Economic Problems of the 1920's

Economic Problems of the 1920’s
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Economic Problems of the 1920’s
The 1920’s represented a time of major economic changes, improvements, adjustments, alterations and reforms in everything all over the world. The decade roared in some selected areas but was a big disappointment for others. The periodic time of the 1920’s earned it its name the “roaring twenties” because the decade sustained prosperity, there were lively cultures and technology was in its advancement stages. The decade marked the distinct flourishing and advancement of mass consumption economy, modern mass production, which raised the bar for the living standards of the middle urban working class as well as delivered remarkable profit margins for investors. But it was not all rosy. Towards the end of the decade, the world suffered the famous ‘Great Depression’.
The great depression was virtually a severe and intense worldwide economic downturn which made many people lose their jobs and homes. The great depression first originated from the United States of America and went on to affect many if not all the counties worldwide. The period and time of great depression greatly varied between countries. It first started in the late 1920’s and ran through the 1930’s and ended in 1940 right before the start of the Second World War This era virtually devastated everyone; people from all walks of life, the poor and rich and people from all occupations of life. The term ‘Great Depression’ was first contrived by Lionel Robinson, a British economist who wrote the book ‘The Great Depression’ in 1934. But it was president Hoover who later popularized it in his statement where he quoted “I need not remind all of you that right this moment, our world is going through a period of great depression.
The real cause and reason for the happening of great depression still remains an open and disputed debate amongst historians and economists. Sociology theorists are divided into two main categories; Keynesian economists and Classical economists. When theorizing the great depression by the Classical economists, they particularly focus on the decisions of central banking and how it led to an economic bubble and overinvestment, or excess supply of gold. Gold was known to back many of the major currencies at that time. On the other hand, Keynesian economists blame the incompetence of banking and the government as well as overinvestment and under consumption.
Many people admit that the events which prompted the great depression were as a result of the stock market crush in 1929. The fateful day of the crash was known to many as the ‘Black Tuesday’. This was the most historic stock market downturn in the history of America. 29th of October 1929 was the fateful day that saw the collapse of the stock market and the start of an economic slump which persisted for more than a decade. The economic slump came off as a big surprise to many people (Walton, Rockoff 2010).
During the roaring twenties, the economic standings were great. Thousands and thousands of Americans were borrowing money and purchasing stocks as the economy looked promising. More than 9 billion US dollars was given out in form of loans. This was much more than the total amount of money going round in the whole of America at that time. The market share prices continued to advance and the people kept on purchasing stocks with a hope that their value would increase. This in turn led to an economic bubble.
The crash of the market stocks prompted and stirred multiple debates. One of the possible cases of the market stock crash was that the banks were enthusiastic and so they put deposits that were at risk up for sale on the stock market. Other people believed that exploitations by some utility holding companies largely contributed to the market stock crash. Another raging debate that still raves on till now is whether the crash of the stock market really sparked the great depression. Eminent economists believe that the great depression was inevitable and the crash of the market stock only aggravated the economic cycle. Monetary History of America, (Friedman, Schwart 1971) states that the depression was not evoked by the crash of the stock market or the negative cycle of businesses but it was aggravated by the rapid downfall of systems of banking during the three panic waves in the early 1930’s.
At the time of the market stock crash, only 16% of Americans had invested in stocks yet everyone felt the brunt of its effects. The reason was simply because many businesses were not in a position to secure enough capital investment funds. This in turn led to financial uncertainty. Job security for many people was not guaranteed because of the financial uncertainty. This led to lowered consumption which in turn caused closure of businesses, unemployment and bankruptcies. The negative cycle of most businesses triggered a worldwide rush on the gold deposits of America which basically forced the Federal Reserve of America to increase the rates of into the slump. With time, a number large number of money lenders and banks ended up failing. Shortly after the crash, there was an implementation of the ‘upstick rule’. This rule kept the short sellers at bay and prevented them from plunging the stock market down in a flat bear run.
The recession in international trade during the beginning of the great depression distinctively stands out as the most shocking in the history of the world trade. Between the years of 1929 and 1932, the world export and import quantities in industrial nations significantly declined. Some of the factors that accounted for this include international exchange rate policies, escalating tariffs, declining demand, an increase in bilateral trade agreements and escalation of nontariff and tariff trade barriers. The US government thought that by erecting barriers of trade they were in turn protecting their economy. Trade barriers were employed to raise revenue, protect industries and to counter balance the barriers that were erected by other countries.
Through the struggles emerged two United States government officials; representative Willis C. Hawley and Senator Reed Smoot. They were aggressively lobbying for an act which would raise the tariffs. They were very vocal and believed that the new act would help the economy. In the 1930, the Hawley-Smoot act was passed into bill. This was put to help raise tariffs on imported goods. The acts main objective was to aid workers and farmers of the US against foreign competition. This was done by raising awareness and encouraging the people to buy products made in America by Americans and also increase the import prices. The idea backfired and blew back right on their faces. Some countries such as Britain, Germany, France and Canada went ahead to develop and forge new partners of trade while other countries raised their tariffs. This led to a decrease of US e exports and a relative increase of imports especially from Europe. It also led to a decrease in general world trade.
The Hawley-Smoot tariff was a complete failure and disaster.in fact it was one of the contributing factors that led to economic slump. In the year of the passing of Hawley-Smoot act saw the doubling of rates of unemployment. In years to come, the country did its best to prevent the passing of disastrous tariffs like the Hawley-Smoot. To ensure this, such protective acts as General Agreement on Tariffs and the Bretton Woods agreement were passed.
By the year 1930, interest rates had tremendously dropped. Despite the drop in interest rates, deflation still happened and it led to individuals and families spending less. Big production companies like producers of automobiles started suffering as the purchasing power and prices staggeringly dipped to their lowest. This continued happening even though the wages held steadily. Later on, a deflationary spiral started. This was because production had been decreased and so were the prices. Limited production meant reduced wages and demand which later led to an even further decline in prices.
During the great depression, some countries unemployment rates rose to a high of 33%. In the United States of America, the unemployment rate rose to 25%. This was a 607% increase between the years of 1929 and 1932. There was also a 46% drop in industrial production, a 70% drop in foreign trade and a 32% drop in wholesale prices.
By 1930 over 10,000 banks had failed with some closing down. At that time, the US lost almost 30% of its GDP while the stock markets took a plunge to a 90% decline. The US government deemed more than 60% of its citizens poor. Many families were stricken by diseases, lived in tents and cardboard boxes and the children were totally malnourished.
Countries from all over the world in a way perceived the accoutrements of the great depression. Countries such as Japan and France were not severely hit as others. To start with, France was a country that was greatly self-reliant and so never had so much to lose on imports and exports. The finance minister of Japan at that time Mr Takahashi Koromiko completely enforced the policies of Keynesian economy. This greatly helped in preventing the negative impact and effects of the great depression on their economy. The finance minister created a large fiscal stimulus which involved devaluing of their currency and deficit spending. By making the changes above, Japan saw itself not being much affected by the great depression and by the year 1933 their economy was running strong.
Countries such as South Africa and Australia who completely relied on industrial exports and agriculture really suffered. There came the emergence of a drought known as ‘the dust bowl’ as it came to be known over the years. The drought had a heavy impact on agriculture in Canada and the US. At that time, the Great Britain also experienced high rates of employments. It also paid homage to many hunger strikes and matches. Chile was another country which was heavily hit by the great depression. Its GDP staggeringly dipped to very low levels. This happened because the government of Chile highly depended on the revenues got from copper and nitrate. At this time, there were low demands for copper and nitrate. Several other Latin American countries that highly depended on the United Sates majorly suffered during the period of great depression.
The president of America was many times publicly criticized for his policies during the period of great depression. Many of his citizens and allies believed that he never did enough to prevent the United States from economic slump.

