Reasons and Results of the Great Depression -1929-

 

Golden(!) Period of Expectations and Demand

The Great Depression was a very significant turning point for both almost all economies of the world and economics as a science also. Since there were loads of devastating effects of depression on most of economies over the world, it is still an important research topic for economists. Even there are still some ongoing arguments and disagreements about causes and onset of slumpflation, it could be firstly said that turning in a restrictive direction of U.S. monetary policy by increasing interest rate was starting effect of depression. This was directly related to FED's fearing of fast booming and unhealthy speculations in the stock markets. There was excessive credit creation at the start 1920s and it was fearful for FED. Then, along with increasing interest rate, a sudden restrictive monetary policy caused big stock market crash in 1929. Especially after World War I, US had become global net creditor and raising interest rate by US make debtor countries get into trouble because of golden standard regime. It could be said that deflation was a better situation than devaluation especially at the first days of depression for FED in that time because of golden standard.

On the other hand, in US, higher interest rates made investment and consumption decisions even worse and expectations got worse, as the time went on it became an aggregate demand shock and this insufficient demand caused deflation finally. Therefore, decreasing of prices had resulted decrease in output. So, deflation in the US caused price deflation abroad especially fragile countries, because US accounted for more than one of third of the global output demand. It is widely-accepted that even though onset of depression was related to stringent monetary policy, increase in the interest rate negative expectations about future and insufficient demand respectively, transmission of the depression to other countries was directly related to fixed exchange rate under gold regime.  In gold standards there was an inequality between countries’ balance of payment. For example, there were some gold rich countries and some countries which had not enough gold. Moreover, there was not a cooperation and solidarity institution like IMF in that time which could support countries which suffered from high interest rate and insufficient gold stocks. “In one of the most memorable acts of misguided monetary policy in history, the Federal Reserve raised interest rates sharply in October 1931 to protect the dollar in the midst of the greatest Depression the modern world economy has ever known. This action was not a technical mistake or simple stupidity; it was the standard response of central banks under the gold standard.” (Temin, 1993:10)

When US increased interest rate in 1929, in order to prevent outflow of golden, debtor and fragile countries had to increase their interest rate too in order to prevent depreciation value of their currency. Because of this, these countries also suffered from deflation and decreasing output, high unemployment and depression finally. “Monetary restriction by the Fed brought US foreign lending to a halt. “(Eichengreen, 1992:10) According to Temin, more than fixed exchange rates, commitment to the gold standard policy regime transmitted the Great Depression around the world. The single best predictor of how severe the Depression was in different countries is how long they stayed on gold. The gold standard was a Midas touch that paralyzed the world economy (Temin, 1993:13). For example, Spain did not suffer from the Great Depression because it was not on the gold standard.

Apart from that, recent studies have showed that in that time especially in US, there were not flexible wages as classical economists asserted. In first months of depression FED and government waited for an invisible hand and price mechanism to adjust markets. However, especially because of high rates of unionization and changing structure of economy after World War I had made wages rigid. Prices were decreasing because of dismal expectations also. As a natural result of these facts, depression got deeper and worse. Because of American roots of it, especially Japan and other European countries lived depression softer in comparison with United States even though they suffered high unemployment and deflation also. As a consequence of depression “Industrial production in the United States, in contrast, declined 21 percent in the first year of the Depression. Thus, the Depression was "great" in the United States sooner than elsewhere.” (Romer, 1993: 4) In 1931 and 1932 industrial production fall 62 percent in US also, unemployment reached 25 percent and almost one of third banks failed because of banking panic in the United States.

After 1930’s most of the countries which suffered from deep depression started to give up gold standard regime and implemented expansionary monetary policy along with expansionary fiscal policies in order to revive and increase effective demand as John M. Keynes suggested. So, Keynesian policies were very helpful and effective to overcome the Great Depression over the time and of course it is accepted that birth of macroeconomics was directly related to depression.

Bitcoin, Cryptocurrencies and The Money in the New Era - 3 -

 4. Trust, Belief and Regulation

As almost for all commodities or financial instruments, trust, belief and legal regulation have a very important effect in also the currency. If a currency has not legal infrastructure, public trust and belief, probably it will not live and be acceptable in the long term.

The reason why most of the people trust and believe the fiat money system is clear. We know that fiat monies are issued by the central banks and mostly they are backed by the states. Actually, issuing by a central bank and backed by a state make fiat monies “the real currency” for the humankind. Unfortunately, it is clear that cryptocurrencies don't have the public trust and belief enough yet. Due to fact that they are not backed by a state and not issued by a central bank people generally consider cryptocurrencies as an unreliable, even a speculative investment tool.

On the other hand, Bitcoin is very young now but it has possibility to become very popular sooner, then it will be able to be a rival for traditional fiat money system or other currencies which means that it could be better to create necessary legislation for cryptocurrencies now. Because later could be too late for this action to take. Even though Bitcoin is not yet widespread and isn’t as wide as other international currencies, taking consideration Bitcoin continues to increase its popularity, regulatory measures will be needed.

There are countries in the European Union that haven’t taken an official stance towards Bitcoins and other virtual currencies, but as Bitcoins continue to be more popular, it is very clear that we are going to see more countries begin to create their own policies in order to regulate virtual currencies. “Further action from other authorities can reasonably be expected in the near future” (European Central Bank, 2012).

