Economic Adjustments: The Late 19th-Century Great Depression
Item 5. Adjustments in the Economy
5.1 The Great Depression
During the late 19th and early 20th centuries, there were significant changes in the global economy. This period, a time of maturity for capitalism, presents two contrasting theories. Depending on the indicators used, conclusions about the era’s evolution differ. If we use changes in profits as an indicator, we find Western Europe immersed in a crisis of contraction, hence the name “Great Depression” or “Finisecular Crisis” (End of the Century Crisis).
- Growth of Output: An increase in production was primarily determined by two factors:
- The addition of new suppliers to global and domestic markets.
- Technological advances associated mainly with what we know as the Second Industrial Revolution.
- New Suppliers: In agriculture, new suppliers were mainly located in what might be called the periphery of Europe (CEE) and partly in overseas territories.
- Technological Progress: New suppliers contributed to increased production, but there was also a process of technological progress that allowed for increased output, improved quality, and, of course, lower costs.
- Decrease in Profits: The decrease in profits was driven by falling prices while costs remained constant. This occurred because prices, in general, dropped more significantly than demand, which increased at a slower pace than supply.
Two effects are observed in the analysis of market prices:
♥ Demand tends to fall due to:
- Demand for Capital Goods: A slowdown in capital goods occurred. While there was initially high consumption of capital goods, this was followed by a payback period. The price of these goods decreased because most employers spent an increasing proportion of their spending on improving and replacing existing capital rather than acquiring new equipment, so demand was not very high.
- Demand for Commodities: Tends to be inelastic because spending on staples usually remains the same. The growth in demand for commodities is proportional to population growth. The prices of these tend to stagnate or go down, given their nature as necessities.
- Demand for Consumer Goods: Depends on the income of the population, exhibiting erratic behavior. Production increases, resulting in an excess, which leads to lower prices and a deflationary crisis.
♥ With regard to stable costs:
- Operating Costs: Decreased due to technological advances (human-machine interaction) and cheaper raw materials.
- Labor Costs: Tend to remain stable or increase because unskilled labor is replaced by a qualified workforce and because trade unions exert pressure to reduce wage cuts.
- Financing Costs: Determined by several banking crises. Banks granted loans with little collateral, which, upon becoming unpaid, led to banking crises. A rationing policy was imposed on the provision of bank loans. The mechanisms used included debtor research and the enforcement of guarantees. A series of discriminations were established regarding the interest rate offered, depending on the collateral provided.
The sum of all segments implies the stability of costs. This phenomenon occurred mainly in Great Britain.