Money Matters: An IMF Exhibit -- The Importance of Global Cooperation

Conflict and Cooperation (1871-1944)

Part 4 of 6


Conflict &
(1871 - 1944)

Destruction &

(1945 - 1958)
The System
in Crisis

(1959 - 1971)
the System

(1972 - 1981)
Debt &

(1981 - 1989)
Globalization and Integration
(1989 - 1999)

Global Depression

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Normalcy returned with the reestablishment of the gold standard in the mid-1920s, but imbalances plagued the monetary system. The prewar fixed exchange rates no longer reflected the relative economic strengths of the major countries:
  • The U.K. pound was greatly overvalued.
  • The U.S. dollar and French franc were undervalued.

  U.S. Stock Market Crash

The Great Depression Arrives

By the end of the decade, economic and financial troubles had spread around the world. Many factors contributed:

  • A decline in prices of primary products devastated the economies of such countries as Argentina, Australia, and Chile.
  • Beginning in 1928, Americans cut back on their investments abroad to capitalize on the booming U.S. stock market. The loss of capital hurt first Germany, which counted on US investments to pay its war reparations, and then the European victors, who relied on Germany’s reparations to repay their own war debts.
  • The 1929 US stock market crash left the United States in financial chaos and accelerated the withdrawal of capital from abroad.

Trade, production, and employment rates fell throughout the world in a dizzying spiral. The Great Depression had arrived. How would the world respond?


International Response:

Beggar-Thy-Neighbor Policies

Instead of cooperating with one another, countries tried to solve their economic problems unilaterally.

To protect domestic industry:
  • Governments devalued their currencies to make their exports cheaper for foreign buyers and to make imports more expensive for their own citizens.
  • Governments also raised tariffs to make imports more expensive for their own citizens.

By selling more and buying less abroad, countries should have created jobs at home and improved their balance of payments positions. But one country’s exports are another’s imports, so these policies, adopted by many countries at the same time, only succeeded in drastically decreasing world trade and worsening the depression.


Worldwide Financial Chaos

Austria’s largest bank, the Vienna Kreditanstalt, collapsed in May 1931. Banking panic spread into Germany and Hungary and eventually forced the United Kingdom off the gold standard. Other countries soon followed in abandoning gold.


Failure to Cooperate

A World Monetary Conference was held in London in the summer of 1933, in hopes that a cooperative effort to restore prosperity might succeed where unilateral attempts had failed. The organizers sought agreement on:

  • Restoring the gold standard
  • Reducing tariffs, import quotas, and other barriers to trade
  • General international coordination of economic policies

Unfortunately, the conference failed. Participants could not come to any significant agreement.


Depression Lingers

The results of the world’s failure to cooperate were devastating. Continued unilateral efforts by individual countries only succeeded in deepening and prolonging economic woe.

  • World unemployment peaked at nearly 30% in 1932 and remained in double digits through the decade.
  • German and US production dropped to 53% of their 1929 levels.
  • One nation after another abandoned the gold standard in the 1930s.
  • Regional trading blocs and bilateral clearing arrangements replaced multilateral trade, making international trade more difficult.
  • Closed currency blocs replaced the international gold standard, further inhibiting trade.

At its lowest point, total world trade sank to just 35% of its 1929 value.



Keynesian Revolution

U.S.A. Work Program

To help alleviate the Great Depression, some countries adopted policies based on the theories of economist John Maynard Keynes. Keynes argued that during slow economic times, the government should jump-start the economy by spending money to create jobs and boost demand.

The Works Progress Administration (WPA) in the United States was an example of the Keynesian approach. In the end, massive military spending finally succeeded in stimulating the global economy and ending the Great Depression.


Political Consequences

The political consequences of the mistakes made after World War I and during the Depression included the rise of totalitarianism and the outbreak of World War II.


The Golden Era Meltdown Cost of the World War
Global Depression The End of the War is in Sight How Could Leaders Ensure a Future of Global Peace and Prosperity?

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