Economic collapse

An economic collapse is a devastating breakdown of a national, regional, or territorial economy. It is essentially a severe economic depression characterised by a sharp increase in bankruptcy and unemployment. A full or near-full economic collapse is often quickly followed by months, years, or even decades of economic depression, social chaos, and civil unrest. Such crises have both been seen to afflict capitalist market economies and state controlled economies. However, in either case the causes and cures are quite different. The economic forecasting community is of two minds on the likely outcome of the financial crisis that erupted in 2007. Some commentators consider it to herald an international economic collapse while the majority, including governments and international organisations, predict a sluggish economy or a recessionary trend.


Cases of economic collapse

Economic collapses often have political as well as financial causes. Because there are so few well documented cases it is difficult to draw any general conclusions about causes. Wars, famines and depletion of important resources have been causes. Incompetent governments are another cause, especially when they go bankrupt and resort to money printing, causing hyperinflation.

Hyperinflation and wars cause hording of essentials and a disruption of markets. In some past hyperinflations, workers were paid daily and immediately spent their earnigs on essential goods, which they often used for barter. More stable foreign currencies, silver and gold (usually coins) were held and exchanged in place of local currency.[1]

In some cases embargoes caused severe hardships that could be considered economic collapse. The Union blockade of the Confederacy severely damaged the South's economy. The Blockade of Germany during WWI lead to starvation of hundreds of thousands of Germans but did not cause economic collapse. For both the Confederacy and Weimar Germany, the cost of the war was worse than the blockade. Many Southern plantaion owners had their bank accounts confiscated and also all had to free their slaves without compensation. The Germans had to make war reparations.

There is a difference between rather sudden economic collapse and long term economic decline, such as the Roman Empire.

Historical examples

China 1852–70

The Taiping Rebellion followed by internal warfare, famines and epidemics caused the deaths of over 100 million and greatly reduced the economy.[2]

Weimar Germany

Following Germany's defeat in World War I, political instability resulted in murders and assassinations of hundreds of political figures. (See: German Revolution of 1918–1919 and Kapp Putsch) Germany's finances were heavily strained by the war and reparations in accordance with the Treaty of Versailles. Unable to raise enough in taxes to run the government and make war reparations, the government resorted to printing money which resulted in the great hyperinflation. One book on the hyperinflation, which includes quotes and a few first hand accounts, is When Money Dies.[1] The hyperinflation eventually ended, but destroyed the wealth of most of her citizens and created a political environment favorable to the Nazi party and the rise of Hitler to power.

The Great Depression of the 1930s

While agruably not a true economic collapse, the decade of the 1930s witnessed the most severe world wide economic contraction since the start of the Industrial Revolution. In the USA, 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.[3] The ensuing rapid recovery was interrupted by a major recession in 1937-38. The USA 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. 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 (See: Executive Order 6102) and were forbidden to own monetary gold for the next four decades. Subsequently gold was revalued from $20 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 bacause of the reduced work week.[4]

Economic collapse of Soviet Communism

During the 1980s, the Eastern Bloc, which relied on a stagnant form of plan economy, experienced a decade-long period of stagflation, and eventual collapse from which it did not recover, culminating with revolutions and the fall of communist regimes throughout Central and Eastern Europe and eventually in the Soviet Union. The process was accompanied by a gradual but important easing of restrictions on economic and political behaviour in the late 1980s, including in the satellite states.

A first hand account of conditions during the economic collapse was told by Dmitry Orlov, a former USSR citizen who became a U.S. citizen, but returned to Russia for a time during the crisis.[5]

Russian financial crisis of 1998

After more or less stabilizing after the disintegration of the USSR, a severe financial crisis took place in the Russian Federation in August 1998. It was caused by low oil prices and government expenditure cuts after the end of the Cold War. Other nations of the former Soviet Union also experienced economic collapse, although a number of crises also involved armed conflicts, like in the break-away region Chechnya. Despite a crackdown on the oligarchs and allegations of a clampdown on the freedom of the media and political opposition, the Russian economy has made a significant recovery in the past decade due in part to proceeds from the sale of oil and gas in neighboring countries, notably in Europe. In the autumn of 2008, Russia suffered a renewed collapse of confidence in its financial markets.

The default by Russia on its government bonds in 1998 led to the collapse of highly leveraged hedge fund Long Term Capital Management, which threatened the world financial system. The U.S. Federal Reserve organized a bailout of LTCM which turned it over to a banking consortium.

