The Super Summary of World History

by Alan Dale Daniel

  After the Great War, America, England, and France disarmed to a large degree and went back to civilian budgets. In America the US Army shrank dramatically, but the navy did somewhat better because nations usually avoided scrapping battleships like beer cans. Germany was stripped of its army and Austria-Hungary ceased to exist. Turkey also faced financial problems that limited its ability to rearm. In the USSR under Stalin, the Soviets began a massive rearming and rebuilding of its army. Its secret arms buildup included development of the excellent T-34 tank. During this period between 1919 and 1929 an economic boom of sorts was underway, and the nations of the world prospered. Europe could trade once more, even though Germany was on the ropes, and the USSR took itself out of international trade under their communist regime. Money was available for investing, and companies expanded to meet growing consumer demand.

  From 1919 to 1933, the United States tried another experiment in abolishing evil. Just as the nation abolished slavery it would now abolish drunkenness by making sales of liquor illegal.[191] The Eighteenth Amendment to the US Constitution, approved on January 29, 1919, prohibited the sale of alcohol in America. This forced many distilleries, bars, and transportation companies out of business or into other businesses. The law made some very expensive property valueless. Legally owned property became contraband overnight. Once again, the government did not pay for the property it made worthless. After all, the property was not seized by the government for public use. Washington DC just said it was illegal to use any property for the now illegal production of alcohol.[192] The great experiment of taming drunkenness fell flat, and in 1932 Roosevelt and the Democrats ran on a platform of overturning the Eighteenth Amendment. Roosevelt was elected in a landslide in 1932 because of the Depression, but one might wonder how many voted Democrat because it would bring back booze (Even I may have voted for that. How dumb are these Republicans anyway?).

  The Great Depression 1929-1942?

  Background

  From 1919 to about 1929, the world economic situation seemed okay. England and France were recovering from the war, supplies of food and manufactured products were plentiful, and living standards were going up. In the USA, President Calvin Coolidge’s administration was running a financial surplus, cutting taxes dramatically, and experiencing a growth in real income per person of 2.1 percent.[193] Underneath however, things were not so rosy. The world’s economic system developed dynamic cracks that were growing and endangering the global economic system.

  The Great War devastated France, destroying large swathes of land requiring millions of francs to restore. France had taken on massive war debts with England and the United States which had to be repaid, but these large debts caused devaluation of the franc making repayment difficult.[194] France was counting on Germany to pay for everything through repatriations (“Germany will pay all” the French government proclaimed); however, the expected repatriations did not show up. Germany was broke. Payments were much lower than agreed and slow in coming. The problem of German repatriations dogged the European powers throughout the 1920s. Germany could not repay England and France, and America would not cancel Allied war debts. Several conferences were held, but no real solutions to the financial problems were ever found. The 1932 Lausanne Conference, held in the middle of the Great Depression, terminated the wrangling over German repatriations by requiring one final payment from Germany. Today it is clear that Germany received more in American loans than she paid in repatriations. Never trust accountants mixing with politicians.

  Britain experienced critical economic problems as well. In 1922 the Conservatives called for protective tariffs, a move which would surely damage international trade. This was contrary to England’s traditional free trade policy. At the urging of Winston Churchill, Chancellor of the Exchequer, Britain went back onto the Gold Standard in 1925, but this also failed to re-establish stability in the world’s money markets. As trade began to shrink more nations enacted protective tariffs further damaging international trade.

  On the financial front, credit markets were getting tight because the money supply was lessening as the decade wore on, businesses were worried about getting loans, and the supply of investment capital was drying up. This was taking place worldwide, and some of the problems included the debts being carried from WWI. In Germany, super inflation was threatening European economic stability. When the economic future turns bleak people with investment money pull back; thus, investment capital was vanishing. Except for Germany’s inflation, most of the problems were sub-rosa and not a concern for the public—at least, that is what the elite leaders of the world believed.

  Britain’s Empire also proceeded to give Britain trouble. Former colonies now wanted independence and nationhood. England responded by giving many colonies more independence, including a parliament and independence in foreign policy, while still maintaining a close relationship to the mother country. Those former colonies included Canada, Australia, New Zealand, and the Union of South Africa. Most notable in not gaining additional independence was India. The new nations often refused to follow Britain’s foreign policy, thus complicating matters for Britain in the 1930s.

  Political problems erupted all over Europe because of growing radical leftist and rightist movements in several European nations. Adolf Hitler, a Germany radical rightist who led the Nazi party, languished in prison in 1925 after a failed coup d’état. While there he wrote Mien Kampf (My Battle) detailing his thoughts about the future of Germany.[195] Hitler’s radical ideas would eventually lead his Nazi party to winning elections in Germany, eventually gaining control of the nation itself. In his book he set out his future plans for conquest, however, few read the tome. Unfortunate, because Hitler adhered to this published plan after he assumed the office of Chancellor of Germany. Due to a good world economy during the early to mid-1920s neither the rightist nor the leftist movements made headway in Europe or Asia, but as the economic situation grew dire things changed. Communist movements gained ground with the result that rightist also attracted followers concerned about the Reds taking over. It was during the crisis of the Great Depression that men like Hitler gained power through the support of the common person who wanted a return to stability. The Great Depression brought on worldwide radical political changes, so please understand this unprecedented economic collapse was a globe changing event and a major reason for WWII.

