Page 69 - Encyclopedia Of World History Vol V

1846 berkshire encyclopedia of world history

Kondratieff wave in the middle of the nineteenth century; depressing industry and commerce, but the period
chemicals, electricity, and automobiles in the third wave 1873–1896 is viewed in retrospect as one of depression
that began in the 1890s. Later writers emphasize elec- in prices and nominal interest rates rather than in real
tronics, petrochemicals, and aviation in the fourth wave output.The deflation was reversed by gold discoveries in
and computers and the Internet in a fifth Kondratieff South Africa and the Klondike and by the invention of
wave. Such breakthroughs in technology and organiza- the cyanide process for extracting gold from low-grade
tion are instances of “creative destruction” rendering ores. The Great Depression of the 1930s, following the
obsolete the physical and human capital of the previous Wall Street crash of October 1929 that ended the U.S.
techniques of production. stock market bubble of the late 1920s, was a depression
Schumpeter interpreted economic fluctuations as the in real output and employment as well as in prices. A
aggregation and interaction of three superimposed cycles: quarter of the U.S. labor force and more than two-fifths
a short Kitchin cycle (inventory cycle) averaging forty of German industrial workers were unemployed by
months’ duration, a Juglar cycle of nine or ten years, and 1932, more than one-fifth of British workers by 1931.
a Kondratieff cycle of forty-eight to sixty years, generated Bank failures and the fear of additional possible bank fail-
by clusters of innovations of different importance and ures, with no deposit insurance, caused depositors to
gestation. By contrast, the economist Solomos Solomou withdraw cash from U.S. banks, and banks to hold more
concludes that the evidence is against the existence of a reserves against their deposits, causing the U.S. money
Kondratieff long wave in output or prices, that the lead- supply and price level to fall by a third or more.The gold
ing industrial economies have not shared the same standard, requiring the convertibility of national curren-
phases of boom and bust over long cycles, and that inno- cies into gold and other currencies at fixed rates, was
vations have not been clustered in the way suggested by seen as spreading the depression from one country to
Schumpeter. However, Solomou found more evidence to another, as national central banks were obliged to con-
support the existence of a Kuznets cycle averaging twenty tract their money supplies to defend the exchange rates
years in length (varying from fourteen to twenty-two in the face of gold outflows. A country could maintain a
years), while other authors had argued that the apparent fixed exchange rate only if the prices of its goods fell by
Kuznets cycle was an artifact of the filtering techniques the same proportion as the price level declined in its
used to decompose time series into trend, cycles, and major trading partners and competitors.These pressures
irregular fluctuations. Increasingly economists and eco- led to the breakdown of the gold standard, with Britain
nomic historians have become skeptical of the existence leaving in September 1931 and the United States in
of true economics cycles—persistent rhythms whose aver- 1933. Another consequence was declining international
age length and size remains unchanged—but recognize trade and movement away from global economic inte-
that responses to real and monetary shocks can be oscil- gration, as countries responded to high unemployment
latory, moving through successive phases of expansion and declining production by imposing tariffs and quotas
and contraction but with the response to each shock on imports and subsidizing exports. Such moves
gradually fading away. increased friction between nations, and together with
high unemployment, especially in Germany, helped to
Depressions undermine democracy and international peace in the
The depression of 1873 to 1896 was a long period of years leading toWorldWar II. Similarly, the “golden age”
generally declining commodity prices and rising pur- of largely sustainedWestern European, North American,
chasing power of money, as the demand for real money and Japanese prosperity from 1950 (after the Marshall
balances grew faster than the world’s supply of gold. Plan and comparable American aid to Japan assisted
Such falling price levels were perceived at the time as postwar reconstruction) until the first oil shock of 1973