Economic collapse

• 1. Introduction

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  Economic collapse is a term that covers an extraordinary range of human catastrophe. At one end sits the Great Depression of the 1930s, with its towering unemployment and waves of bankruptcy. At the other, something even grimmer: an actual rise in the death rate, a shrinking population, whole societies contracting toward a vanishing point. In between lies every shade of ruin, from the paralysis of hyperinflation to the silent strangulation of a blockade.

  What makes these episodes so difficult to study is that their causes rarely arrive one at a time. Ben Bernanke, writing in 1995, called understanding the Great Depression "the Holy Grail of macroeconomics." He meant it as a measure of difficulty. When trade deficits, wars, revolutions, famines, and resource depletion can all contribute to varying degrees, pinning down a single cause is less like solving an equation and more like untangling a net.

  The story of economic collapse is not one story. It is many, unfolding across centuries and continents, each with its own trigger and its own toll. What they share is a common aftermath: social chaos, civil unrest, and a breakdown of the ordinary rules that hold commerce and daily life together.

• 2. The Weapons of War and Blockade

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  The Embargo Act of 1807 gives an early, sharp lesson in how trade disruption translates directly into economic pain. The United States Congress forbade foreign trade with warring European nations, and the result was a severe depression that fell hardest on shipping and port cities, ending what had been a substantial commercial boom.

  Blockades in later conflicts cut even deeper. The Union blockade of the Confederate States damaged plantation owners, though the South had already seen little industrial development. More revealing is the case of Germany during World War I. The blockade caused the starvation of hundreds of thousands of Germans but did not, by itself, tip the country into collapse. It was the political turmoil and hyperinflation that followed the war that did the real damage.

  For both the Confederacy and Weimar Germany, the costs of fighting the war itself exceeded the harm of the blockade. Southern plantation owners had their bank accounts confiscated and were forced to free enslaved people without any compensation. The Germans faced war reparations imposed by the Treaty of Versailles. When the conquering side refuses to honor the paper currency of the defeated, that currency collapses to nothing, as Confederate money did. Governments often restructure their debt, and bonds sometimes become worthless. The historical lesson, repeated across these cases, is that people under such pressure tend to fall back on gold and silver as the only store of value they trust.

• 3. What Hyperinflation Does to Daily Life

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  Weimar Germany provides the most documented portrait of hyperinflation in European history. Following the political chaos of the German Revolution of 1918-1919 and the Kapp Putsch, the government found itself unable to raise sufficient tax revenue to cover both operating costs and war reparations. Printing money to fill the gap produced an inflation that wiped out ordinary citizens' savings when it finally ended in December 1923, with government debt cleared at their expense.

  The lived texture of hyperinflation follows a recognizable pattern. Workers were paid daily and spent those wages immediately on essentials, since the money lost value by the hour. Store shelves emptied. Barter replaced purchase. Stocks, oddly, held much of their value compared to paper currency; bonds denominated in the inflating currency were often destroyed. Jewelry changed hands as a medium of exchange. Alcoholic beverages served as barter goods. Desperate people sold heirlooms to buy bread.

  Armenia in the early 1990s shows the same pattern playing out under different political pressures. Three shocks arrived nearly simultaneously: the collapse of Soviet central planning wiped out markets for large Armenian companies almost overnight; the price of imported energy soared relative to Armenia's exports; and the war in Nagorno-Karabakh placed an additional burden on an already strained economy. By 1993, Armenia's GDP had fallen to just 47 percent of its 1990 level. Average consumer price inflation ran above 5,000 percent in 1994. The recovery that followed was a genuine reversal: tight collaboration between the Armenian government and the Central Bank brought inflation down to 175 percent by 1995, and Armenia was later described as one of the region's true success stories.

• 4. The Great Depression's Unusual Shape

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  American stock prices began their fall in the summer of 1929 and did not stop until July 1932. By the first quarter of 1933, the banking system had broken down entirely: asset prices had collapsed, bank lending had largely ceased, a quarter of the American workforce was unemployed, and real GDP per capita was 29 percent below its 1929 level. This was severe, but economists have argued it was not a true collapse in the fullest sense, since most banks in developed countries survived, as did most currencies and governments.

  The most consequential change was monetary. The United States had allowed citizens to redeem dollars for gold, but in 1933, under Executive Order 6102, Americans were compelled to surrender their gold except for five ounces, receiving fiat currency in return. Gold ownership remained illegal for the next four decades. Gold was simultaneously revalued from $20.67 per ounce to $35 per ounce. Foreign governments could still redeem dollars for gold until 1971. Americans regained the legal right to own gold in 1974.