  In the 1920s, England and France were having money problems and sought loans from the United States, or loan extensions, to cover war debts and other matters. American bankers extended the loan payments and gave new loans to Europe keeping the nations economies afloat. It seemed to most these loans were good business because the future looked bright and money was being made everywhere. The banks thought that as the world economy continued improving the money would come flowing in. These assumptions of a bright future proved false.

  Causes

  We will now start an analysis of the Great Depression’s causes; however, they are still widely debated and unresolved. Many economists argue the 1920’s era displayed real growth, while others think it was an era of false prosperity—profitless prosperity—because business profits were weak even though the economy was booming. Raw data from the 1920’s indicate real profits and real growth, as manufacturing output rose over 23 percent, but underneath it all something else was eating at the foundations. That something else was the money supply. The Federal Reserve (Central Bank or Fed) was making money easy to get in the mid-1920s by increasing the money supply, and the Fed injected money into the credit markets. This, some say, created a boom economy based on money supply growth and easy loans, not business growth in real terms (whatever “real” means).

  Economist Milton Friedman says the Fed reduced the money supply and raised interest rates after the 1929 crash, thus making the downturn worse; other economists say the Fed increased in money supply after the crash and propped up failing businesses, thus increasing the severity of the debacle. The cold facts: Between 1921 and 1927, th
e money supply increased 60 percent. That is a lot by historical standards, and made loans easy to obtain. Starting in 1928, the Fed began tightening the money supply by raising the discount rate (the rate paid to borrow money) from 3.5 percent to 5 percent, thus making loans harder to get. Then came the 1929 stock market crash. In 1931 the money supply was decreased 30 percent or more, and in 1936 the central bank doubled the reserve requirements (the amount of money a bank has to keep on deposit as a safety net against failure); thus, taking more money out of the financial system. Those differentials represent a large swing in the supply of money between 1927 and 1936. Note that the Fed decreased the money supply after the crash. Private business capital investment also fell to zero, creating a situation where money was almost impossible to obtain. Everyone was living hand to mouth. Sounds like Milton Friedman was right. The Federal Reserve took money out of the system before and after the crash, just when it needed money the most, thereby increasing the severity of the Great Depression. The problem in studying the Great Depression revolves around the chosen economic theory, because that determines which statistics are the most important, and how they are interpreted. One thing is certain, the crash of 1929 became a worldwide disaster throwing people out of work in great numbers and causing starvation and fear on a world wide scale.

  We must now look at a few economic concepts that are central to understanding the Great Depression.

  Money Supply—Money Value

  Money supply and money value are esoteric economic and banking concepts of major importance to the modern world, and understanding how the Great Depression is analyzed. A nation’s money supply is the amount of money in circulation in the nation’s economy. This is important because it determines the amount of money available for bank loans. A nation’s central bank tries to control the nation’s money supply, among other things. If money is easily available to banks they will try and loan it out by dropping interest rates, because loans are how banks make money. When there is less money available banks reduce lending and borrower’s interest rates rise.

  Another key factor is the value of money. Strange as it may seem, money does vary in value in relation to other currencies, especially if they are “floated” (not backed by gold or silver) which allows money to rise or fall in value with the strength of a nation’s economy. If one nation’s economy is strong its money will have more value than an economically weak nation. Note what happens during value changes. As the value of a nation’s money increases, its merchants can buy more goods from other nations because the outside products cost relatively less, however, it makes it harder to sell goods because the cost of its products rise with the value of its money. When the value of money shifts then buying power shifts. When a nation just prints money without backing it up with gold the value of its money decreases because there is more of it. If the supply of money decreases, the value of money will normally increase because there is less of it.[196] All this can be very obscure, as everything from cash flow to emotion impacts the increase or decrease in the value of money, and often in ways not fully agreed upon by economists.

  In general, the central bankers would rather that the value of money remains stable, but many elements of a society push and pull on the government to favor their position. Debtors, like farmers, want “easy money” so they can borrow dollars and then watch their value fall because of inflation, thus paying back their debt in cheaper dollars than they borrowed. Creditors, such as people selling farm equipment, want “tight money” so the value of the money stays the same allowing them to receive full value for their loans even if they are paid off over time. In any event, numerous factors influence the value of money, so its value changes a lot. For example, I once purchased a German Olympic air rifle at what I thought was a high price. Checking the price of the air rifle one year later it had jumped over 30 percent. The product was no different, but the value of the Euro (a European currency) increased relative to the US dollar; thus, increasing the price in US dollars. However, the price of US made air rifles stayed the same thereby making them more competitive. If a US merchant imported those German air guns, he would pay 30 percent more than a person selling the same air gun in Germany. However, a German air gun merchant could import US made units for 30 percent less because of the growth in value of his nation’s money. In theory, when a country’s money increases in value the money begins to leave the country because its citizens can buy items abroad cheaper.

