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There is no precise definition of an economic collapse. The term has been used to describe a broad range of bad economic conditions, ranging from a severe, prolonged depression with high bankruptcy rates and high unemployment (such as the Great Depression of the 1930s), to a breakdown in normal commerce caused by hyperinflation (such as in Weimar Germany in the 1920s), or even an economically caused sharp increase in the death rate and perhaps even a decline in population (such as in countries of the former USSR in the 1990s).
Often economic collapse is accompanied by social chaos, civil unrest and sometimes a breakdown of law and order.
An example of an economic collapse is when the Great Depression happened.
There are few well documented cases of economic collapse. One of the best documented cases of collapse or near collapse is the Great Depression, the causes of which are still being debated.
Bernanke's comment addresses the difficulty of identifying specific causes when many factors may each have contributed to various extents.
Past economic collapses have had political as well as financial causes. Persistent trade deficits, wars, revolutions, famines, depletion of important resources, and government-induced hyperinflation have been listed as causes.
In some cases blockades and embargoes caused severe hardships that could be considered economic collapse. In the U.S. the Embargo Act of 1807 forbade foreign trade with warring European nations, causing a severe depression in the heavily international trade dependent economy, especially in the shipping industry and port cities, ending a great boom. The Union blockade of the Confederate States of America severely damaged the South's plantation owners; however, the South had little economic development. The Blockade of Germany during WWI lead to starvation of hundreds of thousands of Germans but did not cause economic collapse, at least until the political turmoil and the hyperinflation that followed. For both the Confederacy and Weimar Germany, the cost of the war was worse than the blockade. Many Southern plantation owners had their bank accounts confiscated and also all had to free their slaves without compensation. The Germans had to make war reparations.
Following defeat in war the conquering country or faction may not accept paper currency of the vanquished, and the paper becomes worthless. (This was the situation of the Confederacy.) Government debt obligations, primarily bonds, are often restructured and sometimes become worthless. Therefore there is a tendency for the public to hold gold and silver during times of war or crisis.
Hyperinflation, wars and revolutions cause hoarding of essentials and a disruption of markets. In some past hyperinflations, workers were paid daily and immediately spent their earnings on essential goods, which they often used for barter. Store shelves were frequently empty.
More stable foreign currencies, silver and gold (usually coins) were held and exchanged in place of local currency. The minting country of precious metal coins tended to be relatively unimportant. Jewelry was also used as a medium of exchange. Alcoholic beverages were also used for barter.
Desperate individuals sold valuable possessions to buy essentials or traded them for gold and silver.
In the German hyperinflation, stocks held much more of their value than paper currency. Bonds denominated in the inflating currency may lose most or all value.
During severe financial crises, sometimes governments close banks. Depositors may be unable to withdraw their money for long periods, as was true in the United States in 1933 under the Emergency Banking Act. Withdrawals may be limited. Bank deposits may be involuntarily converted to government bonds or to a new currency of lesser value in foreign exchange.
During financial crises and even less severe situations, capital controls are often imposed to restrict or prohibit transferring or personally taking money, securities or other valuables out of a country. To end hyperinflations a new currency is typically issued. The old currency is often not worth exchanging for new.
See also: Financial repression
Following Germany's defeat in World War I, political instability resulted in murders and assassinations of hundreds of political figures. (See: German Revolution of 1918–1919 and Kapp Putsch) Germany's finances were heavily strained by the war and reparations in accordance with the Treaty of Versailles. Unable to raise enough in taxes to run the government and make war reparations, the government resorted to printing money which resulted in the great hyperinflation. One book on the hyperinflation, which includes quotes and a few first hand accounts, is When Money Dies. The hyperinflation eventually ended, it cleared government debt at the cost of the citizens' savings. Some believe that the hyperinflation of 1923 has helped fuel the eventual rise of the Nazi party and the rise of Hitler to power in 1933. Economists, however, tend to attribute Hitler's rise to the Deflation and the Great Depression beginning in 1929. Paul Krugman concluded that the 1923 hyperinflation didn’t bring Hitler to power; it was the Brüning deflation and depression. Before 1929 the Nazi party was actually in decline with less than 3% of votes in the German federal election of 1928 (see election results of the Nazi Party).