Argentine economic crisis (1999–2002)

Present economic trends

Rep. Paul Kanjorski on the near collapse:[6]

“On Thursday [the 18th], at about 11 o’clock in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to a tune of $550 billion being drawn out in a matter of an hour or two. The Treasury opened up its window to help. They pumped $105 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic and there. And that’s what actually happened. If they had not done that their estimation was that by two o’clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed. Now we talked at that time about what would have happened if that happened. It would have been the end of our economic system and our political system as we know it.”

The Baltic states, once showing strong GDP growth (Baltic Tiger), started to experience economic downturn since the late 2008.[7] In Latvia, the GDP has declined more than 20% since 2008, one of the worst recessions on record.[8]

Theories of economic collapse

Neo-classical economic theory does not offer a theory of economic collapse. Rather, the insights it offers concerning economic collapse are that they result from exogenous shocks, mismanagement of monetary policy or failures of regulation and supervision of lending practices. Other schools of economic thought, however, offer fundamental theories of such economic phenomena.

Austrian school

Some economists (i.e. the Austrian School, in particular Ludwig von Mises), believe that government intervention and over-regulation of the economy can lead to the conditions for collapse. In particular, Austrian theoretical research has been focused on such problems emanating from socialist forms of economic organization. This however is not a theory of economic collapse involving the breakdown of freely functioning financial markets. Rather the focus is on economic malfunction and crisis emanating from state control.

Georgist explanation

In his posthumous work "The Science of Political Economy" published in 1905 Henry George traced the many financial crises in the USA in the 19th century to bank lending practices linked to asset bubbles in the market for land. As land is a scarce resource, it lends itself to such speculation. The speculative bubble bursts when the banks run out of money and can no longer lend for such speculative investments. Bank insolvencies follow as the asset price drops and speculators are unable to pay back the loans. This is similar to subsequent speculative bubbles in other asset markets, including equity and mortgages. In short, this is not a theory of economic collapse proper but an explanation of shortcomings in bank lending as a cause of financial crisis and economic collapse.

Sarkar's Theory

The Indian philosopher P.R. Sarkar and his disciple Dr. Ravi Batra, hold that the "concentration of wealth in few hands" and "stoppages in the rolling of money" are root causes of such crisis of capitalism. The concentration of wealth engenders an euphoric phase accompanied by rising asset prices and further excesses which are eventually followed by a correction in asset prices, a liquidity crisis, insolvency and collapse. Government efforts to inject liquidity into the financial system or bolster demand can postpone the crisis but not avoid it. At best, a trade-off is seen to exist between unemployment and inflation. In the Great Depression of 1930s, mass unemployment developed along with deflation in the USA. Some believe that expansionary economic policies may be able to avoid high levels of unemployment but at the cost of high inflation. However, high inflation and high unemployment brought the Weimar Republic to its knees in the early 1930s. While the economic system may eventually absorb the losses, it does so only after considerable suffering by the general population. Unlike Communism, capitalism has so far weathered such storms because its inherent dynamic properties have eventually engendered a recovery. However, should a sufficiently traumatic collapse occur, it could serve to reduce the legitimacy of capitalism and lead to upheaval and radical societal changes.

Neo-Malthusian theory

In The Limits to Growth (1972), a series of computerized economic models were run that simulated population growth, natural resources and pollution, under various assumptions. These models typically show that economic growth will eventually turn negative in the 21st Century as population outgrows food supply, natural resources become scarce and pollution becomes intolerable.

This school of thought is associated with Ecological economics.

Economic disaster

An economic disaster is a widespread disruption or collapse of a national or regional economy, due to natural causes, such as hurricanes, volcanic eruptions or droughts, resulting in famine or plagues. Some of these occurrences are short-lived, while others may last for years. Economic disasters are different from economic collapses due to human agency or economic forces, such as imbalances in the stock market or mistakes in the conduct of monetary policy.

See also


External links


  1. ^ a b Fergusson, Adam (1975). When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. ISBN 1586489941. 
  2. ^ See, e.g. Korotayev, Andrey V., & Tsirel, Sergey V. A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis. Structure and Dynamics. 2010. Vol.4. #1. P.3-57.p 27. This is a secondary source. Primary sources are cited in article.
  3. ^ Real GDP per capita was $7099 in 1929 and $5056 in 1933; NIPA Table 7.1, row 9.
  4. ^ Bell, Spurgeon (1940). Productivity, Wages and National Income , The Institute of Economics of the Brookings Institution 
  5. ^ Orlov, Dmitry (2008). Reinventing Collapse: The Soviet Example and American Prospects. New Society Publishers. ISBN 865716064. 
  6. ^ [1]
  7. ^
  8. ^

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