The Crisis of Capitalism PDF

The Crisis of Capitalism Amatori-Colli, ch. 12 Sonia Schifano a.y. 2024/2025 Cl. 15 In this class The Crisis Propagation of the Great Crisis Economic consequences of the Great Crisis a.y. 2024/2025 30067 - cl. 15 2 The Bac...

The Crisis of Capitalism Amatori-Colli, ch. 12 Sonia Schifano a.y. 2024/2025 Cl. 15 In this class The Crisis Propagation of the Great Crisis Economic consequences of the Great Crisis a.y. 2024/2025 30067 - cl. 15 2 The Background… In the United States, the signs of the impending outbreak of an economic crisis were evident in 1928: prices began to fall (indicating the existence of overproduction problems in many industries) agriculture came to a standstill the construction sector slowed down a.y. 2024/2025 30067 - cl. 15 3 The Background... But the very same time: profits continued to grow access to credit was not expensive much of the financial wealth took the path of speculative investments speculative investments abounded on the stock market a.y. 2024/2025 30067 - cl. 15 4 The Bubble... The crash was the result of a structural weakness in the US credit system. The US banking system was characterised by the presence of many credit institutions that were not controlled by the Fed (= Federal Reserve = US Central Bank) The stock market system was constantly expanding due to: speculation by large operators high appetite for risk (easy credit) investment trusts operating with few rules and little transparency The vitality of the stock market had spread the perception that the economy was healthy but in reality the value of share prices was not linked to the ability of companies to produce profits…. a.y. 2024/2025 30067 - cl. 15 5 Wall Street crash of 1929 and Great Depression To avoid the worst, the Fed raised interest rates to bring stock market speculation under control, but the result was the attraction of new capitals to New York weakening the gold stock on European countries On 24 October and 29 October 1929 two waves of selling on the Wall Street stock market brought the system to its knees. Pa decreased from 381 to 196 (base 100 in 1926) a.y. 2024/2025 30067 - cl. 15 6 a.y. 2024/2025 30067 - cl. 15 7 Wall Street crash of 1929 and Great Depression The withdrawal of capital from the New York market was tumultuous Involved both American and foreign investors. Not only that, but many companies feared the worst They started a liquidity race and began to curtail their spending. Inventories declined and at the same time production collapsed dramatically In the automobile industry, for instance, it went from 440.000 units in August 1929 to 92.500 in December on the same year. General Motor reacted with diversification Visible effects were also in the property sector a.y. 2024/2025 30067 - cl. 15 8  Source: Steindl, Frank. “Economic Recovery in the Great Depression”, 2008 a.y. 2024/2025 30067 - cl. 15 9 Wall Street crash of 1929 and Great Depression The immediate consequence were The fall of American prices The stop of international trade → reduced by 70% →The crisis reached Europe Commercial Balance was at risk: Introduction of new tariffs → protectionism Reduction of production What is the consequence? a.y. 2024/2025 30067 - cl. 15 10 a.y. 2024/2025 30067 - cl. 15 11 Wall Street crash of 1929 and Great Depression: Deflation Particularly pernicious was deflation, i.e. the protracted decline in prices: in industrial countries it discouraged investment and postponed consumption in primary goods-producing countries it caused export revenues to plummet and made it more difficult to pay foreign debt more generally, deflation weakened the ability of debtors to repay debt, causing problems for creditors and the banking system in the relatively interdependent world of the 1920s, the slowdown of one economy affected the others in a downward spiral a.y. 2024/2025 30067 - cl. 15 12 Wall Street crash of 1929 and Great Depression: Reaction In the months following the crash the gold standard forced central banks to pursue restrictive monetary policies. No one thought of implementing expansionary monetary policies and everyone preferred to adopt spending review measures. These defensive strategies produced liquidity crises and multiple bank failures (especially in the USA). The tight control on capital flows had negative effects on international trade. a.y. 2024/2025 30067 - cl. 15 13 Wall Street crash of 1929 and Great Depression: Reaction In Europe the crisis became particularly intense in 1931. Financial