Great Depression within the Context of Stability and Role of IMF 1 . Introduction: Rising Waves of Globalization and Economic Crises Globalization is a multidimensional process. Relatively speaking, economic globalization is the integration of national economies into the international economy in order to constitute a unique global market. In this thesis, the role of WTO in the economic globalization process after 1950 and its place in contemporary economic system are studied.
GATT, having an institutional and legal framework, is a macro organization which has been established after the Second World War for liberalization of world rade system. GATT has been transformed to WTO in 1995 (ORourke and Williamson, 2002). The functions of the WTO are the same with the GATT but have a stronger legal status. Although some serious problems within the WTO system, this positive impact have been still lasting.
As for the relationship of these matters, we see that international systems stability is affected by the operations of international organizations such as IMF or World Bank. So, there is a clear link between emergence of crises and the measures taken to mediate and stabilize these possible crises. After aking all of these steps, it is vital to link antecedents of crises to their control and stabilization mechanisms (Mitchener, 2005). 2. Great Depression: Antecedents and the Context Factors 1873 Long Depression (Panic of 1873) was the first ever crises experienced before the Great Depression.
Although literature refers The Great Depression of 1929 as the first international crisis, Long Depression was a deeper economic crisis embracing the world and during the depression no country could loan the others. Since The Great Depression world countries has faced many economic crisis. As a consequence of the lobalization and interdependence, all countries felt the crises more or less (Calomiris and Mason, 2003). Contagious effects of the crises particularly following 1990s have resulted in the creation of new theories.
Nevertheless internal economic and political instabilities of a certain country may also lead to a crisis. In case of instability, due to the great sensibility of the foreign capital, outflow of foreign capital may intensify the damages of crisis. Before the Great Depression, world witnessed another significant crises that shaped the dynamics and power structures of the world. The crisis of 1873-1896 can be considered the first general crisis of capitalism.
This crisis, which was named as “Great Depression” by contemporaries, manifested itself with a persisting profitability problem arising from secular downward trend in prices and pessimistic investment conditions. However, during the crisis period, volume of production and foreign trade continued to increase with decelerating growth rate (Calomiris and Mason, 2003). During the Greta Depression period, underdeveloped countries including the Ottoman Empire and the newly emerging Turkish Republic faced serious problems because of the cessation of the capital xports from developed countries.
In these countries European financial control was established to guarantee large debt payments. European financial control over the economies of underdeveloped countries led to the establishment of a new international division ot labor on which the underdeveloped countries specialized on the production and exportation of primary goods (Mitchener, 2005). Moreover, deterioration of external terms of trade and rapid decline in prices of primary goods strengthened the control of international finance-capital over underdeveloped countries.
However, the crisis affected these countries according to their internal conditions (Calomiris, 1993). To overcome profitability problem associated with crisis, some mechanisms were implemented. Among them, protective tariffs, creating monopolies such as trusts and cartels, increasing productivity by developing more efficient management techniques, capital export for controlling raw material resources and markets and geographical division of world among great powers could be mentioned.
With these developments, internationalization of capitalism accelerated and capitalism evolved from the stage f free competition to a monopolistic stage where monopolies and finance capital dominated the whole economic activities (Hatton and Williamson, 1994). 3. Great Depression and the Effects over Turkish Republic: Various Policy Measures Taken The Great Depression that started in U. S. in 1929 and spread all over the world also caused a social and political crisis lasted 10 years. Afterwards, ultra-nationalist movements arose in Europe led the world to a world war lasted 4 years.
The young Turkish Republic founded after a dense war period that began with Balkan War and ended in The Independence War had lost all its economic power. Whereas, for the young Turkish Republic there was an economical war that must be won and some social and political revolutions to be conducted together with the war. This struggle was to be conducted under the economic situation of a nation destructed and lost her millions of citizens after 4 wars between 1911 and 1922 (O’Rourke and Williamson, 2002).
In addition to the economic crisis, the foreign debt inherited from Ottoman Empire and the tariff dated September 1, 1916 and lasted until 1929 were the other economical drawbacks of young Turkish Republic. Education level in the ation was less than 10 percent. The wars occurred one after another had decreased the young population sharply. There had not been any transportation network other than a few railway lines. The industry was under control of foreigners and minorities (Bernanke and James, 1991). The young Turkish Republic had faced with this global economic crisis in the early years of a period like this.
Atat??rk gave priority to political and social revolutions until the year 1929 and made some decisions to encourage the private sector for economic development. But desirable success had not been gained ue to the inadequacy in capital stock and low level of industrialization. The government intervened the economy immediately when the currency lost value and the gap between import and export expanded. Beginning this period etatism in the economy had been adopted and applied for a long time by the Governments of Turkish Republic.
