Topic 11 - World Economic Crisis

Question 1

When did the Great Depression begin and end in most economic chronologies?

Answer 1

It is generally dated from the Wall Street Crash in October1929 to the U.S. recovery in 1933–1937, with global repercussions lasting through the late‑1930s.

Question 2

What was the gold‑exchange standard restored at the 1922 Genoa Conference?

Answer 2

A system in which countries held reserve assets in both gold and key ‘exchange’ currencies (mainly sterling and dollars) while maintaining fixed parities to gold.

Question 3

Define ‘deflationary spiral’.

Answer 3

A self‑reinforcing cycle in which falling prices raise real debt burdens, depress spending, cut output and wages, and lead to further price declines.

Question 4

What did the Smoot‑Hawley Tariff Act of 1930 do?

Answer 4

It raised U.S. duties on over 20 000 imported goods, pushing the average tariff on dutiable items to about 50 %, triggering foreign retaliation.

Question 5

What was the 1924 Dawes Plan?

Answer 5

An agreement that re‑scheduled German reparations and arranged short‑term U.S. loans to Germany to stabilise the mark and European payments.

Question 6

Which European universal bank’s collapse in May 1931 is often viewed as the spark of a continental banking panic?

Answer 6

Austria’s Creditanstalt.

Question 7

Explain a ‘bank run’.

Answer 7

A sudden mass withdrawal of deposits when customers fear the bank will become insolvent, forcing asset liquidation at fire‑sale prices.

Question 8

What is meant by ‘beggar‑thy‑neighbour’ policy?

Answer 8

An economic policy—typically tariffs, competitive devaluations or quotas—intended to improve one country’s position at the expense of others.

Question 9

Define ‘lender of last resort’.

Answer 9

A central bank that supplies liquidity to solvent banks facing runs to prevent systemic collapse.

Question 10

What does ‘balance‑of‑payments constraint’ refer to in inter‑war macroeconomics?

Answer 10

The limit imposed on a country’s spending by the need to maintain gold reserves (or foreign exchange) under fixed exchange rates.

Question 11

Which 1933 U.S. legislation created the FDIC and separated commercial from investment banking?

Answer 11

The Glass‑Steagall Act (Banking Act of 1933).

Question 12

What is meant by ‘sterling bloc’ after September 1931?

Answer 12

A group of countries that pegged their currencies to the British pound once the UK left gold, coordinating exchange‑rate policy.

Question 13

Explain ‘competitive devaluation’.

Answer 13

A strategy where countries lower the external value of their currency to gain export advantage, often prompting retaliatory moves.

Question 14

What was the primary objective of the 1933 London Economic Conference?

Answer 14

To coordinate international action against the Depression, including stabilising exchange rates and reducing trade barriers (it ultimately failed).

Question 15

Define ‘open‑market operations’.

Answer 15

Central‑bank purchases or sales of government securities to influence the money supply and short‑term interest rates.

Question 16

Which landmark study by Milton Friedman & Anna J. Schwartz (1963) argued the Fed’s contractionary policy turned a recession into the Great Depression?

Answer 16

“A Monetary History of the United States, 1867‑1960,” particularly Chapter7 on 1929‑1933.

Question 17

What is John Maynard Keynes’s (1936) central explanation for prolonged unemployment in ‘The General Theory’?

Answer 17

Insufficient aggregate demand can trap economies in equilibrium well below full employment; fiscal stimulus is needed to restore output.

Question 18

What does Barry Eichengreen argue in ‘Golden Fetters’ (1992)?

Answer 18

The rigidity of the inter‑war gold standard transmitted deflation internationally and prevented monetary expansion, deepening the Depression.

Question 19

Irving Fisher’s 1933 theory relevant to the Depression is called what, and what is its core idea?

Answer 19

The ‘Debt‑Deflation Theory of Great Depressions’; falling prices raise real debts, forcing liquidation and further price declines.

Question 20

What is the ‘financial accelerator’ mechanism highlighted by Ben S. Bernanke (1983)?

Answer 20

Declining borrower net worth during crises increases external‑finance premiums, amplifying output contractions.

Question 21

What thesis does Peter Temin challenge in ‘Did Monetary Forces Cause the Great Depression?’ (1976)?

Answer 21

He questions the monetarist view, emphasizing spending‑supply shocks and international gold‑standard constraints over Fed policy errors.

Question 22

Which Austrian‑school work by FriedrichA.Hayek (1931) attributes the Depression to prior credit over‑expansion?

Answer 22

‘Prices and Production’; it argues that forced liquidation was required to correct earlier malinvestment.

Question 23

What argument does Charles Kindleberger make in ‘The World in Depression, 1929‑1939’ (1973)?

Answer 23

The crisis escalated because no hegemon provided global public goods—liquidity, lender‑of‑last‑resort, open markets—after Britain’s decline and before U.S. leadership.

