Economic collapse

There is no precise definition of an economic collapse. The term has been used to describe a broad range of bad economic conditions from a severe, prolonged depression with high bankruptcy rates and high unemployment, such as the Great Depression, to a breakdown in normal commerce caused by hyperinflation (such as in Weimar Germany), or even an economically caused sharp increase in the death rate and perhaps even a decline in population (Former USSR). Often economic collapse is accompanied by social chaos, civil unrest and sometimes a breakdown of law and order.

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 Economics"Ben Bernanke (1995)

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 and depletion of important resources have been listed as causes. Incompetent governments are another cause, especially when they go bankrupt and resort to money printing, causing hyperinflation.

In some cases blockades and embargoes caused severe hardships that could be considered economic collapse. For more information on economic collapse please check economic collapse. In the U. S. the Embargo Act of 1807 forbid 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 WWI lead 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 plantaion 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. (This was the situation of the Confederacy.) 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. Historically this was as coins, foreign or domestic, by the general public. Jewelry was also used as a medium of exchange.

Economic collapse requires some sort of developed economy to begin with. Rural, agrarian economies that operate at subsistence level that are affected by famines and plagues are not normally considered a form of economic collapse. There is a difference between rather sudden economic collapse and longer term economic decline, such as the Roman Empire, which occurred in a few decades, or the societal collapse of past civilizations.

Effects of war and hyperinflation on wealth and commerce: Hyperinflation, wars and revolutions cause hording 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.

More stable foreign currencies, silver and gold (usually coins) 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 hyperinflations stocks typically hold 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, normally to save the banks and not necessarily the depositors. Depositors remain unable to withdraw their money, sometimes 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. Sometimes funds are confiscated. In the U.S. gold was confiscated under Executive Order 6102 and compensated at $20.67 per ounce. Gold was later revalued to $35 per ounce; however, the main negative effect was felt by foreign holders of dollar denominated investments and some of those involved in international trade.

Confiscation of private pensions, such as 401k accounts and Individual retirement account ("IRA") accounts, already has been proposed or instituted as a solution to pension problems but many fear the money could be used for other government expenses. 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.

During the financial panic of 2008 the US Government halted a bank run on money market funds (MMFs) by extending government insurance. Recently however, Securities and Exchange Commission (SEC) Chairman Mary L. Shapiro warned that money market fund investors "have been given a false sense of security." In the event of another run Shapiro said the SEC was considering imposing fees or limits on withdrawals. The SEC also wants to require MMFs to maintain capital reserves.

Historical example

Weimar Germany: 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. 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. 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.