Had a good chat with my friend from in the banking industry. He send me this article, i can only say, maybe the signs are here. Would this be the end of times ... well read the article and i will highlight some interesting points..
1. The great depression started in US and was due to the extensive borrowing.
2. It all started in the Financial industry
3. The initial depression got worse because the government then did not do anything to intervene ( Maybe that is why now, the world RBA are trying to bailout the financial system)
4. With so many speculation going on, the government might push for a one world currency
5. Lastly, isn't this interesting that more and more institutions are becoming "nationalised" meaning owned by the government. I wonder... what will happen next.
Great DepressionFrom Wikipedia, the free encyclopedia
(Redirected from
Great depression)
Jump to:
navigation,
search"The Great Depression" redirects here. For other uses, see
The Great Depression (disambiguation).
Dorothea Lange's
Migrant Mother depicts destitute
pea pickers in
California, centering on
Florence Owens Thompson, a mother of seven children, age 32, in
Nipomo, California, March 1936.
The Great Depression was a worldwide economic
downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries. It was the largest and most important economic depression in modern history, and is used in the 21st century as a benchmark on how far the world's economy can fall. The Great Depression originated in the United States; historians most often use as a starting date the
stock market crash on October 29, 1929, known as
Black Tuesday. The end of the depression in the U.S. is associated with the onset of the
war economy of
World War II, beginning around 1939.
[1]The depression had devastating effects both in the
developed and
developing world. International trade was deeply affected, as were personal
incomes,
tax revenues,
prices, and
profits.
Cities all around the world were hit hard, especially those dependent on
heavy industry. Construction was virtually halted in many countries.
Farming and rural areas suffered as crop prices fell by 40 to 60 percent.
[2][3] Facing plummeting demand with few alternate sources of jobs, areas dependent on
primary sector industries such as farming,
mining and
logging suffered the most.
[4] Even shortly after the Wall Street Crash of 1929, optimism persisted.
John D. Rockefeller said that "These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again."
[5]The Great Depression ended at different times in different countries; for subsequent history see
Home front during World War II. The majority of countries set up relief programs, and most underwent some sort of political upheaval, pushing them to the left or right. In some states, the desperate citizens turned toward nationalist
demagogues - the most infamous being
Adolf Hitler - setting the stage for
World War II in 1939.
[
edit] The snowball spiral
The Great Depression was not a sudden total collapse. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929.
[6] Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the northern summer of 1930.
In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing.[
citation needed] By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worst in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the
American economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through
protectionist policies, like the 1930 U.S.
Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.
[
edit] Causes
There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists (such as Peter Temin and Barry Eichengreen) point to Britain's decision to return to the Gold Standard at pre-World War I parities (US$4.86:£1).
Main article:
Causes of the Great DepressionRecession cycles are thought to be a normal part of living in a world of inexact balances between
supply and demand. What turns a usually mild and short recession or "ordinary"
business cycle into a great depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is whether it was largely a failure on the part of
free markets or largely a failure on the part of governments to curtail widespread bank failures, the resulting panics, and reduction in the money supply. Those who believe in a large role for governments in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that compounded the problem.
Current theories may be broadly classified into three main points of view. First, there is orthodox
classical economics:
monetarist,
Austrian Economics and
neoclassical economic theory, all of which focus on the
macroeconomic effects of
money supply and the supply of gold which backed many currencies before the Great Depression, including
production and
consumption.
Chart 1: USA GDP annual pattern and long-term trend, 1920-40, in billions of constant dollars
[7].
Second, there are structural theories, most importantly
Keynesian, but also including those of
institutional economics, that point to
underconsumption and overinvestment (
economic bubble),
malfeasance by bankers and industrialists, or incompetence by government officials. The only consensus viewpoint is that there was a large-scale lack of confidence. Unfortunately, once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices got lower and lower and a given amount of money bought ever more goods.
Third, there is the
Marxist critique of political economy. This emphasizes contradictions within capital itself (which is viewed as a social relation involving the appropriation of surplus value) as giving rise to an inherently unbalanced dynamic of accumulation resulting in an overaccumulation of capital, culminating in periodic crises of devaluation of capital. The origin of crisis is thus located firmly in the sphere of production, though economic crisis can be aggravated by problems of disproportionality of over-production in the manufacturing and related production sectors and the underconsumption of the masses.
US industrial production (1928-39).
[
edit] Debt
Crowd at New York's American Union Bank during a
bank run early in the Great Depression.
Debt is seen as one of the causes of the Great Depression[
citation needed], particularly in the
United States[
citation needed].
Macroeconomists including
Ben Bernanke, the current chairman of the
U.S. Federal Reserve Bank, have revived the debt-deflation view[
citation needed] of the Great Depression originated by
Arthur Cecil Pigou and
Irving Fisher:[
citation needed] in the 1920s, American consumers and businesses relied on cheap credit[
citation needed], the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production[
citation needed]. This fueled strong short-term growth but created consumer and commercial debt[
citation needed]. People and businesses who were deeply in debt when
price deflation occurred or demand for their product decreased often risked default[
citation needed]. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as
construction work and factory orders plunged.
Massive layoffs occurred, resulting in US unemployment rates of over 25% by 1933. Banks which had financed this debt began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple
bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.
[8] Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.
[8]Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor,
capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.
[8] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A
vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
[
edit] Trade decline and the U.S. Smoot-Hawley Tariff Act
Main article:
Smoot-Hawley Tariff ActMany economists have argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign trade. Most historians and economists partly blame the American
Smoot-Hawley Tariff Act (enacted June 17, 1930) for worsening the depression by seriously reducing international trade and causing retaliatory tariffs (i.e. a tax increase) in other countries. Foreign trade was a small part of overall economic activity in the United States and was concentrated in a few businesses like farming; it was a much larger factor in many other countries.
[9] The average
ad valorem rate of duties on dutiable imports for 1921–1925 was 25.9% but under the new tariff it jumped to 50% in 1931–1935.
In dollar terms, American exports declined from about $5.2 billion in 1929 to $1.7 billion in 1933; but prices also fell, so the physical volume of exports only fell by half. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this theory, the collapse of farm exports caused many American farmers to default on their loans, leading to the
bank runs on small rural banks that characterized the early years of the Great Depression.
[
edit] U.S. Federal Reserve and money supply
Monetarists, including
Milton Friedman and current
Federal Reserve System chairman
Ben Bernanke, argue that the Great Depression was caused by
monetary contraction, the consequence of poor policymaking by the American
Federal Reserve System and continuous crisis in the banking system.
[10][11] In this view, the Federal Reserve, by not acting, allowed the money supply as measured by the
M2 to shrink by one-third from 1929 to 1933. Friedman argued
[12] that the downward turn in the economy, starting with the stock market crash, would have been just another recession. The problem was that some large, public bank failures, particularly that of the
Bank of the United States, produced panic and widespread runs on local banks, and that the Federal Reserve sat idly by while banks fell. He claimed that, if the Fed had provided emergency lending to these key banks, or simply bought
government bonds on the
open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, and the money supply would not have fallen as far and as fast as it did.
[13] With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch.
[14]One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit the Federal Reserve could issue was limited by laws which required partial gold backing of that credit. By the late 1920s the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes. Since a "promise of gold" is not as good as "gold in the hand", during the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. Several years into the Great Depression, the private ownership of gold was declared illegal, reducing the pressure on Federal Reserve gold.
