Good to add IS/LM Model here
World Economy – The Great Depression (A)
The World Economy in 1913
• World GDP per capita from 1990int $712 in 1820 to 1543 in 1913.
• A lot of that is the West pulling ahead. Integration of world economy: 1913, world imports +
exports represent about 1/3 of world GDP.
• Fixed exchange rate regime: GOLD STANDARD (GS)era
Shock of WW1
• Destruction of capital and mobilisation of workers = fall in GDP per capita
• Reduction in trade flows during the war
• Suspension of GS
• War debts: France and UK borrow heavily from USA
Interwar period: recovery followed by Great Depression
Recovery:
• GDP per head starts growing again
• Growth particularly high in USA ‘roaring 20’s’
• High inflation in Europe but countries end up going back on GS
October 1929: Wall Street Crash
• Fall in GDP per capita and employment
• Coordination problem leading to Great Depression
• Recovery better for Great Recession much better than for Great Depression
• For Great Depression, after 4 years GDP was 85% of what it was before.
Debt overhang
War financed by borrowing, not taxation
• Complex network of international indebtedness. USA was the main lender and was
responsible for 60% of international lending.
• Germany most indebted country. Germany starts servicing 50 billion.
Solution – debt monetisation
• Government prints money to repay debt – govt asks CB to keep IR low.
• Increase in money supply – inflation – through open market operations buying bonds.
Inflation in the 1920’s
• Low inflation in the UK – prices multiplied by 2.5 between 1914 and 1920 and then inflation.
• Moderate inflation in Italy and France. Hyperinflation in Germany, Hungary, Poland.
German hyperinflation:
• Was it inevitable? Eichengreen (1992) hard to avoid because of size of reparations and
distributional effects
• Ferguson (1996) budget deficit due to govt spending, not reparations. Could’ve been
avoided.
Stabilisation in November 1923:
• New currency – Rentenmark
• Budget balanced (cut in expenditure)
• 1924 Dawes Plan postponed reparations
World Economy – The Great Depression (A)
The World Economy in 1913
• World GDP per capita from 1990int $712 in 1820 to 1543 in 1913.
• A lot of that is the West pulling ahead. Integration of world economy: 1913, world imports +
exports represent about 1/3 of world GDP.
• Fixed exchange rate regime: GOLD STANDARD (GS)era
Shock of WW1
• Destruction of capital and mobilisation of workers = fall in GDP per capita
• Reduction in trade flows during the war
• Suspension of GS
• War debts: France and UK borrow heavily from USA
Interwar period: recovery followed by Great Depression
Recovery:
• GDP per head starts growing again
• Growth particularly high in USA ‘roaring 20’s’
• High inflation in Europe but countries end up going back on GS
October 1929: Wall Street Crash
• Fall in GDP per capita and employment
• Coordination problem leading to Great Depression
• Recovery better for Great Recession much better than for Great Depression
• For Great Depression, after 4 years GDP was 85% of what it was before.
Debt overhang
War financed by borrowing, not taxation
• Complex network of international indebtedness. USA was the main lender and was
responsible for 60% of international lending.
• Germany most indebted country. Germany starts servicing 50 billion.
Solution – debt monetisation
• Government prints money to repay debt – govt asks CB to keep IR low.
• Increase in money supply – inflation – through open market operations buying bonds.
Inflation in the 1920’s
• Low inflation in the UK – prices multiplied by 2.5 between 1914 and 1920 and then inflation.
• Moderate inflation in Italy and France. Hyperinflation in Germany, Hungary, Poland.
German hyperinflation:
• Was it inevitable? Eichengreen (1992) hard to avoid because of size of reparations and
distributional effects
• Ferguson (1996) budget deficit due to govt spending, not reparations. Could’ve been
avoided.
Stabilisation in November 1923:
• New currency – Rentenmark
• Budget balanced (cut in expenditure)
• 1924 Dawes Plan postponed reparations