  In 2010, a controversy continues between the US and China because China keeps the value of its currency artificially low compared to US dollars; thus, keeping the prices of their goods low. This value differential angers US merchants who say China is cheating in trade competition and driving US manufactures out of business. Now the US central bank is lowering the value of the dollar causing more turmoil in the world money markets. As one can see, monetary value and supply is serious stuff in international relations.

  Money supply and money value tie to another economic idea, the gold standard. This simply means that when a nation is on the gold standard that nation’s paper money can be traded for gold bullion (you know, the real stuff). Many economists claim the 1800s and early 1900s were prosperous because most nations adhered to the gold standard. In America, for example, the government promised its paper money was redeemable for gold at a rate of $20.67 per ounce.[197] Having a currency on the gold standard helps stabilize its value, stabilizes the money supply, contains inflation, and makes international trade easier. Using the gold standard, a nation can only print money up to the value of the amount of gold it holds. Since the amount of gold and the amount of paper money must be equal, excess money cannot be printed and this controls inflation. Since a nation on the gold standard cannot just print money the belligerents in WWI went off the gold standard, allowing them to print more money to pay for the war. This, of course, led to economic problems in the 1920s and 1930s as nations tried to readjust by going back on the gold standard. During WWI, nations incurred big debts with devalued money (money printed without backing by gold) and were paying the debts back after the war in high value money (money backed by gold). This split in money value contributed to instability in the financial markets in the 1920s. Few nations today are on the gold standard.

  Instability in the value of money greatly affects international trade. What many overlooked in 1929 was the interconnected nature of the world economy. No nation stood alone any longer in the economic world. Events in one nation often had worldwide ramifications. As events would soon show, the interconnectedness ran deep.

  Interest Rates

  interest rates are another economic concept we should try to understand. Once again, interest rates influence business and personal loans. Private banks borrow funds from the central bank at set interest rates and then loan the money to their customers. The banks then add a few percentage points to the federal loan percentage and then loan the money to the private sector. Thus, as the central bank increases their interest rates to banks, the banks have to increase their interest rates to their customers, and it becomes harder for businesses and individuals to obtain a loan.

  This is important to the national economy because, like the money supply, it affects a bank’s willingness and ability to loan. As loan funds dry up businesses find it harder to expand, hire new workers, or buy better equipment. On the other hand, if too much money is available and being loaned out below market rates this causes an economy to “heat up” or begin expanding faster than it should, resulting in inflation hampering the economy and destroying its ability to function if the malady gets bad enough.[198] A nation’s central bank tries to ensure that enough money is available for loans, at reasonable rates, so the economy grows at a steady but sustainable rate, without much inflation, and no hefty contractions (depressions and deep recessions). This is difficult, because economies respond slowly to changes in the money supply, interest rates, and changes in monetary valuation. Months can pass before economic changes become evident, and by then some
other change may be necessary to keep the economy on track (steady but reasonable expansion without much inflation and reasonable contractions or corrections). [199]

  When the money supply gets tight and loans are hard to obtain businesses stagnate and often stop hiring or start laying workers off to save money. Fewer employed people results in other businesses selling fewer items and they start to lay off workers. This cycle, if continued, can trigger a depression and destroy an economy. When the money supply is easy and loans are easy to obtain businesses may borrow to expand and hire more workers. More employed people means more goods are sold. If many people try to buy the same items the prices will increase under the rules of supply and demand. If these prices continue to rise they can cause runaway inflation which can also destroy an economy. It is a tricky balancing act to keep economies on track.

  Prior to the advent of the central bank concept, financial markets set the interest rates banks could charge for loans without government interference. Coupled with the gold standard, the market handled the variables of money supply, monetary value, and the interest rates charged for loans very well before the depression. During the Great Depression, nations went off the gold standard and began economic manipulation, eliminating the free market financial mechanisms setting interest rates and other monetary variables. This was a major and permanent change in the financial world.

  Tariffs

  Tariffs are critical to international trade. tariffs are a financial charge placed on goods coming in from foreign nations, thus making foreign-made goods more expensive. The international community knows that if one nation raises tariffs the nations negatively impacted will also raise tariffs. In practice, England might raise tariffs 10 percent on cars from the United States, and in response the United States will raise tariffs on English tea by 15 percent. Then England will retaliate for that US move, and back and forth it goes until both nations price themselves out of the markets for tea and cars. In 1930, the Congress of the United States passed very high tariffs on goods from other nations in the Smoot Hawley Tariff Act. This could not have come at a worse time. The world’s nations responded by rising their tariffs and international trade began to implode, especially for exports from the United States. Fewer export goods sold because the overseas price took buyers out of the market. This tariff act, along with retaliatory acts passed by other nations, prolonged and increased the severity of the depression and made the disaster truly global.