While arguably not a true economic collapse, the decade of the 1930s witnessed the most severe world wide economic contraction since the start of the Industrial Revolution. In the US, the Depression began in the summer of 1929, soon followed by the stock market crash of October 1929. American stock prices continued to decline in fits and starts until they hit bottom in July 1932. In the first quarter of 1933, the banking system broke down: asset prices had collapsed, bank lending had largely ceased, a quarter of the American work force was unemployed, and real GDP per capita in 1933 was 29% below its 1929 value. The ensuing rapid recovery was interrupted by a major recession in 1937-38. The USA fully recovered by 1941, the eve of its entry in World War II, which gave rise to a boom as dramatic as the Depression that preceded it.
While there were numerous bank failures during the Great Depression, most banks in developed countries survived, as did most currencies and governments. The most significant monetary change during the depression was the demise of the gold standard by most nations that were on it. In the U.S., the dollar was redeemable in gold until 1933 when U.S. citizens were forced to turn over their gold (except for 5 ounces) for fiat currency (See: Executive Order 6102) and were forbidden to own monetary gold for the next four decades. Subsequently gold was revalued from $20.67 per ounce to $35 per ounce. U.S. dollars remained redeemable in gold by foreigners until 1971. Gold ownership was legalized in the U.S. in 1974, but not with legal tender status.
As bad as the Great Depression was, it took place during a period of high productivity growth, which caused real wages to rise. The high unemployment was partly a result of the productivity gains, allowing the number of hours of the standard work week to be cut while restoring economic output to previous levels after a few years. Workers who remained employed saw their real hourly earnings rise because wages remained constant while prices fell; however, overall earnings remained relatively constant because of the reduced work week. Converting the dollar to a fiat currency and devaluing against gold ensured the end of deflation and created inflation, which made the high debt accumulated during the 1920s boom easier to repay, although some of the debt was written off.
During the 1980s, the Eastern Bloc, which relied on a stagnant form of planned economy, experienced a decade-long period of stagflation, and eventual collapse from which it did not recover, culminating with revolutions and the fall of communist regimes throughout Central and Eastern Europe and eventually in the Soviet Union. The process was accompanied by a gradual but important easing of restrictions on economic and political behaviour in the late 1980s, including the satellite states.
The collapse in the USSR was characterized by an increase in the death rate, especially by men over 50, with alcoholism a major cause. There was also an increase in violent crime and murder. The Russian population peaked in the 1990s and is lower today than two decades ago, as the demographics of Russia show.
After more or less stabilizing after the disintegration of the USSR, a severe financial crisis took place in the Russian Federation in August 1998. It was caused by low oil prices and government expenditure cuts after the end of the Cold War. Other nations of the former Soviet Union also experienced economic collapse, although a number of crises also involved armed conflicts, like in the break-away region Chechnya. The default by Russia on its government bonds in 1998 led to the collapse of highly leveraged hedge fund Long Term Capital Management, which threatened the world financial system. The U.S. Federal Reserve organized a bailout of LTCM which turned it over to a banking consortium.
Some economists (i.e. the Austrian School, in particular Ludwig von Mises), believe that government intervention and over-regulation of the economy can lead to the conditions for collapse. In particular, Austrian theoretical research has been focused on such problems emanating from socialist forms of economic organization. This however is not a theory of economic collapse involving the breakdown of freely functioning financial markets; rather, the focus is on economic malfunction and crisis emanating from state control.
However, many Austrian economists also subscribe to what is called the "ABCT," or Austrian Business Cycle Theory. Economist Roger Garrison describes the bubble as merely a form of unsustainable boom (not a theory of all depression), as Mises and F.A. Hayek did, despite their disagreements on the exact workings of it. The essential part of the theory is that it is inherently unsustainable to try to manipulate monetary policy to boost both investment and consumption; usually through interest rate manipulation and bond-buying and such. The "boom" was created by "malinvestments," as Mises called them; business decisions that are bad investments and unsustainable in the long run because lowering interest rates by padding the supply of money and credit will only work in the short-term, but will ultimately collapse because the government can only hold down interest rates so long before fear of inflation kicks in (and deflation comes at the peak of the business cycle), or they go into hyperinflation (which is completely outside the realm of the ABCT).
In "The Science of Political Economy", published in 1905, Henry George argued that because land is a scarce resource, it is particularly subject to speculation; and many financial crises in the USA in the 19th century were caused by bank lending practices linked to asset bubbles in the market for land. George suggested that speculative bubbles burst when the banks run out of money and can no longer lend for such speculative investments; bank insolvencies would follow as the asset price drops and speculators are unable to repay loans. This is not a theory of economic collapse proper but a hypothesis of shortcomings in bank lending as a cause of financial crisis and economic collapse.