  One paradox of the Depression is that it coincided with high productivity growth. Real wages actually rose for workers who kept their jobs, because wages stayed roughly constant while prices fell. Hours were cut rather than wages, which helped restore output after a few years. The shift to fiat currency and the devaluation against gold ended deflation and created inflation, making the heavy debts accumulated during the 1920s boom easier to repay. A major recession in 1937-38 interrupted the recovery, but the U.S. had fully returned to pre-Depression output by 1941, on the eve of entering World War II.

• 5. The Soviet Collapse and Its Human Cost

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  The Eastern Bloc's planned economy stagnated throughout the 1980s and never recovered. By the end of that decade, communist governments fell across Central and Eastern Europe. The Soviet Union itself dissolved by 1991. What followed in Russia was not a clean transition. Even before a separate financial crisis struck in August 1998, Russia's GDP had already fallen to half of what it had been in the early 1990s.

  The human dimension of the Soviet collapse was unusually stark. Death rates rose, particularly among men over fifty, with alcoholism identified as a major cause. Violent crime and murder increased. Russia's population, which peaked in the 1990s, was lower decades later than it had been at that peak. A firsthand account of conditions during this period was provided by Dmitry Orlov, a former USSR citizen who returned to Russia during the crisis after becoming a U.S. citizen.

  The 1998 Russian financial crisis then delivered a second blow. Low oil prices and government spending cuts after the Cold War created the conditions for a sovereign default in August of that year. Russia's default on its government bonds triggered the collapse of Long-Term Capital Management, a heavily leveraged American hedge fund whose failure threatened the broader global financial system. The U.S. Federal Reserve organized a rescue, transferring control of the fund to a banking consortium.

• 6. Argentina, Zimbabwe, and Venezuela

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  The Argentine depression of 1998-2002 arrived in the wake of financial crises in Russia and Brazil. The economy shrank by 28 percent over those four years. At the crisis's depth in 2002, over 50 percent of Argentines were living in poverty and 25 percent were classified as indigent. Seven out of ten Argentine children were poor. The peso's fixed exchange rate to the U.S. dollar collapsed. The government defaulted on its foreign debt. Alternative currencies emerged as people improvised ways to conduct commerce.

  By the end of November 2001, Argentines were withdrawing large sums of dollars from banks, converting pesos into dollars, and moving the money abroad. The resulting bank run led to a freeze on accounts, which drove people into the streets of major cities including Buenos Aires. President De la Rua fled the Casa Rosada by helicopter on the 21st of December 2001.

  Zimbabwe's crisis, which began in the early 2000s, reached a peak that is almost impossible to describe with conventional language. Hyperinflation hit an estimated 89.7 sextillion percent year-on-year in November 2008 before the local currency was abandoned. When that currency was reintroduced, annual inflation surpassed 800 percent in May 2020. GDP contracted from 2001 to 2008, and again from 2018 onward. Venezuela's economic crisis, which began in 2013 under President Nicolas Maduro, is described as the worst in Venezuelan history, driven by government economic policies, falling oil prices, and other factors. GDP fell more than 40 percent from 2014 onward, and millions of Venezuelans fled to neighboring countries.

• 7. Theories of Why Collapse Happens

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  Ludwig von Mises and other economists of the Austrian School have argued that government intervention and over-regulation create the conditions for collapse, with particular attention to economies organized around state control. The Austrian Business Cycle Theory, which Roger Garrison describes as a theory of unsustainable boom rather than a theory of all depressions, holds that manipulating monetary policy to stimulate both investment and consumption simultaneously is inherently unstable. Lowering interest rates by expanding the supply of money and credit works in the short term, but the "malinvestments" Mises identified eventually collapse when the government can no longer suppress interest rates without triggering inflation fears.

  A more sweeping and darker theory comes from Nicholas Georgescu-Roegen, a Romanian-American economist who founded the field of ecological economics. His argument begins with thermodynamics: natural resources are extracted and used, transformed from states useful to human beings into waste and pollution. Nothing is created or destroyed, only degraded. This entropy, he argued, means the Earth's capacity to sustain human populations will eventually decrease as finite mineral stocks are depleted. The Industrial Revolution in Britain in the second half of the 18th century, he conjectured, set human civilization on a long overshoot-and-collapse trajectory from which there is no return.

  Georgescu-Roegen's social theory adds a second dimension. He argued that human beings are biologically incapable of restraining collective consumption voluntarily and permanently for the benefit of future generations. The pressure of population on resources, in his view, can only grow. Taken together, his predictions point toward inevitable civilizational decline. Georgescu-Roegen is also considered the primary intellectual figure behind the degrowth movement, which takes his analysis of finite resources as a starting point for rethinking economic organization.