The Treaty of Versailles
The economic problems of the late 1920’s had even heavier ramifications on other matters of non-economic relations such as the events that were happening in Germany. The period of great depression brought about political uncertainty and unrest in the once so powerful and influential country of Germany.
The Versailles treaty was a peace settlement that was signed right after the end of World War one in the year 1918. This was in line with the Russian revolution and many other events happening in Russia at that particular time. The treaty of Versailles was signed at the monumental Palace of Versailles near Paris. The peace treaty was between Germany and all its allies. The Paris peace conference was initiated on the 12th of January 1919. The conference meetings were held in different areas in and out of Paris. On the 20th of January of the year 1920, thirty two leaders from thirty two states attended the conference (Hay, 2002). The negotiations in this meeting were dominated by five main powers that were responsible for beating the so called central power (Germany). These countries were Italy, France, Japan, Britain and the United States.
In the long run, five major treaties arose from the conference. These five treaties were specially dubbed after the Paris suburbs. They were:
a) St Germany of Austria
b) Versailles of Germany
c) Serves of turkey
d) Neuilly of Bulgaria
e) Trianon of Hungary
The major agreement and conditions of the treaty of Versailles were
a) The recovery and return of Alsace Lorraine to France
b) Surrendering of all colonies of Germany just as mandated by the League of Nations
c) Return of upper Silesia, Poznan and some of parts of east Prussia back to Poland
d) The recovery and return of Memel to Lithuania, Eupen and Malmedy back to Belgium and the district of Hultschin back to Czechoslovakia
e) Danzig was to be freed
f) Germany was to repartee 6,600 million euros
g) In order to settle the frontier for Danish-Germany, a plebiscites was to be held in the North of Schleswig
h) There was to be a fifteen year occupation and demilitarization of the Rhineland
i) Special status and occupation for the Saar under which was under the control of the French
j) Germany was to accept and take responsibilities for causing the war
k) There was to be a ban on the Austria and German unions
l) Provision for the ultimate trial and conviction of war leaders including Kaiser
m) To limit and reduce the number of the Germany army personnel to at least 10,000 men. This also meant that they would not be allowed to use heavy artillery, no tanks, no conscription, no airships, no poison gas supplies and no aircrafts.
n) To limit the number of German navy to use vessels that is below 100,000 tons and with no submarines.

