6 Crises That Keep Economists Up At Night
Thomas Carlyle once called economics "a dismal science." Indeed, economists tend to be cautious and pedestrian, but can you blame them? After all, in these troubled times, who could sleep easy knowing these scary stories?
1. The Irish Potato Famine
When you think of economics, think of food. Until the late 1800s economic crisis usually meant agricultural crisis, with famine a not-so-infrequent consequence. Before the advent of industrial agricultural methods, weather conditions and infestations of various kinds had the power to hold the economy hostage.
In 1845 a new fungus, Phytophthora infestans, struck the potato—the mainstay of Ireland's food supply. Although the blight lasted only a few years, its effects were far reaching. As many as 1.5 million died as a direct result of the famine, and many more emigrated in the second half of the 19th century. Even today, only half as many people live in Ireland as did before the famine.
2. German Hyperinï¬‚ation
By November 1923 in Germany, $1 in the United States equaled 4.2 billion German marks, and even daily staples had to be purchased with wheelbarrows of cash. How did this happen? In 1918 Germany lost World War I, suffered a revolution, and became a republic when Emperor Wilhelm II was forced to abdicate. The Treaty of Versailles, signed a year later, saddled Germany with 6.6 billion British pounds' worth of reparations. With the German treasury empty, the government could pay—and conduct its ongoing business—only by printing lots of money: the quickest recipe for inï¬‚ation. At the height of inï¬‚ation in 1923, prices rose 40% per day. People rushed to the stores as soon as they were paid, before their money became worthless. The frightful experience of the early 1920s scarred the German national psyche and undermined faith in the Weimar Republic, which helped pave the way for Adolf Hitler and the Nazi Party. In fact, Hitler's early grab for power—the Beer Hall Putsch in Munich—came on November 8, 1923.
3. The Great Depression
During the Roaring '20s in the United States, the wealthy spent a lot of money they had, and the not-so-wealthy spent a lot of money they didn't have. The Great Depression began soon after the stock market crashed in October 1929, but economists still argue whether the bursting of the 1920s ï¬nancial bubble caused the Depression or merely foretold the coming economic slump. Either way, by 1932 the economy contracted by 31%, and some 13 million were left jobless—a quarter of the workforce. When President Franklin Delano Roosevelt took office in 1932, he started the New Deal, a set of policies to boost federal spending and create government-ï¬nanced jobs. Although the economy began growing again in the mid-1930s, the effects of the Depression lingered on until Pearl Harbor. The number of unemployed fell to 7.6 million in 1936 but rose again to 10 million in 1938—the same number of men drafted into the armed forces during World War II.
4. The '70s Oil Crisis
The price of oil tends to be slippery—something the economists forgot in the early 1970s when they conï¬dently predicted that crude prices could fall as low as the cost of pumping oil out of the Saudi desert (estimated at less than $1 per barrel). Instead, following the Yom Kippur War between Israel and its Arab neighbors in October 1973, Arab oil producers declared an embargo. Oil prices tripled to more than $10 per barrel, and gasoline shortages ensued. By December President Nixon had to announce that because of the energy crisis, the White House Christmas tree would not be lighted. The 1979 Iranian revolution brought a second oil shock, and oil prices eventually peaked at around $35 per barrel. The oil crisis helped bring on a period of stagï¬‚ation—meaning that even though the U.S. economy barely dragged along, inï¬‚ation continued to rise.
5. The Asian Flu
The domino-like collapse of several Asian economies in the late 1990s seemed to come out of nowhere. The "tiger" economies of Southeast Asia had been booming for years, and the region widely expected to stay an economic powerhouse straight into the upcoming millennium. Yet in July 1997 things went spectacularly wrong. Thailand became the catalyst for the crisis, when severe pressure from speculators brought down its currency, the baht. The Philippine peso and the Malaysian ringgit fell next. Then the Indonesian rupiah was devalued in August, ushering in political and social turmoil. Finally, even South Korea, one of the strongest economies in east Asia, nearly went bankrupt and had to be bailed out. Economists were at a loss to fully explain the crisis. But as country after country succumbed to the ï¬nancial bug, one lesson seemed clear: an interconnected global economy can transmit panic just as well as it can goods and services.
6. Argentina's Peso Crisis
During the 1990s Argentina was the star pupil of the International Monetary Fund. After two decades of runaway inï¬‚ation and collapsing currencies, the Argentine government ï¬nally turned over a new economic leaf in 1992. Economy minister Domingo Cavallo helped set up a new currency, the peso, and ï¬rmly linked it to the U.S. dollar. The government decreed that one peso could always be exchanged for one dollar and that it would print only as many pesos as were backed by dollar reserves. The system functioned extremely well for a few years, but by late 1997 the overvalued peso and restrictive monetary policies helped bring on a prolonged recession, accompanied by turmoil in ï¬nancial markets. Successive economy ministers and presidents could ï¬nd no solution. In December 2001 the Argentine peso was devalued, and the government defaulted on some $140 billion in debt, the biggest default on record.
This article was excerpted from Condensed Knowledge: A Deliciously Irreverent Guide to Feeling Smart Again. You can pick up a copy in the mental_floss store.