Causes of Great Depression in Europe
The Great Depression in Europe occurred during 1930s due to the economic depression that started in America in 1929. The depression was one of the biggest economic slowdown noticed by the Britain in 20th century. World trade was reduced almost by fifty percent, unemployment increased and industrial output were reduces significantly. The foundation of Great Depression started developing after World War I when various countries started manipulating their currencies and abandoned gold standard. Though various countries returned to gold standard, but it did not help in strengthening their economy or increase in spending. Britain also established gold standard in year 1925 but with a higher value (around one pound for USD 4.86). This made British export very expensive and uncompetitive in global market. Further, it resulted in decreasing liquidity in the market as people started holding gold (Richardson, 1970).
After WWI, recovery of British economy became very slow due to higher exchange rate and lower industrial productivity. In year 1928, United States stiffened their economic policy in order to prevent the loss of gold to France which resulted in further reducing the liquidity and cash crunch. In year 1929, crash of Wall Street collapsed American economy. Due to economic slowdown, United States was unable to provide loan and funds to other countries including Europe. In absence of American credit British government reduced its tariff rates among members but increased them for United States and other nations.
Impact of British industrial production and consumption was immediate and distressing. Tariff policies and unavailability of fund resulted in collapsing the demand of British goods. In year 1930, unemployment increased from 1 million to 2.5 million. British export was also reduced by 50 percent and banking system was also unable to help economy. United States Federal Reserve restricted money flow to stabilize stock market, which worsened the situation. Europe did not receive money from the lenders. United States increased interest rates to discourage the borrowing of dollar; the act received criticism as it only increased difficulties. United States Federal Reserve was unable to decrease the interest rate which reduced consumption and industrial investment (Feinstein et al., 1997).
Poor liquidity and credit crunch only weakened the consumer spending. However, slowly the situation started recovering and industries started manufacturing goods in bulk. British industries miscalculated the demand and produce goods in excess with low demand. Higher supply of products and lower demand resulted in decreasing the prices of products. This whole situation created poor business environment and wage distribution. During early and mid-1930s conditions for business investment were bad, hence, investors decided to hold their gold or money (Stevenson and Cook, 2010). Western countries started showing their faith in free-market and self-correction. British market had insufficient liquidity in absence of government intervention, and liquidity is essential to drive any capitalistic economy. Business spending is directly associated with availability of fund and liquidity available in the market.
During the Great Depression, capitalism was not succeeded as it could not generate the consumer demand and liquidity. People with wealth were in panic, hence they decided not to invest. Overall the major causes for Great Depression in Europe and Britain were poor economic policies, failure of banking and lending system, crash of stock market, poor capital flow, and poor trade & tariff policy.
References
Feinstein, C. H, Temin, Peter, and Toniolo, Gianni, 1997. The European economy between the wars. Oxford: Oxford University Press.
Richardson, P., 1970. Britain, Europe and the Modern World, 1918-1968. 1st ed. New York, NY: Cambridge University Press.
Stevenson, J., and Chris Cook, 2010. The Slump: Britain in the Great Depression. 3rd ed. New York, NY: Routledge.
