Introduction
The catastrophic convulsion of stock-market prices on the New York Stock Exchange in October 1929 and the Great Depression which followed are among the most noteworthy events of the twentieth century.
As noted by Steindl (2007), these two events changed the global economic landscape of the time as developed economies, led by the United States, gravitated towards a grotesque economic slump which resulted in massive job losses, meltdown in global trade, severe contraction in spending, and failure of financial institutions.
Granted the importance of these events, then, it was inevitable for policy analysts to learn important lessons from the Great Depression to avoid a repeat of economic blunders that precipitated the worldâs worst depression to date.
Indeed, the widely held perspective, according to Bramble (2009), is that the experience of a generation that was faced with an overwhelmingly greater degree of uncertainty can teach us some important lessons about how to negotiate our own economic uncertainty.
This paper will attempt to critically analyze if the lessons learnt from the Great Depression were decisive in shaping the post-1945 global economy. This objective will be achieved by analyzing three broad domains, namely: consequences of the depression to the global economy; the fall of the gold standard, and; the Bretton Woods system.
The Great Depression Era & its Consequences to the Global Economy
The economic slump that hit industrialized economies of the world, starting in the U.S. and later spreading to Europe, began in earnest in 1929 and lasted until about 1941, making it the longest and most ruthless depression ever experienced by the developed world (Ahamed, 2011).
Policy analysts are in agreement that the economic losses occasioned by this depression, in their full volume and magnitude, are immeasurable.
Although it is outside the scope of this paper to dwell on the real or perceived causes of this depression, it is worth noting that the catastrophic collapse of stock-market prices coupled with unparalleled bank failures and American economic policy with Europe generated an enabling environment that not only destroyed but also dislocated the economic structure of the United States and Europe (Gay, 1992).
The Great Depression brought with it a myriad of consequences that shook the global economy to the core. Indeed, many of the lessons learnt from the depression, according to Bramble (2009), accentuated the need for countries to develop mechanisms that would shield their economies from such consequences should they ever arise again.
This notwithstanding, research into the depression demonstrates that massive unemployment across global economies was one of the overriding consequences of the depression (Hannikainen, 2008).
Romer (2009) notes that, at its most terrible state, unemployment in the U.S. in the decade of the 1930s hit the 25 percent mark, and a quarter of American workers had partial access to the social welfare needed to maintain the fundamentals of life during unemployment.
Another consequence, which is related to the first, is that the GDP of many economies in the developed world declined catastrophically, mainly due to a fall in commodity prices, low production capacity, and a massive volume of economic losses that threatened the already struggling financial institutions (Prescott, 1999).
Romer (2009) observes that â…between the peak in 1929 and the trough of the Great Depression in 1933, real GDP [in the U.S.] fell over 25%â (p. 1). The decline in GDP of major world economies triggered further consequences, particularly the rise in the standard of living, rapid shifts in habits of consumption, easy credit, over-borrowing, and the spread of price agreements and market controls.
As will be discussed elsewhere in this paper, the above consequences brought with them valuable insights that were used to devise a roadmap of postwar economic recovery in what came to be popularly referred to as the Bretton Woods System.
According to Ahamed (2011), the post-1945 global economic arrangements, implemented by institutions such as the International Monetary Fund (IMF) and the World Bank, made it possible for economies to employ collective fiscal controls and monetary policies that checked and controlled easy credit, over-borrowing, and excessive leverage.
The IMF, in particular, was used as a vehicle to streamline unrestrained flexibility of exchange rates, a feature that was predominant during the Great Depression.
As surmised by Temin (1991), policies hatched during the consultative meeting held in 1944 in Bretton Woods, U.S., and which were largely meant to assist in postwar reconstruction of Europe, viewed economic recovery through the lens of events that happened during the interwar years, particularly the events underlying the Great Depression.
Consequently, it can be deduced that the lessons learnt from the depression were critical in shaping the post-1945 world economy.
The fall of the Gold Standard & the Hegemony of the Dollar
One of the major consequences of the Great Depression, and which will receive considerable attention, is the abandonment of the gold standard and the subsequent demonstrable alterations in the money markets of major world economies.
Most economists, according to Ahamed (2011), believe what came to be known as the Great Depression could have been an ordinary, forgettable recession if only the Federal Reserve had not been so preoccupied with defending the gold standard instead of the real economy.
This policy, coupled with easy credit and unstable currencies, messed up the international financial system, leaving exchange-rate arrangements in absolute disarray (Ahamed, 2011; Gay, 1992). These events, which modern economists argue could have been prevented, led to the abandonment of gold standard by England in September 1931, followed by the U.S. shortly afterwards (Gay, 1992).
According to Subachi (2008), it was President Roosevelt who first set the stage for the dollar to become a hegemonic currency when he torpedoed the agreement of currency stabilization, hatched by his European counterparts in the London agreement of 1933, and instead devalued the dollar by permitting the U.S. to ease credit conditions at home.
Indeed, it is widely believed that Rooseveltâs decision not only made the dollar achieve its hegemonic status, but brought to an end the depression era in America (Ahamed, 2011).
