The Dissolution Of The 1St Global Economy. Study Guide

Front 1

How did the Great War transform the financial position of the United States in the world economy? What were the implications of this?

Back 1

Once the war begun fighting turned out to be more protracted than anticipated and it drew the participants out of the world economy and toward the war effort. This left a vacuum toward which the US were drawn. Before the war the US were barely engaged with the rest of the world. WWI forced Europe to depend on US capital, market, technology, and to look at it for political leadership.

The balance of power shifted in favor of the US.

- The most striking change was in South America where European interests had been paramount for centuries, In less than a decade from the start of the war the US shot to financial, industrial and commercial dominance of south America.

The US loaned to Britain an enormous amount of money to finance the war. The US went from being the world largest debtor to the largest lender.
At the end of the war countries outside Europe whose economic needs where satisfied by Europe looked onto the US instead.

Front 2

What was the main reason for the United States’ inconsistent international position in the 1920s, embracing both global financial leadership and political isolationism?

Back 2

The major reason was the uneven nature of the country’s overseas involvement. In the US international economic involvement varied tremendously. Wall Street, some farmers, and some of the leading industries were engaged, but the bulk of Americas industry continued to look inward and remained insular and protectionist

Front 3

What was the basis of John Maynard Keynes’ criticism of the gold standard?

Back 3

The economy after the war was simply not adjusting at it was before the war. The greater organization of product and labor markets meant that prices of goods and wages might not decline as needed to sustain or restore balance in the economy. Wages and prices were not as flexible as they were before the war. Wages and price flexibility is a requirement for the gold standard. Keynes argued that the policies required to the pound to the gold standard would prove socially and politically impossible.

Front 4

How did the gold standard magnify the economic collapse of the early 1930s?

Back 4

Governments searching for alternatives to deflationary paralysis ran into the obstacle of the parity link of currency to gold. Their attempt to stop deflation and raise prices where blocked by their commitment to parity with gold. They had to let prices take their course as attempt to print money would lead investors to sell currency for dollars or gold. But at this point the currency would be devaluated.

The gold standard ruled out the option of monetary stimulation and delayed the response of governments to a crisis and it also sped the speed at which the crisis would spread.
The government had to accept international financial demands even if it meant sacrificing local conditions to maintain the exchange rate.

The gold standard is the key to understanding the depression. The gold standard of the 20s set the stage for the depression f the 30s by heightening the fragility f the international financial system. The gold standard what the mechanism transmitting the destabilizing impulse from the US to rest of the world. The gold standard magnified the initial destabilizing shock. And it was the principal obstacle to the offsetting action. It was the binding constraint preventing policymakers from adverting the failure of banks and containing the spread of financial panic. For all these reasons the international gold standard was the a central factor in the worldwide depression. Recovery was possible, for the same reasons, only after abandoning the gold standard.

Front 5

What does autarky mean?
What kind of nations tended to adopt autarkic economic
policies? Describe what these policies did in the 1930s?

Back 5

A policy of national economic self-sufficiency or independence and non-reliance on imports or economic aid.

- The “middle class” of the nations, those neither rich nor really poor, like Germany, Greece, Latvia, Portugal, Italy Romania, Mexico, Latin America

- Autarkies pursued national industrialization by concerted sometime extremes means. They took money for industry from agriculture and mining and out of mass consumption.

They mix of policies was varied but the core was similar everywhere: throw all available resources into industry.

These policies in fact closed the economy to the foreign market, imposed prohibitive trade protections, denounced the foreign banks and the money owed to them and force marched modern industry growth.

Front 6

How did most developing nations respond to the Great Depression?

Back 6

Most developing nations responded to depression by turning inward, by deploying policies to speed industrial development with emphasis on producing for the national market with profits going to the national firms

Front 7

Debt Deflation

Back 7

A situation in which the collateral used to secure a loan, or another form of debt, decreases in value. This can be detrimental to the borrower, as it may lead to a restructuring of the loan agreement or even a loan recall.

Also known as "worst deflation" and "collateral deflation".

1920's: We demonstrate three facts consistent with the debt deflation/credit view explanation of the Great Depression. First, private medium- and long-term nominal debt during the 1920 s exhibited a combination of a high initial value relative to income and a rapid growth rate that is unparalleled in a consistent data set covering more than half a century. Second, the debt issued during the 1920 s occurred in a stable price regime. Third, near the onset of the Depression, the price process switched to one of deflation. Taken together, the evidence suggests that debt deflation was operative during the Depression

Front 8

Creditanstalt

Back 8

was an Austrian bank. The Creditanstalt was based in Vienna, founded 1855 as K. k. priv. Österreichische Credit-Anstalt für Handel und Gewerbe (approximately translated as: Imperial royal privileged Austrian Credit-Institute for Commerce and Industry) by the Rothschild family. Being very successful it became the largest bank of Austria-Hungary. It declared bankruptcy on May 11, 1931, during the Great Depression but was rescued by the Oesterreichische Nationalbank and the Rothschilds and merged with the Wiener Bankverein, thus changing its name to Creditanstalt-Bankverein.

After World War 2 the bank was nationalised, and became mainly a commercial bank and highly involved in Austria's economy, holding stakes in important Austrian companies such as Wienerberger, Steyr-Daimler-Puch, Lenzing AG and Semperit.

Front 9

Hjalmar Schacht

Back 9

(22 January 1877 – 3 June 1970) was a German financial expert and Minister of Economics from 1935 until 1937.

He joined the Dresdner Bank in 1903, where he became deputy director from 1908 to 1915. He was then a member of the committee of direction of the German National Bank for the next seven years, until 1922, and after its merger with the Darmstädter und Nationalbank (Danatbank), a member of the Danatbank's committee of direction. In 1905, while on a business trip to the United States with board members of the Dresdner Bank, Schacht met the famous American banker J. P. Morgan, as well as U.S. President Theodore Roosevelt.

During the First World War, Schacht was tasked to serve on the staff of General von Lumm, the Banking Commissioner for Occupied Beligum. Schacht was responsible for organizing the financing of Germany's purchasing policy within the country, and was summarily dismissed by General von Lumm when it was discovered that he had used his previous employer, the Dresdner Bank, to channel the note remittances for nearly 500 million francs of Belgian national bonds destined to pay for the requisitions.

Subsequent to Schacht's dismissal from the public service, he resumed a brief stint at the Dresdner Bank, before moving on to various positions within rival establishments. In 1923, Schacht applied and was rejected for the position of head of the Reichsbank, largely as a result of his dismissal from von Lumm's service.

Front 10

Terms of Trade

Back 10

_________ is an index of the price of a country's exports in terms of its imports. The terms of trade are said to improve if that index rises.

- An analogous use is when comparing relative prices. If the cost of agricultural goods in terms of industrial goods goes up, one might say the "terms of trade ... shifted in favor of agricultural.

(1930)Germany's terms of trade did improve during the 1930's, ... manipulation of Germany's terms of trade in September, 1934, when Hjalmar Schacht's Neuer Plan ...