CAS IR 349 Lecture 13: Great Depression

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pinktoad207

18 May 2018

School

Boston University

Department

International Relations

Course

CAS IR 349

Professor

William Keylor

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International Economic Order, 1929-1939: The Great Depression and its Aftermath

The Crash effect on the cycle of Money:

In the 1920s, cash flow was based on the Dawes plan and the young plan after – US to Germany, Germany

to other countries, other countries repaying US, and Germany paying back US.

This stabilized the economy- for a while.

The U“ goeet as’t ioled and this was enough to stabilize things.

But where do American banks and businesses get the money to loan and invest?

- By investing in stock market. In 1920s, the stock market was generally like the

market today, stocks were increasing so there was money.

- Oct 29,1929, Stock market crashes in US.

- The akets that ee’t depedet o U“ did’t iediately feel the ipat

however, Germany felt it greatly.

- This resulted in the loss of loans sent to Germany. Most businesses that

dependent on the money from the loans were completely shut

- Americans were in ruins- ones who depended on stocks etc. Affecting average

everyday Americans and Germans.

- Gea aks uikly aoue isis ad say they a’t pay epaatios

anymore.

- The British, the French and the Belgias ee’t as tied to the Aeia aket

and therefore did not suffer immediate effect until after 1930s.

That’s he Heet Hooe oes i play. Heet Hooe as ko fo his ok i WW fo the

successful multimillionaire and businessman he was. He then resigned to help work for relief aid. So he

was a good negotiator. He organized a lot of relief work with the US government.

Moratorium (1931) : his solution was given in 1931 for all the loans. He said we should concentrate on

the domestic economic structure for a year. Which will be used to figure something out.

By 1932, Fae ad Belgiu had said they o’t e payig. The U“ goeet suddely has to deal

with the fact that they will not be paid back. They could not declare war either because where would they

get the money to fight?

By 1933: Bitish also delae that they a’t pay the etie thig, ut soe of it.

By 1934, all countries except one has stopped paying American banks back. The one country that

eventually fulfills its payments is Finland.

How does this affect everyone around?

- Slight problem?

- The American response is (Hiram)Johnson Act (1934)

- This would operate in US, saying that any country with war debt to the US will

no longer be issued any form of loan- private or public

- This complicates relationship in the Trans-Atlantic front as most countries

ould’t oo

- This not only affects domestic but even economic recovery

- Even the Quakers were called back.

- Its not that everyone stops, but a significant reductions

Side Note: The biggest French export was French wine in the 1930s, and then there was prohibition which

really hurts their economy as US was their main importer.

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American Liquidation:

1929-9: U“ aks sells off foeig iestets. Ceditastalt’s (Austrian National Bank) assets frozen.

Leading to Bank Panic of 1932.

Austria was hugely harmed.

Austria had no massive war debts, or reparations so US hugely invested in Austria in 1920s.

But in 1929, America goes back. They sell everything off.

This leads to unemployment, economic ruins.

Ee though the outy did’t hae diet elatios, the iestets eally affeted the eooy of

Austria.

Protectionist Strategies:

The other element related with Hooverism.

Charity begins at home.

The problem is that there are so many countries in the world whose economy depend on the American

economy – Caribbean, Chile, Argentina, China, Japan and Europe.

US: Hawley-Smoot Tariff 1930: 59% tariff.

They expected that people would buy American, leading to an increase in money. Financial incentive to

buy American.

But this would lead to other countries putting tariffs on their goods.

At the same time, GOLDSTAR VOYAGE there was a movement where women went across the sea to

France- these women were the ones who lost husband/sons who are buried in France.

Both agree to subsidize their voyage.

How does this relate to the bigger picture where tariffs, anti-foreign products are being prorogated?

- This sends a message that there is an effort to respect the sacrifices of the

African American communities.

- But it gets lost in all the noise

British Epire Iperial Preferece (Ottawa Conference, 1932): Basically, similar to tariff for any non-

British imperial goods. There was tariff imposed on all goods coming into their imperial colonies.

How does this affect the colonies like India, Africa etc?

- India was focusing on not buying British goods

- Tutu/Kuku? in Kenya did the same

- Garvey in Nigeria was doing the same but initiating Nigerian businesses

How does this make those men look to the British parliament?

- Gandhi was suddenly an enemy

2 years later, French do the same thing.

Franc Zone (1934)

What about Germany?