Other commentators are of the opinion that the dollar attained its hegemonic status after the currency was proposed by the Bretton Woods convenors as the vehicle currency for world trade in an attempt to correct the misaligned exchange rates and intractable current account imbalances â factors that either prolonged or intensified the depression (Vasudevan, 2008).
Consequently, it is important to note that the hegemonic status of the dollar was critical in shaping post-war global economy.
The Bretton Woods System
The Bretton Woods system, instituted in 1944, was the foremost exemplar of an entirely negotiated international monetary system projected to administer financial discipline and govern monetary relations among global economies (Bramble, 2009).
According to Subachi (2008), the planners at Bretton Woods, U.S., not only came up with a legal system of rules, institutions, and processes to regulate the international monetary system, but also established the IMF and the World Bank to facilitate multilateral decision-making with regard to currency relations among national economies.
The two institutions became operational in 1945. Vasudevan (2008) notes that â…the International Monetary Fund (IMF) was initially conceived as an instrument to facilitate expansionary national economic policies that would enable member countries to overcome temporary liquidity problems, such as a shortage of fundsâ (p. 38).
The negotiators, while forming the Bretton Woods institutions, came up with four critical policies aimed at strengthening global economies to avoid repeating what was perceived to be the errors of the past.
First, the negotiators developed a âpegged rateâ currency regime to check unrestrained flexibility of exchange rates, which not only discouraged trade and investment, but also fuelled destabilizing speculation and competitive depreciations â factors that were primarily responsible for the escalation of the depression in the 1930s (Vasudevan, 2008).
Consequently, it can be argued that by âpeggingâ major world currencies to the American dollar, the negotiators had conclusively relied on the lessons from the depression, particularly the realization that misaligned exchange rates and the emergent threat of protectionism were to blame for the force and magnitude with which the depression hit global economies (Ravenhill, 2008).
It therefore follows that lessons from the depression were decisive in shaping the post-1945 world economy.
As noted by Vasudevan (2008), the second policy aimed at addressing liquidity problems by ensuring adequate supply of monetary reserves and gold were embedded in the IMF in subscriptions and quotas contributed by individual countries according to their relative economic importance.
The rationale behind establishing such a fund, according to Subachi (2008), was to bail out States that, by any eventuality, experienced shortage of monetary reserves by permitting them to borrow the required foreign currency in amounts determined by the size of their subscriptions and quotas.
It should be recalled that international liquidity problems and unequal balance of payments provided the impetus for the depression to spread fast from its epicentre in the U.S. to other parts of Europe (Prescott, 1999).
Equally, this policy has been particularly popular with nations in need of extra reserves â at least until the collapse of the Bretton Woods system in 1971. In light of these revelations, it is safe to argue that lessons from the Great Depression were decisive in shaping modern world economy.
The third policy revolved around eliminating existing exchange controls that, according to economists, constrained currency convertibility and, in their place, encourage independent member states to return to a monetary and financial system of free multilateral payments (Bramble, 2009).
According to Subachi (2008), the negotiators at Breton Woods felt that discriminatory currency practices and exchange regulation had to be prohibited in principle if governments were to circumvent a recurrence of the kind of economic meltdown that had characterized the decade of the 1930s.
This particular policy, in its element, demonstrates that the lessons learnt from the depression were critical in determining futuristic monetary principles and policies, particularly in ensuring that world economies did not fall prey to the same challenges that befell preceding economies.
A critical analysis of the post-1945 world economy demonstrates that discriminatory currency practices and limited currency convertibility are not only incongruous to a free market economy, but may further misalign exchange rates of global economies, leading to the kind of confusion reminiscent of what was experienced in the 1930s (Steindl, 2007).
Consequently, it can be argued that the lesson learnt from the depression of the 1930s â that protectionism, limited currency convertibility, and exchange regulation leads to chaos in the currency market â was decisive in shaping post-war world economy.
The fourth policy, according to Subachi (2008), established some form of international monetary cooperation among nation-states, which was to be institutionalized on a permanent basis. This institutional forum, it was felt, could be used to check currency troubles which became prevalent during interwar years (Steindl, 2007).
Again, it can be argued that this policy was a direct offshoot of the depression as it is during this era that global currencies started collapsing, making the world economy pose more dangers than it had been previously imagined.
Conclusion
Mainstream commentators are in agreement that the Great Depression, witnessed from 1929 to 1941, was indeed a watershed in the history of contemporary global economics (Ravenhill, 2008).
After critically discussing the causes and consequences of the Great Depression, the gold and dollar issue, and the Bretton Woods system, it is clear that the events and lessons from the Great Depression of the 1930s were decisive in shaping the post-1945 world economy.
It is of interest to note that many of the consequences of the depression, particularly currency troubles, exchange regulation, liquidity problems, discriminatory currency practices, and competitive depreciations, were addressed at length during the consultative meeting held at Bretton Woods in 1944.
According to Ravenhill (2008), the outcome of this particular meeting provided the foundation for the postwar world economy, at least until the 1970s. This interplay, therefore, demonstrates the importance of the lessons learnt from the depression in shaping postwar global economy.
List of References
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