 

5.Conclusion

As we have discussed before, it is well-known that Cryptocurrencies have a lot of disadvantages about being widely accepted for now at least. Generally, in financial subjects, making people trust you could take a long time. Due to fact that Cryptocurrencies-Bitcoin have high volatility of value, there is no state or bank guarantee in the back of it and it has not been widely accepted by the community yet, we could say easily that cryptocurrency cannot acquire the role of money for now.

On the other hand, it is an undeniable reality that cryptocurrencies have been attracting a lot of public attention in recent years. Especially western governments, universities and Non-governmental Organizations have been making researches about cryptocurrencies increasing day by day. Moreover, the number of people who invest on Bitcoin are mounting and everyone asks for information about Cryptocurrencies in almost every day to financial consulting firms or the banks. Bitcoins could be regarded as a bad alternative to traditional money with the scope of criminal activities, because virtual currencies would make easier to conduct criminal activity such as: money laundering, drugs trafficking, computer hacking and terrorism.

It is clear that, none of these activities is widespread or extensive to the use of Bitcoins. There are other bad or negative sides to using a virtual currency that do not have to do with criminality such as speculation, risky investment and issue of unpredictability. It is obvious that without necessary legal regulation and central bank or government guarantee, Bitcoin or all other Cryptocurrency users bear all the risks.

It should be accepted that keeping Bitcoins in a digital Bitcoin wallet will leave your virtual currency vulnerable. If we consider the issue in the scope of computer hacking for example. We would say that a digital wallet is weak to computer hackers. In order to attract people attention to this issue, The European Banking Authority has issued this warning to its citizens, “Exercise the same caution with your digital wallet as you would do with your conventional wallet” further urging users of Bitcoins, “not to store large amounts of Bitcoins in their digital wallets for an extended period of time” 

In conclusion, we could say that if cryptocurrency will gain the role of money one day in the future, it must serve also as functions of money also. Even it has some of functions of money like being a store of value, a unit of account and a medium of exchange, Cryptocurrencies cannot execute all these functions properly yet.

Despite the fact that the most known cryptocurrency-Bitcoin has a lot of popularity and a good number of investors, it is clearly known that it is not highly accepted yet all around the world.

After considering all these facts, especially in the short term, it seems that cryptocurrency could be an investment instrument for the investors who like taking risk instead of acquiring the role of money.

How to buy Bitcoin? Will Bitcoin fall more or rise increase? THE MONEY IN THE NEW ERA - 2 -

 3.Definition and Functions of Money

After defining and understanding what a cryptocurrency is and how it works, we should analyse it with conventional money. Money has a lot of definition and it has been defined diversely from different points of view. However, it could be said briefly that money is a tool which is based on public trust and provide us to buy our needs and making our transactions. Moreover, money is “a stock of assets that can be readily used to make transactions “.

 

Due to fact that money has three main functions, if we want to predict or understand future of the money and cryptocurrency, we must consider and analyse firstly these three functions in terms of usage of cryptocurrency also. It should not be forgotten that our real main target in analysing functions of money is to understand if cryptocurrency can obtain the role of money in the future in terms of functions of money.

 

It has been widely accepted that main and primary function of money is the medium of exchange function. If you can't transfer or exchange goods and services via money easily clearly the usage of money will not mean anything to you anymore. In this aspect if we consider "Bitcoin" as the most accepted and used cryptocurrency, it is not impossible to buy or exchange some goods or services via bitcoin but it is very clear that bitcoin has a limited ability in the sense of the medium of exchange function. Bitcoin has a very limited space for buying or transferring goods or services all around the world in comparison with fiat or modern money.

There are some limited number of online shopping websites and retailers operate all around the world and they accept cryptocurrencies especially bitcoin as an exchange or buying tool if you have a crypto-bitcoin wallet. However, it could be readily said that these kind of limited and selected numbers of retailers or websites are not enough to be widely accepted as money.

 

One another important aspect and function of money is to serve as store of value for its owner. In this aspect having stability and predictability are very crucial for any commodity or any currency. Because via money people want to have some value which will not change in the short term. In this scope volatility emerge as a very significant term for the currency.  When we look at the volatility issue in terms of most known cryptocurrency-bitcoin it is very obvious that value of bitcoin has been so volatile during the recent years.

According to Kuikka (2019: 16) Shortly after the invention, the value of the new digital currency “bitcoin” when compared to the US dollar was measured in only about a cent. However, during the following year, bitcoin saw a rapid rise in value reaching a total of 27 US dollars by end of 2009. In the early 2010s, bitcoin began to gain more mainstream adaptation, and in 2014 Microsoft was one of the first major corporations which declared it will begin accepting payment transactions by bitcoin (Smith, 2014) and by the end of 2017, bitcoin had reached its highest value of 19,783.21 US dollars. The rapid development of bitcoin created a lot of speculation and interest in the area of cryptocurrency. It seems that solving volatility issue seems one of the most important and difficult problems for cryptocurrency.

 

As the third important function of money: "a unit of account" represents a useful function. When we think that sometimes how important even buying a little slice of cake, this function of money emerges as a very important issue. If you have a sole and inseparable currency and while you cannot buy even a little slice cake from a retail store with it, it is very obvious that you start to think again if it is a real currency or not.

to be continued..