The Roaring 20s and the US
position than it would of otherwise been. As a result of the rising consumer culture and confidence of the 1920s, credit buying became much more widespread in the US, and this was unsustainable, as it left the economy vulnerable in cases of increased uncertainty, as banks are less likely to cope with the high number of consequent withdrawals. In the 1920s there was an increase in the demand for stocks, and this inflated their prices in accordance with said demand and meant the value was not based on the productivity of companies. Investors made money from these stocks by selling them to other investors, and stockbrokers sold the stocks on margin throughout the late 1920s, causing concerns with some politicians, but not President Hoover, who supported what the banks and brokers were doing. Historian David Kennedy said “By 1929, commercial bankers were in the unusual position of loaning more money for stock market and real estate investments than for commercial ventures”, and this fact was a sign that the economy was in a vulnerable state, especially when considered with the fact that this was also the case in 2008, when recession hit. Due to regulation of business being so opposed in the 1920s, any concerns could not be properly acted on, and despite suggestions from The Federal Reserve Board that banks should reduce the amount of money they were lending, the majority of banks continued the practice of lending to the stockbrokers, and stocks continued to be sold on margin. This set the stock market up for an inevitable crash, which occurred in 1929, after a downward trend had begun in September, and October 26th, known as “Black Tuesday”, saw the worst day. Though the stock market crash did contribute to increasing uncertainty and thus was a factor in the triggering of the Great Depression, the degree to which is a subject of debate, only 16% of American household had investments in the stock market (13) and the direct economic effect was not highly significant. Uncertainty was, nonetheless, triggered in the US shortly after this and people withdrew their money from their banks, taking it out of circulation meaning that it could not be used for investments/loans. This causes banks to fail because they cannot continue without any resources and is what happened at the beginning of the Great Depression. The banking system was a weakness for the US which contributed significantly to the Great Depression. In the 1920s American banks were small, independent institutions which had to rely on their own reserves. This was a major weakness, as if many people wished to withdraw their money at once, the banks may not have enough, and would fail. When panic was created people did such, and this occurred in the 1930s, with a wave of bank failures stemming from Kentucky and reaching Illinois, Indiana, Arkansas, North Carolina and Missouri. The failures would cause panic and cause depositors with other banks to withdraw their own savings in mass numbers, which caused more failures, and so it continued. The bank failures caused a frozen credit system and with less money in circulation a deflationary cycle was set in motion. Deflation lead to unemployment as businesses had to lay off workers as the low returns meant costs became too high, and this unemployment decreased purchasing power, meaning more deflation, meaning more unemployment. This truly ushered in the Great Depression - a time of widespread unemployment and poverty. The deflationary cycle was allowed to continue because the American government did not want to intervene, and the Federal Reserve was not rescuing banks or pumping money into the economy, but instead tight monetary policy was in place, restricting spending at a time when it was already low and thus worsening economic downturn, as the economy was not being stimulated to encourage spending and create jobs. Due to the Gold Standard, and also largely World War One, which created debts between nations such as Germany and the US, economies were linked and when America reached this point of economic disaster, Britain and European nations soon followed suit.
The Gold Standard
The gold standard played a role in prolonging the Great Depression, and nations which were remained on it longer, also took longer to recover. For example, Britain and Scandinavia recovered more quickly than others after they left the gold standard in 1931, while France and Belgium stayed until 1936 and 1935, respectively, and suffered longer recoveries. The Gold standard was an international system in place in the early 20th century in which the unit of account was based on gold quantities. This meant governments could not devalue their currency and were interdependent on each other’s monetary policy. High interest rates would prevent investors exchanging currency for gold, keeping the gold reserves stable, but the interest rates had to keep up with the rates of other Gold Standard nations, otherwise investors would move their money overseas. The exchange rate was fixed under the gold standard, and could not be devalued, the money supply only increasing as much as the gold reserves. An inability to increase the money supply/devalue currency meant the economy could not be stimulated by infusing money into it, and thus the Depression was prolonged by its existence, as stimulation of the economy is what lifted the Great Depression. Due to the drawbacks of the system, countries such as the US followed Britain and moved away from the Gold standard, floating their currency. Many did this too late however, and in the mean time world financial markets were worsened, freezing up due to the different systems. The abandonment of the Gold Standard by major economies was a significant effect, that is still relevant today, as the same situation was never returned to. The existence of the Gold Standard to begin with was a contributing factor in the international spread of the Great Depression, and thus its effect on New Zealand, because it linked global economies in a rigid way.
British RelianceIn the early 20th century the New Zealand economy was heavily reliant on exports to the UK, which was the destination of between almost 80% of yearly New Zealand exports at the lowest point and over 90% at the highest, throughout the 1920s and 1930s (8). Britain was hit hard by The Great Depression, afflicted with mass unemployment and low wages which meant they could no longer afford as many goods, including those produced by New Zealand, and so the export sector was hit hard. This triggered unemployment and a decrease in aggregate demand in New Zealand, contributing to the start of the economic downturn and preventing recovery. American tariffs on overseas products, such as South American meat, significant due to New Zealand's heavy reliance on meat exports, meant export receipts decreased further, as more nations sought to sell exports to Britain. Ultimately, the close trading relationship with Britain was the main factor in the beginning of the Great Depression in New Zealand, as it linked New Zealand to Britain and made the New Zealand economy reliant on that of Britain.
|