Reactions of Germany to the Versailles Treaty
The government of Germany was given two options:
a) Accept the terms and conditions of the treaty and sign it or
b) Be raided or attacked by its allies
In November 1918 right after agreeing to the terms and conditions put on the Versailles treaty, the Germans were sure that either of its allies would consult her about the issues raised and contained in the Versailles treaty. They were wrong, that did not happen and so they were defenceless since the army had been completely disintegrated. This lack of consultation deeply hurt and angered the Germans but being in the position they were, they could nothing about it.
When the terms of the Versailles treaty were made public, there was an uproar and anger throughout the whole of Germany. They named the treaty ‘Diktat’ since it was practically forced on them. The entire German population never wanted anything to do with the treaty but they were left with no choice but to accept the terms of the treaty and sign it. The representatives knew that they had no defence at that time and were incapable of starting the war all over again.
In one last act of defiance, the naval force that was previously captured and held in the North of Scotland (Scapa Flow) deliberately sank itself.

Treaty of Versailles and its Consequences
Although the treaty of Versailles was in essence a peace settlement but in reality it had many opposing issues. The peace treaty drastically altered Europe’s geography. The treaty contained clauses that questioned the participation and role of Germany in aggravating the First World War. They were blamed for stirring and exhilarating the war and so it resulted in parts of their land and colonies being taken away. They were also commanded to pay up compensations to their allies for they were held liable for war costs. These payments were called reparations and were supposed to be paid on a monthly basis. The economic might that Germany once had was deteriorating because it was overstretched beyond its limits during the First World War. They were now left to reconstruct their already failing economy and at the same time pay the reparations.
The treaty of Versailles seemed to favour the ‘Big Three’. That is, in their eyes they saw this as a way of keeping Germany weak, restrain them from spreading communism and keep the borders between the French and Germans safe from attack by the Germans. They also created the League of Nations, an organization that would help bring an end to war throughout the entire world. This did not go well with the Germans as they felt that they were unfairly targeted. They extremely disliked the clause that blamed them for the war and the heavy financial penalties imposed on them (Jessop, 1942).
Germany was in trouble economically because it had lost some of its treasured raw materials sources. This happened because it surrendered some of its colonies that were a rich source of income and raw material. All the above made the German economy got through a lot of strains and so was hard to cope. In the west of Europe, the Versailles treaty signalled the isolation of Germany. It was deemed an outcast in politics internationally and was especially distrusted and feared by its allies.

References
Friedman, M., & Schwartz, A. J. (1971). A Monetary history of the United States, 1867-1960. Princeton, N.J: Princeton University Press.
Walton, Gary M., Rockoff, Hugh. (2010) History of the American Economy. Canada: Nelson Education, Ltd, Print.
Hay, J. (2002). The Treaty of Versailles. San Diego, Calif: Greenhaven Press.
Jessop, T. E. (1942). The treaty of Versailles, was it just?. London: T. Nelson and Sons Ltd.
PBS. (n.d.). The Great Depression. PBS.org. Retrieved from http://www.pbs.org/wgbh/americanexperience/features/general-article/dustbowlgreat depression/.