downturn worse; other economists say the Fed
increased
in money supply after the crash and propped up failing businesses, thus increasing the severity of the debacle. The cold facts: Between 1921 and 1927, the money supply
increased
60
percent
. That is a lot by historical standards, and made loans easy to obtain. Starting in 1928, the Fed began
tightening
the
money
supply
by raising the discount rate (the rate paid to borrow money) from 3.5 percent to 5 percent, thus making loans harder to get. Then came the 1929 stock market crash. In 1931 the money supply was
decreased
30
percent
or more, and in 1936 the central bank doubled the reserve requirements (the amount of money a bank has to keep on deposit as a safety net against failure); thus, taking more money
out
of the financial system. Those differentials represent a large swing in the supply of money between 1927 and 1936. Note that the Fed
decreased
the money supply
after
the crash. Private business capital investment also fell to zero, creating a situation where money was almost impossible to obtain. Everyone was living hand to mouth. Sounds like Milton Friedman was right. The Federal Reserve took money out of the system before and after the crash, just when it needed money the most, thereby increasing the severity of the Great Depression. The problem in studying the Great Depression revolves around the chosen economic theory, because that determines which statistics are the most important, and how they are interpreted. One thing is certain, the crash of 1929 became a worldwide disaster throwing people out of work in great numbers and causing starvation and fear on a world wide scale.

We must now look at a few economic concepts that are central to understanding the Great Depression.

Money
Supply—Money
Value

Money supply and money value are esoteric economic and banking concepts of major importance to the modern world, and understanding how the Great Depression is analyzed. A nation’s
money supply
is the amount of money in circulation in the nation’s economy. This is important because it determines the amount of money available for bank loans. A nation’s
central
bank
tries to control the nation’s money supply, among other things. If money is easily available to banks they will try and loan it out by dropping interest rates, because loans are how banks make money. When there is less money available banks reduce lending and borrower’s interest rates rise.

Another key factor is the
value of money
. Strange as it may seem, money does vary in value
in
relation
to
other
currencies
, especially if they are “floated” (not backed by gold or silver) which allows money to rise or fall in value with the strength of a nation’s economy. If one nation’s economy is strong its money will have more value than an economically weak nation. Note what happens during value changes. As the value of a nation’s money increases, its merchants can buy more goods from other nations because the outside products cost relatively less, however, it makes it harder to sell goods because the cost of its products rise with the value of its money. When the value of money shifts then buying power shifts. When a nation just prints money without backing it up with gold the value of its money
decreases
because there is more of it. If the supply of money decreases, the value of money will normally
increase
because there is less of it.
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All this can be very obscure, as everything from cash flow to emotion impacts the increase or decrease in the value of money, and often in ways not fully agreed upon by economists.

In general, the central bankers would rather that the value of money remains stable, but many elements of a society push and pull on the government to favor their position. Debtors, like farmers, want “easy money” so they can borrow dollars and then watch their value fall because of inflation, thus paying back their debt in cheaper dollars than they borrowed. Creditors, such as people selling farm equipment, want “tight money” so the value of the money stays the same allowing them to receive full value for their loans even if they are paid off over time. In any event, numerous factors influence the value of money, so its value changes a lot. For example, I once purchased a German Olympic air rifle at what I thought was a high price. Checking the price of the air rifle one year later it had jumped over 30 percent. The product was no different, but the value of the Euro (a European currency) increased relative to the US dollar; thus, increasing the price in US dollars. However, the price of US made air rifles stayed the same thereby making them more competitive. If a US merchant imported those German air guns, he would pay 30 percent more than a person selling the same air gun in Germany. However, a German air gun merchant could import US made units for 30 percent less because of the growth in value of his nation’s money.
In
theory
, when a country’s money increases in value the money begins to leave the country because its citizens can buy items abroad cheaper.

In 2010, a controversy continues between the US and China because China keeps the value of its currency artificially low compared to US dollars; thus, keeping the prices of their goods low. This value differential angers US merchants who say China is cheating in trade competition and driving US manufactures out of business. Now the US central bank is lowering the value of the dollar causing more turmoil in the world money markets. As one can see, monetary value and supply is serious stuff in international relations.

Money supply and money value tie to another economic idea, the
gold standard
.
This simply means that when a nation is on the gold standard that nation’s paper money can be traded for gold bullion (you know, the
real
stuff). Many economists claim the 1800s and early 1900s were prosperous because most nations adhered to the gold standard. In America, for example, the government promised its paper money was redeemable for gold at a rate of $20.67 per ounce.
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Having a currency on the gold standard helps stabilize its value, stabilizes the money supply, contains inflation, and makes international trade easier. Using the gold standard, a nation can only print money up to the value of the amount of gold it holds. Since the amount of gold and the amount of paper money must be equal, excess money cannot be printed and this controls inflation. Since a nation on the gold standard cannot just print money the belligerents in WWI went off the gold standard, allowing them to print more money to pay for the war. This, of course, led to economic problems in the 1920s and 1930s as nations tried to readjust by going back on the gold standard. During WWI, nations incurred big debts with devalued money (money printed without backing by gold) and were paying the debts back after the war in high value money (money backed by gold). This split in money value contributed to instability in the financial markets in the 1920s. Few nations today are on the gold standard.

Instability in the value of money greatly affects international trade. What many overlooked in 1929 was the interconnected nature of the world economy. No nation stood alone any longer in the economic world. Events in one nation often had worldwide ramifications. As events would soon show, the interconnectedness ran deep.

Interest
Rates

interest rates
are another economic concept we should try to understand. Once again, interest rates influence business and personal loans. Private banks borrow funds from the central bank at set interest rates and then loan the money to their customers. The banks then add a few percentage points to the federal loan percentage and then loan the money to the private sector. Thus, as the central bank increases their interest rates to banks, the banks have to increase their interest rates to their customers, and it becomes harder for businesses and individuals to obtain a loan.

This is important to the national economy because, like the money supply, it affects a bank’s willingness and ability to loan. As loan funds dry up businesses find it harder to expand, hire new workers, or buy better equipment. On the other hand, if too much money is available and being loaned out below market rates this causes an economy to “heat up” or begin expanding faster than it should, resulting in inflation hampering the economy and destroying its ability to function if the malady gets bad enough.
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A nation’s central bank tries to ensure that enough money is available for loans, at reasonable rates, so the economy grows at a steady but sustainable rate, without much inflation, and no hefty contractions (depressions and deep recessions). This is difficult, because economies respond slowly to changes in the money supply, interest rates, and changes in monetary valuation. Months can pass before economic changes become evident, and by then some other change may be necessary to keep the economy on track (steady but reasonable expansion without much inflation and reasonable contractions or corrections).
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