Money
Matters: An IMF Exhibit -- The Importance of Global Cooperation
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Conflict
and Cooperation (1871-1944)
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Part
4 of 6
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Global Depression
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Normalcy returned with the reestablishment of the gold standard in
the mid-1920s, but imbalances plagued the monetary system. The prewar
fixed exchange rates no longer
reflected the relative economic strengths of the major countries:
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The U.K. pound was greatly overvalued.
- The
U.S. dollar and French franc were undervalued.
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credits |
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The
Great Depression Arrives
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By
the end of the decade, economic and financial troubles had spread
around the world. Many factors contributed:
- A
decline in prices of primary products devastated the economies
of such countries as Argentina, Australia, and Chile.
- Beginning
in 1928, Americans cut back on their investments abroad to capitalize
on the booming U.S. stock market. The loss of capital hurt first
Germany, which counted on US investments to pay its war reparations,
and then the European victors, who relied on Germany’s reparations
to repay their own war debts.
- The
1929 US stock market crash left the United States in financial
chaos and accelerated the withdrawal of capital from abroad.
Trade,
production, and employment rates fell throughout the world in a
dizzying spiral. The Great Depression had arrived. How
would the world respond?
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International
Response:
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Beggar-Thy-Neighbor
Policies
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Instead
of cooperating with one another, countries tried to solve their economic
problems unilaterally.
To protect domestic industry:
- Governments
devalued their currencies to make their exports cheaper for foreign
buyers and to make imports more expensive for their own citizens.
- Governments
also raised tariffs to make imports more expensive for their own
citizens.
By
selling more and buying less abroad, countries should have created
jobs at home and improved their balance
of payments positions. But one country’s exports are another’s
imports, so these policies, adopted by many countries at the same
time, only succeeded in drastically decreasing world trade and worsening
the depression.
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Worldwide
Financial Chaos
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Austria’s
largest bank, the Vienna Kreditanstalt, collapsed in May 1931. Banking
panic spread into Germany and Hungary and eventually forced the
United Kingdom off the gold standard. Other countries soon followed
in abandoning gold.
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Failure
to Cooperate
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A
World Monetary Conference was held in London in the summer of 1933,
in hopes that a cooperative effort to restore prosperity might succeed
where unilateral attempts had failed. The organizers sought agreement
on:
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Restoring the gold standard
- Reducing
tariffs, import quotas, and other barriers to trade
- General
international coordination of economic policies
Unfortunately,
the conference failed. Participants could not come to any significant
agreement.
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Depression
Lingers
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The
results of the world’s failure to cooperate were devastating.
Continued unilateral efforts by individual countries only succeeded
in deepening and prolonging economic woe.
- World
unemployment peaked at nearly 30% in 1932 and remained in double
digits through the decade.
- German
and US production dropped to 53% of their 1929 levels.
- One
nation after another abandoned the gold standard in the 1930s.
- Regional
trading blocs and bilateral clearing arrangements replaced multilateral
trade, making international trade more difficult.
- Closed
currency blocs replaced the international gold standard, further
inhibiting trade.
At
its lowest point, total world trade sank to just 35% of its 1929
value.
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Keynesian
Revolution
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To
help alleviate the Great Depression, some countries adopted
policies based on the theories of economist John Maynard Keynes.
Keynes argued that during slow economic times, the government
should jump-start the economy by spending money to create
jobs and boost demand.
The Works Progress Administration (WPA) in the United States
was an example of the Keynesian approach. In the end, massive
military spending finally succeeded in stimulating the global
economy and ending the Great Depression.
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Political
Consequences
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The
political consequences of the mistakes made after World War I and
during the Depression included the rise of totalitarianism and the
outbreak of World War II.
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