- Germany too was based on their relation with other countries

- Gea the poposed the Bate Blok (9-1938)

- Its applied on an international scale specifically to southeast Europe, China and

Latin America for coffee, sugar, steel, Gold etc.

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Document Summary

International economic order, 1929-1939: the great depression and its aftermath. The crash effect on the cycle of money: In the 1920s, cash flow was based on the dawes plan and the young plan after us to germany, germany to other countries, other countries repaying us, and germany paying back us. The u go(cid:448)e(cid:396)(cid:374)(cid:373)e(cid:374)t (cid:449)as(cid:374)"t i(cid:374)(cid:448)ol(cid:448)ed and this was enough to stabilize things. In 1920s, the stock market was generally like the market today, stocks were increasing so there was money. Oct 29,1929, stock market crashes in us. The (cid:373)a(cid:396)kets that (cid:449)e(cid:396)e(cid:374)"t depe(cid:374)de(cid:374)t o(cid:374) u did(cid:374)"t i(cid:373)(cid:373)ediately feel the i(cid:373)pa(cid:272)t however, germany felt it greatly. This resulted in the loss of loans sent to germany. Most businesses that dependent on the money from the loans were completely shut. Americans were in ruins- ones who depended on stocks etc. Ge(cid:396)(cid:373)a(cid:374) (cid:271)a(cid:374)ks (cid:395)ui(cid:272)kly a(cid:374)(cid:374)ou(cid:374)(cid:272)e (cid:272)(cid:396)isis a(cid:374)d say they (cid:272)a(cid:374)"t pay (cid:396)epa(cid:396)atio(cid:374)s anymore.

Related Questions

1. Why Niall Ferguson thought that the expansionary fiscal policy (or government deficit) could produce crowding-out effect? You can explain by using the IS-LM model or you can use the logic of loanable funds theory.

Niall Ferguson believed that expansionary fiscal policy could produce a crowding-out effect. Ferguson believed that if the government tried to increase demand during the crisis it would cause the real interest rate to increase. He theorized that if the government tried to boost the economy through deficit spending it would cause the interest rate to rise, which in turn would crowd-out investors and consumers. The interest in the deficit would lead to an increase in the demand for loanable funds, which would lead to an increase in interest rates. Ferguson stated "The lesson of economic growth is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from private sector, not from the state."

2. Why Paul Krugman thinks that Niall Ferguson was wrong and thought that government deficit could not produce a crowding-out effect? In other words, please explain Krugman's Liquidity trap .

Paul Krugman disagreed with Ferguson and believed that the government deficit could not produce a crowding out effect. Krugman's liquidity trap: Private demand is so low that even if the short-term interest rate is 0% spending is less that what is needed for full employment. Normal monetary policy of the central bank purchasing short-term debts with new money is ineffective. Krugman argues that a major issue during the crisis was people wanting to save money combined with the private sector being far less likely to invest. He referred to this a "savings glut". It was argued that the federal reserve was playing the part that the private banking system through buying private securities and the federal government was playing the roll that business wasn't by engaging in investment. Due to the liquidity trap excess demand for savings is not going to drive interest rates up. Krugman stated " Government borrowing gives some of those excess saving a place to go and in the process expands overall demand, and hence GDP. It does not crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap."

3. In the discussion, other discussants such as George Soros and Robin Wells pointed out some interesting issues. Please provide at least one thing that you agree and one thing that you disagree. Discuss in details why you think so.

I agree with Soros view that the publics view of the financial markets has been forever changed. " Financial markets namely that they tend toward equilibrium, and that equilibrium is disturbed by extraneous forces, outside shocks. But the finical system collapsed of its own weight." I feel like this is a situation in which it takes a very long time to build trust, but that trust can be lost instantly. The crash has challenged the felling of security that people once felt in the banking system. The idea of the market regulating itself is fading, it wasn't until the government stepped that people felt reassured in the banking system. I believe this will lead to a period of government regulation that wouldn't have arose without this change in view. I disagree with robin Wells' view that the US needs to shift towards protectionism. I believe that free trade is good for everyone as long as there is a comparative advantage. If the US moves toward protections as a result of the deficit it will slow economic growth and place us at a disadvantage compared to countries with free trade. Not to mention consumers in the US will be placed with the burden of higher prices on goods.

Please make comments to the discussion I provided above(at least 300 words). And you can start with "I agree with you on some points... But I disagree with you on some points".

CAS IR 349 Lecture 13: Great Depression

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