In order to provide the businessmen with capital to make investments, Central Bank and many commercial banks had been established during this period. The Law of Protecting Turkish Currency was enacted to prevent Turkish currency from losing value and some regulations were made to overcome the deficit n foreign trade (Calomiris and Mason, 2003). In order to contribute to development ot agriculture the i t the was taken ott in addition to measures taken to encourage the villagers to conduct modernized agricultural activities and new factories were established for processing the agricultural products.
Within the context of studies conducted to establish heavy industry, mines were extracted from the ground and the mining facilities were established to process those mines. In the field of transportation, a general mobilization was declared to reach every part of the nation via railway lines In ddition to this; some important studies were conducted to activate the highways and the ports (Bernanke and James, 1991). During this period, many innovations were made in economy and those were supported with other innovations in other fields like social, cultural, political etc.
The aim was to reach Turkish people to the level of contemporary civilizations. For this reason, education was given particular importance and firstly education institutions were combined in order to prevent them from being under control of religious sector and foreigners. With the adoption f new Turkish alphabet literacy was made easier and a nationwide literacy campaign had been started. Institutions for public education and village institutes had been established to struggle with illiteracy in all parts of the nation.
New universities had been established to train the university students in the standards of western countries and many students had been sent abroad for training purposes. In many fields like women’s rights, dress, hat, calendar, time and measurement units, weekend vacations, fine arts etc. some laws were enacted in order to catch up on the standards of the Western Civilizations. 4. Crises across the Europe and Rest of the World and Role of IMF in Stabilizing these Crises World has been going through many crises.
The economies of the world many times were shaken by the global large and small shocks from great economic depression of 1929 to 2008 world economic crisis. Although these crises have many similarities, they have many differences. After that because of the non-static structure of the economy and including the meaning of the word “the effort of unlimited needs by rare equities”, our countrys economy as well as the world’s other economies will be exposed to large and small shocks and rises (Mitchener, 2005).
The crisis known as “Mortgage Crisis” between the periods of 2007-2008 in the United States due to the housing loan market disruption can be considered as the final process of the disruptions of the market-based global economy. In this context, especially the nature of the relationship between the housing market and the derivatives is a striking example of the functionality of financial architecture. One of the major axes of this study is that the essential function of the financial markets is to ensure the funds that reel sector needs, but this function is pushed back.
The solution proposals came to the agenda after the crisis discussed by imitating the solutions after 1929 Great Depression, or at least remembering these solutions, is Just because the crisis is compared to the Great Depression. These discussions some times made around the question that, if the solution proposals of 2007-2008 period are Keynesian actions. The main reason why the axis of the discussions made around Keynasianism is that; the 1929 and the continued process is similar to the 2007-2008 process from some directions. Role of the IMF in providing financial stability in the globalization process has been very ignificant.
When one looks at the review of the development process of measures d the policies implemented by the IMF tor the detection, it is seen that history ot IMF is rooted in monitoring and prevention of the problems that may threaten system. Moreover, IMF aims at ensuring the stability of the financial system, the detection of changes in the duties and functions and in the means of implementation of the IMF since its establishment in the process of providing the global financial and economic stability, the investigation of adequacy and the results of the stabilization olicies implemented by IMF.
In this respect, duties and responsibility areas of IMF are defined by the roots of major crises, namely of Great Depression (Calomiris, 1993). Firstly, the phenomenon of financial stability, different opinions that merged due to difficulties in defining this concept, development of financial stability and the destabilizing factors that threatens stability in the process of historical development, the missions of Central Banks and international institutions to ensure the stability are considered to be some of the critical concepts in the context of crises.
Review of studies showed that the conditions that required the establishment of the IMF, the period before the establishment of the IMF, the Fund’s organizational chart, its financial facilities are closely associated with the major crises, namely the Great Depression. For instance the Fund’s stabilization policies and tools in the process providing stability, stabilization models and evaluation methods of fund programs are created to fght against possible crises (Bernanke and Carey, 1996).
Since the end of the 20th century, major financial crises that shook the world showed the invalidity f the argument of neoclassical economics claiming that instabilities will not emerge in the capitalist system. These crises increased the interest of the idea that the current crises must be dealt with more heterodox models such as the theories of Veblen, Keynes and Minsky related to economic instabilities are examined. Although they examine different periods of the capitalism, there are significant similarities between views of Veblen, Keynes and Minsky.
The most important of these similarities is that each accepts the fact that money is a variable affecting the evel of economic activity and, in this context, they carry out their analyses within the framework of the monetary production economy. These economists point out to the unstable nature of capitalism and they explain the instabilities in a capitalist economy with the tension between financial and real activities. Another similarity between these analyses is considering the changes in profit expectations as a major force that put the economy in to crises and depressions.
