Economic collapse
Economic collapse, also called economic meltdown, is any of a broad range of poor economic conditions, ranging from a severe, prolonged depression with high bankruptcy rates and high unemployment, to a breakdown in normal commerce caused by hyperinflation, or even an economically caused sharp rise in the death rate and perhaps even a decline in population. Often economic collapse is accompanied by social chaos, civil unrest and a breakdown of law and order.
Cases
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."To understand the Great Depression is the Holy Grail of macroeconomics." —Ben Bernanke
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 World War I led 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. 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.
Effects of war and hyperinflation on wealth and commerce
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. A vivid example of it was seen in Armenia. During the collapse of the Soviet Union, Armenia experienced three major shocks during this early phase of transformation, resulting in hyperinflation and loss of huge part of commerce. First, the old central planning regime collapsed, and many big Armenian companies that had been developed to serve the Soviet Union lost their markets almost overnight. Second, as an energy importer, Armenia's terms of exchange deteriorated sharply as the price of imported energy soared dramatically compared to the prices of its exports. Third, the war in Nagorno-Karabakh was a huge burden on the economy, and it was followed by blockades and other economic disturbances, some of which continue to this day. As a result, by 1993, Armenia's GDP had fallen to just 47 percent of its 1990 level. However, by the middle of the 1990s, hyperinflation in Armenia had been tamed thanks to the tight collaboration of the government and the Central Bank of Armenia in implementing strong monetary and fiscal policies. The average consumer price inflation was reduced from over 5,000% to 175%. Armenia was, indeed, one of the region's true success stories.More stable foreign currencies, silver and gold 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.
Bank holidays, conversion or confiscation of accounts and new currency
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.
Historical examples
China 1852–70
The Taiping Rebellion followed by internal warfare, famines and epidemics caused the deaths of over 100 million and greatly damaged the economy.Weimar Germany in the 1920s
Following Germany's defeat in World War I, political instability resulted in murders and assassinations of hundreds of political figures.Germany's finances were heavily strained by the war and reparations in accordance with the Treaty of Versailles, leaving the government unable to raise enough taxation to operate and make war reparations. The government resorted to printing money to cover the shortfall, which resulted in major hyperinflation; one book on these events, which includes quotes and a few first hand accounts, is When Money Dies. The hyperinflation ended in December 1923, with government debt being cleared at the cost of ordinary citizens' savings.
Some believe that the hyperinflation of 1923 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, but the Brüning deflation and depression.
Before 1929, the Nazi party had been actually in decline, receiving less than 3% of votes in the German federal election in 1928.
The Great Depression of the 1930s
While arguably not a true economic collapse, the decade of the 1930s witnessed the most severe worldwide 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 U.S. 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 for fiat currency 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.
The Eastern Bloc in the 1980s and 90s
During the 1980s, the Eastern Bloc, which relied on a highly centralized form of planned economy, experienced a decade-long period of stagnation from which it did not recover. The end of the decade saw revolutions and the fall of communist regimes throughout Central and Eastern Europe, and eventually in the Soviet Union by 1991. 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, culminating with economic collapse and shock therapy in the 1990s. Even before Russia's financial crisis of 1998, Russia's GDP was half of what it had been in the early 1990s.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.
A firsthand account of conditions during the economic collapse was told by Dmitry Orlov, a former USSR citizen who became a US citizen but returned to Russia for a time during the crisis.