It's amazing how so many people act as though every significant event happens in a vacuum, completely isolated and independent of every other event that preceded it. For instance, most people contend that the September 11th, 2001 attack on the United States was unprovoked and out of the blue. The seeds for that attack were planted 22 years before when the Soviet Union invaded Afghanistan. That was when a very young Osama bin Laden became indoctrinated into the school of thought that led him to issue his first fatwa (decree), in 1996, which called for the US military to leave Saudi Arabia. The effects of that single September 2001 event were profound, causing global economic uncertainty, massive geopolitical shifts and two wars, one of which ended just last year. And they prove the risks of missing critical perspectives when seeing cataclysms like 9-11 as disconnected from the chain of events that preceded them. There seems to be a similar vacuum regarding the start of the Second World War. The common narrative goes: Nazis gained power, Hitler wanted to rule the world, he started in Poland... But the rise of Nazism didn't just happen. If it hadn't been for a profound economic shockwave on another continent, perhaps Herr Hitler would have never gained a foothold at all. That shockwave was the Great Depression; the circumstances leading to that event should be a cautionary tale for us today.
|Events that led to the Great Depression:|
|- Distress selling of assets and debt liquidation due to over-indebtedness.|
|- Bank loans are paid off; money supply contracts.|
|- Asset prices drop because supply is greater than demand.|
|- Business net worths fall, provoking large-scale bankruptcies.|
|- A reduction in employment leads to a drop in production and trade.|
|- A dramatic drop in profits across the board.|
|- Drops lead to a loss of confidence; pessimism sets in.|
|- People who have money start hoarding it.|
|- A drop in nominal interest rates coupled with a rise in deflation-adjusted interest rates.|
What Caused the Great Depression
War is big business. It's a nasty business, too, but one that creates heroes and mints millionaires seemingly overnight. Aren't heroes and millionaires what nations build their legends on? They must be because the rich and heroic are usually the parts of war we focus on. In the run-up to the Great Depression, they were the only ones that mattered. Them, and the so-called Spanish flu pandemic.
The end of the First World War coincided with the start of the influenza pandemic. Even though American soldiers didn't join in the fighting until the war's last year, it was a very long year on the home front and, rather than revelling in soldiers' return, people had to buckle down and stay away from one another. We know what battling a pandemic feels like, don't we? The pandemic caused an economic downturn (as it did in our time) so, as it waned, the US president was keen to kickstart the economy. Thus, the Roaring Twenties. Industry ground into high gear, mass-producing such luxuries as refrigerators, wireless radios and automobiles, all priced cheap enough for everyone to buy. And they all did, even if they had to buy on credit. In that glut of riches and triumphant feeling, robber barons saw their path forward. The United States had social programmes in place, back then, and laws to prevent financial trickery. However, the country's expansive mood, coupled with the president's desire to further grow the economy allowed tycoons to press for advantage. They persuaded legislators to repeal restrictive financial laws and minimise social welfare programmes. Soon, they had access to all manner of capital and used it to enrich themselves. Does any of this feel familiar? It should. These happenings are exactly the same that led to the 2008 economic downturn.
What Was Happening in Germany
Germany wasn't exactly under sanctions but they did have substantial war reparations to pay. So high were these penalties that Germany, already edging toward insolvency, came to a point when they no longer pay them. The US, by then the world's dominant economic power, saw an opportunity. Those legislators drafted the Dawes Plan, which allowed American tycoons to invest in Germany via Wall Street financial institutions. Germany used that money to repay the UK and other Allied powers. Those countries then repaid the US government for their post-war loans. The whole event became a giant money recycling machine, with the US profiting at both ends. The Dawes Plan afforded Germany a five-year interlude to enjoy their version of the Roaring Twenties; the Golden Twenties. Meanwhile, in the US, all of the cars and appliances that could be bought had been. At that time, people did not own more than one car unless they were very rich, and what could an ordinary household do with more than one refrigerator? Sales started dropping off but speculation in financial markets ran rampant. After so many boom years, who could blame them?
The first market quake happened in March of 1929 when investors started feverishly selling off stock. That slide was stopped when one banker announced a $25 million guarantee against any losses. Now reassured, stock trading continued at its former pitch, even as industry declined and consumers were drowning in debt. The US stock markets boom finally ended in September of that year. Even then, investors believed that the tailspin start was just the markets correcting themselves; they continued inflating speculative bubbles. The London Stock Exchange crash on September 20th ended all illusions of market stability. Investors pulled out of international markets, which left the fledgling German economy suddenly with no support. To make matters worse, American creditors started calling in markers made to European nations, leaving them virtually bankrupt. Inflation started to soar and, with trade under pressure from the United States' Smoot-Hawley Tariff Act, there were fewer commodities - grains and such, to buy. Broke, hungry and humiliated (thanks to the Treaty of Versailles) on the world stage, the mood in Weimar Germany turned both ugly and desperate. The people were primed for an autocrat leader like Adolf Hitler, who knew all the right things to say - soundbites to stoke anger and division, and all the right promises to make: of prosperity and destiny. His playbook wasn't so different from the one used by some of today's leaders.
The Parallels With the War in Ukraine
Looking back over the past 35 or so years, it's easy to recognise the patterns and actions that led to the Great Depression which, as we now know, led to the Second World War.
- Starting in the mid-80s, the United States enjoyed remarkable prosperity; the wealth was shared (to varying degrees) around the world when the Iron Curtain fell, in 1989.
- In the 1990s, the US government repealed the Glass-Stegall Act, a law enacted in the aftermath of the Great Depression, that mandated the separation of commercial and individual banking. Removing the partition between them gave investors access to huge troves of cash previously unavailable to them.
- The 2010 Supreme Court decision in Citizens United v. FEC essentially designated corporations as people, giving corporations undue influence over the government.
- The 2018 repeal of the Frank-Dodd Act, a series of financial system regulatory reforms, removed virtually all of the safeguards from Wall Street, once again permitting the same type of speculative bubble creation that brought about the Great Depression and the 2008 global recession.
- Starting in 2020, the coronavirus pandemic took its toll on individual countries' economies, which caused instability in the global economy.
Few economies made it through the pandemic unscathed. In terms of real GDP growth, Russia fared worse than the United States but neither economy was doing well. And the US had removed all the checkpoints safeguarding its economy. By August 2020, Russia's economy had contracted by 8.5% and only has attained weak to moderate growth since then. Furthermore, that country's government has been labouring under a list of sanctions, some levied as far back as 2014 when Russia annexed the Crimean peninsula. Russia has a lot of potential assets but turning them into worth would take staggering amounts of money. All of the mines, logging forests and even their access to open water are all on the eastern end of the country but industry and civilization are mostly all at the western end. Even the country's oligarchs likely wouldn't care to relocate closer to their diamond mines and oil fields. Their one, easily-accessible asset, gas, is essentially their cash cow but those reserves are under heavy sanctions, too. By contrast, Ukraine is known as the world's breadbasket. That country exports grains all over the world and has plenty of other riches. And, most importantly, it has access to open water. And now, we come back to our starting premise; that earth-shattering events do not happen in a vacuum. Last year, Russia quietly issued passports to residents of Ukraine's Donbas region, giving that government a legitimate claim to defend Russian citizens living in Ukraine. Apparently, they expected a quick victory, after which they could claim Ukraine's riches for their own and use them to prop up their economy. That could allow Russia to finally surpass America's distressed economy. Thus, the Russian people would never feel broke, hungry and humiliated, as Weimar Germans did all those years ago. Was that Mr Putin's motive for the attack? If so, it may backfire. Now, discover how the war in Ukraine is rattling the global economy.
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