Economic Depression in Germany and USA 1920s

Introduction

Considered as one of the most important factors that determine the living standards of each country, the level of economic growth plays an important role in ensuring independent, secured, and well-improved services in a country. In order to measure the level of economy in a country, it is vital to measure the Gross Domestic Product (GDP), which relates to the total monetary value of resources within a state. Every country must formulate policies that support economic growth since any decline is likely to affect most of the activities playing a crucial role in the growth of the economy. The reductions in the economic value of a country constitute economic depression (Rothbard, 2005).

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It often results from a severe downturn in the economy that lasts for years. The United States has not been able to experience economic depression since the 1930s when it experienced The Great Depression that lasted for ten years; it contributed to a declining in employment rates by 25%. Moreover, since economic depression negatively affects the country, it often contributes to wage reduction due to increased cost of production and low returns from the sales. Most economists consider economic depression as cataclysmic since it takes several forms, which still affect the economy.

Overproduction

Another factor that contributed to the economic depression was overproduction from manufacturing and agricultural sector. During World War I, countries such as the US produced more food than the population could consume which generally improved the output but negatively affected these sectors; as a result, the farmers ended up making losses as the value of lands reduced immensely. With the failure of the economic sector, most people were rendered jobless without any means of acquiring financial resources. Moreover, unemployment and food production rose and declined, respectively, contributing to economic depression (Rothbard, 2005).

Uneven incomes

In the 1930s, there was a great disparity in relation to the levels of incomes. The gap continued to increase with those earning huge incomes comprising 1% of the working population. Considering the pay rises, the top 1% enjoyed 75% of the increment while their 99% counterparts are only receiving 9%. When the level of industrial production rose, the country did not keep the pace since the expandable income was not available to purchase what the industries required for product creation (Shlaes, 2007). In addition, the widened gap determined the purchasing power of the population, which negatively affected other economic sectors, thus contributing to the economic recession.

Stock Rumour

The existence of limited policies to regulate the stock markets before the economic slump in 1929 made investors speculate prices; as a result, they ended up purchasing the stocks on margins, or through borrowed money. The result of these speculations was erroneous stock prices that escalated, faltering the stock market. These affected the speculative investors who were not able to earn their margin calls, thus prompting a huge sell-off due for fear that the investors would lose even much. When the investors began to sell their stocks at lower prices, the stability of the market began deteriorating. This contributed to economic depression due to poor policies that were governing the stock market at the time.

Bank failures

During the Great Depression, more than 9000 banks failed. Considering the criterion for banks management in the 1930s, most people lost their savings since there were no policies that ensured the insurance of the banks. The results of these failures were reduced cost of living conditions, as well as increased poverty rates. Moreover, the surviving banks were not willing to create loaning policies; they sopped offering loans to the people due to uncertainties in the market trends (Shlaes, 2007). As a result, the banks contributed to the exacerbation of the situation leading to a reduction in the expenditure. With reduced expenditure, most businesses collapsed, contributing to the economic recession.

Similarities and Differences between Germany and the US in the 1920s

Both countries exhibited several important similarities and differences in the 1920s. Immediately after the First World War, both countries suffered severe losses contributing to food reductions, increased unemployment rates, and homelessness. After the war, both countries began regretting their participation in the war, considering the number of people who lost their lives during the course. This factor triggered the conceptualisation of peace strategies between the two nations.

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Moreover, they formulated an agenda, which called for huge scope disbarments and international treaties to stop the wars. Both the US and Germany experienced an economic recession in the 1920s. The major difference between the countries is how they managed to handle the situation (Office of the Historian, 2000). While the US, for instance, decided to borrow money in order to correct the situation, Germany, on the other hand, acted irresponsibly through printing the fiat currency in order to pay for the government debts, offer a subsidy for the people, and reduce the cost of war.

With the worsening economic conditions in America in the 1920s, most of its citizens committed themselves to remedy the situation and ensuring the country enjoyed a proper economic environment. However, the Germans became apartheid and considered such move an obligation of the government. They did not take any concern regarding the skyrocketing government debts since the government was able to offer stable prices, services, and consumable products. Even though Germany enjoyed a stable economy than the US in the 1920s, it experienced a great shock in 1923 when inflation rates greatly hit the country like in the US.

Another similarity between Germany and the US was the fact that they had untied their currencies to gold and silver. Money borrowing was easier considering one could visit the bank with only a bank certificate worth given silver, and be given the silver or equivalent gold. Nevertheless, Germany changed the system and began printing paper currency in order to pay their debts. According to the Office of the Historian (2000), their currency retained the mark on the gold and used it on their paper money. Consequently, through the Federal Reserve, the state moved at a slower pace compared to Germany while trying to take the dollar off the gold standard.

Both countries used their respective currencies to settle their debts. Considering the rate of dependence on both countries in the 1920s, Germany greatly depended on the US for loans. Germany relied much on the exports due to the huge loan they owed the US. The German economy experienced the greatest economic blow when the US halted further borrowing. Although the country enjoyed rapid economic growth at that time, it could not bear financial and capital retractions from its economy. Moreover, the Germans decided to fund some of their activities through external borrowing. As a result, the country experienced hyperinflation between 1921 and 1924.

Before the First World War, both the United States and Germany enjoyed friendly international relations. Even though America decided to refrain from any war activity, the Germans decided to attack the US. The war sparked anti-German hysteria in the US, which led to the prosecution of German-Americans (EDSITEmen, n.d.). These wars greatly affected the sociability of the two nations; as a result, President Wilson of the US began using volunteers to gather information relating to the loyalty of the German immigrants.

References

EDSITEmen. (n.d.). From Neutrality to War: The United States and Europe, 1921–1941. Web.

Office of the Historian. (2000). U.S. Entry into World War I, 1917 – 1914–1920 – Milestones Office of the Historian. Web.

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Rothbard, M. N. (2005). Economic Depressions: Their Cause and Cure. Web.

Shlaes, A. (2007). The forgotten man: A new history of the Great Depression. New York: HarperCollins Publishers. Web.

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