FINANCIAL CRISIS

Financial Crisis

Financial Crisis

Introduction

Prior to entering the recession phase of the business cycle, the economy reaches the peak of its expansion. When it nears the full-employment level of output, its rate of growth begins to slow. Prices are generally rising, so consumers demand fewer products and services. As a result, companies begin to hire fewer new workers, and demand falls even further with the reduction in incomes. Productivity and output begin to decline as costs increase, and companies respond by decreasing investment. Gradually, the overall economy contracts, as the decrease in investment reduces production and employment. Eventually, government intervention and the natural progression of the business cycle cause the recession to end, or reach a trough or turning point, and the upswing stage begins(Kose, 2010, 4283).

Financial Crisis of 1929-1930

The international economy, which had grown intensively during the nineteenth century, came to a sudden end with the outbreak of the First World War in 1914. The war had massive direct and indirect economic impacts. International trade, international investment and immigration flows broke down and the international payment system was given up completely. The leading nations Germany, France and Britain lost their status in the world's economy and Japan and the US became the new economic powerhouses. During the First World War the US experienced an export boom. On the one hand from European countries as their demand for armaments, ammunition, food and clothing skyrocketed due to the war and on the other from other non-European countries, which had been previously been supplied by Europe. The favorable geographic situation of the US was another important factor for the shift of trade, which was a serious problem for more distant countries like Australia and New Zealand. Because of the war shipping around the world became very difficult. So at this time the US was more or less the world's remaining economic powerhouse. In consequence 'exports increased from 2.8 billion dollars in 1913 to 7.3 billion dollars in 1918', which is a level that was never reached again. (Hardach, 1987, p. 255) (Goldberg, 2009, 171).

Moreover, production of the heavy industry boomed as the European Allies ordered gigantic amounts of steel and other raw materials for war production. In addition when the US did enter the war in 1917, US producers of manufactured goods faced further increasing demand from their own government. As mentioned above before the war the US was already a major industrial nation with an important heavy industry sector and modern production techniques. Although manufacturers benefited more, the agricultural sector faced advantageous conditions as well. Between 1913 and 1918 the exports of wheat and flour rose from 142 million dollars to 505 million dollars and meat exports from 68 million dollars to 668 million dollars (Hardach, 1987, p.256).

Financial Crisis of 1929-2009

Furthermore, there was a higher demand for skilled labor and the new restrictions of massive immigration, which affected mainly unskilled people, led to a raise in wages of unskilled workers. Thus the income and wealth distribution gap between skilled and unskilled ...