Finally, all of these economists oppose to the core assumptions of neoclassical economic analysis and its valuation form of economic instabilities. Veblen, Keynes and Minsky have some important differences as well as the similarities in their explanations about economic instabilities and methodological structure they adapt. In the literature, there are many studies that argue that a complementarity relationship can be established based on the similarities and differences between the analyses of these three economists (Calomiris, 1993).
Keynesian economics emerging after the great depression kept its influence on world’s economic policies until 1960’s. Nevertheless, large increases in public debt in ost of the countries that implemented Keynesian economic policies and failure of Keynesian policies to combat stagtlation during O’s nave resulted in a rise ot monetarist economic policies in many countries. During the same period, arbitrary economic policies that give vast authority to politic groups and damaging effects of these policies in economy have brought new discussions about rule-based economic policies.
Especially, fiscal rule implementation has been took place in countries which experienced unstable public finances to maintain the fiscal discipline after 1980’s. Therefore it is seen that there are major differences in fiscal discipline and fiscal rule in details and to examine fiscal rule implementation in various countries. Assessing Europe, USA and emerging economies in the context of fiscal rule implementation, macroeconomic stability and providing information on their economic outlook are especially important part of this study.
Overall, implementations of fiscal rules have seemed to contribute long term economic stability in countries and combat the undesirable effects of crises such as the recent crises and Great Depression. 5. Wave f Great Depression towards Europe and Rest of the World Back in 1950s, the whole construction of the European Union was based on an effort to replace the ruinous and bloody rivalries of European history, with a new logic based around mutual economic interests.
By early 1980s, strong neo-liberal pressures in the global economy had further pushed European governments to converge interests under the umbrella of the European Monetary Union (EMU), as qualitatively a new step in European integration. By early 2000s, the single European currency Euro became the united Europe’s proudest achievement and centerpiece of supranationalism Calomiris and Mason, 2003).
While externally EMU and Euro were designed to give Europe a chance in global economy, internally they aimed ‘politically’ cementing Germany to the Community while ‘economically’ cementing Community to the orthodox monetarist/flscal policies of Germany. However the unexpected events of the global financial crisis of 2008, global economic crisis of 2009 and the European sovereign debt crisis of 2010, had brutally exposed that the scheme was not working as well as it should. The costs of these crises to Europe were not Just financial, but political and social.
This thesis attempts to illustrate how the rules of the EMU turned out to be unrealistic, unsuitable, unmanageable, unsustainable, unreliable, unenforced, unsuccessful while the ad-hoc cures to save the EMU had been incomprehensive, unpopular, unstable and installing, as putting all those different economies at different stages of their developments into one basket; turned out to be a “trap” for all parties involved; be it the most powerful Germany or the weaker economies of the single currency. 6. Conclusions In summation, it is seen that Great Depression was not the only crises world has been going through.
There were many other cases as evidenced in the recent crises started in the USA and spread over the rest of Europe. For many decades, international organizations and institutions tried to take measures for stabilization of the integrated world and gradually, taking such steps has become more difficult. Ever integrated world and increasing flow of information among countries in the world have made the control process even more challenging. Also, process of crises emergence has become like a vicious circle; any problem that takes place in one part of the world immediately affects the rest of the world (i. , the case of USA mortgage shaping the dynamics in rest of Europe). So, measures should be taken at wider level and controls should ensure the consistency across countries. REFERENCES Bernanke, B. and K. Carey (1996). “Nominal Wage Stickiness and Aggegate Supply in the Great Depression. ” The Quarterly Journal of Economics 1 1 1(3): 853-883. Bernanke, B. and H. James (1991). The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison Financial Markets and Financial Crisis. R. G. Hubbard, University of Chicago Press: 33-68. Calomiris, C. W. 993). “Financial Factors in the Great Depression. ” The Journal of Economic Perspectives 7(2): 61-85. Calomiris, C. W. and J. R. Mason (1997). “Contagion and Bank Failures during the Great Depression: The June 1932 Chicago Banking Panic. ” The American Economic Review 87(5): 863-883. Calomiris, C. W. and J. R. Mason (2003). “Consequences of Bank Distress during the Great Depression. ” The American Economic Review 93(3): 937-947. calomtns, C. W. and J. R. Mason (2003). “Fundamentals, Panics, and Bank Distress during the Depression. ” The American Economic Review 93(5): 1615-1647. Hatton, J. d J. G. Williamson (1994). “What Drove the Mass Migration from Europe in the Late Nineteenth Century? ” Population and Development Review 20(3): 533-559. O’Rourke, K. H. and J. G. Williamson (2002). “When Did Globalization Begin? ” European Review of Economic History 6: 23-50. Mitchener, K. J. (2005). “Bank Supervision, Regulation, and Instability during the Great Depression. ” The Journal of Economic History 65(1): 152-185. White, E. N. (1986). “Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks. ” Explorations in Economic History 23: 33-55.