panic spread in the wake of the bankruptcy of the Austrian Credit Anstalt and the German currency crisis. The reaction to the crisis was uncoordinated and disjointed. Each government took its own decisions unilaterally, without thinking about the (possible) repercussions on other parties. In September 1931 Great Britain abandoned the gold standard In 1932 it abandoned free trade by adopting the so-called ‘imperial preference’ (Ottawa Conference). The protectionist spiral contributed to the collapse of world trade and pushed many countries towards forms of autarchy. a.y. 2024/2025 30067 - cl. 15 14 Wall Street crash of 1929 and Great Depression: Reaction But why protectionism? Bilateral Clearing agreement to control the commercial balance and to avoid that currency would leave the country. a.y. 2024/2025 30067 - cl. 15 15  World trade decline during the Great Depression (in US$ m) Source: C. Kindleberger (1986) a.y. 2024/2025 30067 - cl. 15 16 Wall Street crash of 1929 and Great Depression: Effects F.D. Roosevelt the governor of Ney York Realised the scale of poverty Increased taxation on highest incomes Other initiatives were taked by local administrator but the risk was the bankrupt Only in 1931 Hoover realised how alarming was the Depression in Central Europe Moratorium on debts (also Germany war’s reparations) Golden Gate Bridge But there was not anymore confidence in the financial system a.y. 2024/2025 30067 - cl. 15 17 Wall Street crash of 1929 and Great Depression: Effects Unemployment rates in some countries (%) Unemployment was certainly the most serious problem. 26% unemployed → 20% of them access to aid 20% of schoolchildren were malnourished Insecurity and unemployment translated into a risk for democracy a.y. 2024/2025 30067 - cl. 15 18 Wall Street crash of 1929 and Great Depression: Reaction President Hoover, always convinced that the government should not intervene with countercyclical policies, was forced to change his mind in the face of unemployment numbers, but the outcomes were not positive. In 1932 (Reconstruction Finance Corporation), he created a federal fund to be allocated to the largest banks, which were supposed to help the smaller ones in turn. The resources were inadequate. Large banks allowed the smaller ones to fail. The Fed decided to lower the discount rate to expand credit, but banks used liquidity to shore up their own accounts rather than granting credit. Hoover also aimed for a balanced budget, which could be achieved by reducing service expenses or increasing taxes; both options would further depress the economy a.y. 2024/2025 30067 - cl. 15 19 International Relationships On the international front, attempts to provide a common response to the crisis are weak: In 1931, Hoover's moratorium on inter-allied and reparations payments, suspending payments for a year. In 1932, the Lausanne Conference resulted in the abolition of German reparations. In 1933, the London Economic and Monetary Conference witnessed a failed attempt to stabilize major currencies: the dollar, pound sterling, and the French franc. a.y. 2024/2025 30067 - cl. 15 20 In Europe Chancellor Bruning of Germany (1930-32): In 1931, effectively suspended the gold standard by imposing strict controls on currency and capital movements but did not use monetary policy to stimulate the economy, opting instead to reduce public spending and salaries. Other related events: The tax increase implemented by U.S. President Herbert Hoover in 1932 to balance the budget. France's steadfast adherence to the gold standard at the London Monetary Conference in 1933. The ideology of the gold standard (financial orthodoxy) that led decision-makers to adopt counterproductive policies was, however, shared by broad segments of public opinion. a.y. 2024/2025 30067 - cl. 15 21 The begining of the Welfare State The Crisis of 1929 had revealed imperfections in the functioning of market mechanisms. State intervention proved indispensable to correct market failures, giving rise to the concept of the welfare state. According to the vision of John Maynard Keynes, states should have adopted countercyclical policies: Governments would have made public spending the engine of economic recovery: wages, consumption, and profits would have mutually supported each other (Keynesian multiplier). In particular, Keynes criticized Say's Law, which posits that 'supply creates its own demand,' as, in his view, it does not function in a crisis context a.y. 2024/2025 30067 - cl. 15 22