Question 24

Christina Romer (1992) identified which policy as key to the U.S. recovery after 1933?

Answer 24

Abandoning gold and the resulting autonomous monetary expansion (including gold inflows and devaluation) boosted the money stock and output.

Question 25

Eichengreen & Irwin’s 2010 econometric study reaches what conclusion about protectionism?

Answer 25

Trade policy accounted for roughly one‑third of the 1929‑33 collapse in world trade, the rest due to income decline.

Question 26

What is the central claim of the ‘international transmission via capital flows’ thesis advanced by Ritschl & Straumann (2010)?

Answer 26

Sudden stops in U.S. short‑term lending after 1928 created balance‑of‑payments crises in Europe, forcing deflation under gold.

Question 27

Which 1932 paper by R. F. Harrod anticipated Keynes’s later ideas by stressing income‑expenditure feedbacks?

Answer 27

‘International Economics of the Depression’; Harrod highlighted the paradox of thrift and demand deficiency.

Question 28

How does Temin (1976) critique Friedman & Schwartz’s monetarist narrative?

Answer 28

He argues money supply declined *because* of falling output and gold constraints, not vice versa; causality runs from real shocks to money.

Question 29

Keynes (1936) versus Hayek (1931): what is their principal disagreement?

Answer 29

Keynes stresses inherent demand shortfalls requiring fiscal action; Hayek sees downturns as necessary liquidation of prior monetary excess.

Question 30

What tension exists between Fisher’s debt‑deflation (1933) and Bernanke’s financial‑accelerator (1983)?

Answer 30

Both focus on balance‑sheet channels, but Bernanke embeds the mechanism in imperfect‑information credit markets, whereas Fisher treats it as macro price‑level dynamics.

Question 31

In what way does Eichengreen (1992) critique monetarist explanations?

Answer 31

He argues that the Fed’s hands were tied by gold‑standard rules; exit from gold, not open‑market operations alone, was needed to expand money.

Question 32

How does Kindleberger’s hegemonic‑stability thesis conflict with purely domestic U.S. explanations?

Answer 32

He claims global leadership failure—not just U.S. policy—allowed the crisis to propagate, implying international coordination was decisive.

Question 33

What criticism is levelled against the view that Smoot‑Hawley ‘caused’ the Depression?

Answer 33

Empirical studies show protectionism exacerbated but did not initiate the downturn; monetary and banking collapses were primary drivers.

Question 34

How does the ‘real‑business‑cycle’ interpretation (Cole & Ohanian 1999) challenge demand‑side views?

Answer 34

It attributes persistence to productivity shocks and labour‑market frictions rather than deficient demand, contesting Keynesian prescriptions.

Question 35

Explain the policy conflict illustrated by the 1931 sterling devaluation for gold‑bloc countries.

Answer 35

UK’s exit eased its deflation, but forced France and others on gold to tighten, highlighting zero‑sum dynamics under fixed parities.

Question 36

Contrast Friedman & Schwartz (1963) with Bernanke’s (1983) view on banking crises.

Answer 36

F&S: bank failures mattered because they contracted money supply; Bernanke: they disrupted credit allocation beyond quantity of money effects.

Question 37

What debate surrounds the effectiveness of New Deal fiscal policy (Romer 1992 vs Brown 1956)?

Answer 37

Romer credits monetary expansion; Brown finds public‑works spending had modest output multipliers, suggesting mixed fiscal impact.

Question 38

Why do some historians critique the ‘gold standard as straitjacket’ thesis?

Answer 38

They point to countries like France that stayed on gold yet initially avoided deep contraction, implying domestic choices also mattered.

Question 39

What is the controversy over the role of wage rigidity (Keynes 1936 vs neoclassical views)?

Answer 39

Keynes: cutting wages may lower demand; neoclassicals: flexibility restores full employment—differing prescriptions for policy.

Question 40

Summarise the conflict between trade‑collapse explanations: income effect vs tariff effect.

Answer 40

Income‑effect advocates see trade decline as a symptom of GDP contraction; tariff‑effect advocates (Irwin) find protectionism directly cut volumes.

Question 41

What critique does Eichengreen (2013) level at the Austrian liquidationist view?

Answer 41

He argues that letting prices fall uncontrollably damaged productive capacity and social cohesion, undermining long‑run growth.

Question 42

Describe the disagreement over the timing of recovery: Romer (1992) vs Cole & Ohanian (1999).

Answer 42

Romer sees recovery beginning 1933 due to policy shifts; Cole & Ohanian argue full recovery delayed until WWII because of negative supply shocks and cartel policies.

Question 43

How do modern DSGE reconstructions (Christiano et al. 2003) integrate competing explanations?

Answer 43

They embed financial frictions into New Keynesian frameworks, showing both monetary shocks and credit spreads were necessary to match Depression dynamics.