23/8/11

The Expansion of the Crisis


In the same way that, between 1922 and 1929, U.S. investments and loans were the engine of European prosperity, the U.S. crisis in the 1930s, dragged many countries in Europe and around the world. The connections of the international economy made the U.S. internal situation had an impact on other countries in the world but especially Europe.
The mechanisms for expansion of the crisis were many: first of all, the decline of prices in American products put companies around the world in serious difficulties because they could not compete with them. Second, the decline in U.S. demand for imports fell sharply, hurting exporters from other countries around the world. And finally, the problems of American banks caused a dramatic decline in their lending and investments in Europe. In addition, U.S. investors asked many of its capital back, stimulating the extension of the banking crisis in Europe.
The banking crisis was then, the first "symptom" of the global recession. Although some European banks were forced to close in 1930, the situation worsened in May 1931 with the collapse of the Creditanstalt, Austria's largest bank. The interbank lending crisis spread to the entire financial system, affecting especially Hungary, Czechoslovakia, Poland and Germany. But the severeness of the recession was very different from country to country, although they had all cut their production and seen the increase unemployment. For example, in Germany, people had been living since the end of the Great War a critical situation but it worsened when its inflation rose to very high levels, industrial production decreased and unemployment affected a large crowd of workers.
In the other hand, in the UK, the recession was not that severe, but the impossibility of maintaining the pound as a reference currency did break the international monetary system. The British government had to suspend gold convertibility of pounds in September 1931, causing 30% more devaluation in currency.
Moreover, France was an example of a country known as the "golden block", which kept their exchange rates. By keeping unchanged the price of their currencies while others devalued, the country lost competitiveness in the international market.
Finally, the main cause of the decline in trade was the rise of protectionism in major countries. The adoption of protective tariffs by the United States in 1930 was considered a declaration of trade war, which was answered by most governments with more protectionist measures. Consequently, each country’s attempts to solve their problems beside the rest, the deep reduction in the demand and a trade confrontation between Europe and the United States, sank the international trade.
In conclusion, the decline in trade implied the expansion of the crisis around countries which exported food and raw materials from Latin America and Asia, where sales fell dramatically. So, the decline in their loans made impossible to return the money to the U.S. bank and forced them to reduce their demand for industrialized countries. That way, once again the crisis nurtured the crisis.


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