Question

Indicate (with brief descriptions) the monetary factors which have been proposed as causes of the Depression which began in 1929 in the United States.

Answer 1

Great depression of 20s and 30s still remains the longest and most severe economic slowdown. (1929-1939). It affected nearly each and every country around the globe. Resulted in mass unemployment, banking crisis,increase in poverty rates. It largely affected the GDP of United states.

Main monetary factor causes for great depression are as follows :

1. Crashing of stock market in the year 1929 - Since the beginning of 1920s US stock market gained an historic expansion and importance among the citizen.During these period stock market prices rose unprecedented level and thus people fell investing in stock market as an easy method to earn more money.Soon the purchase price of the stock were financed with multiple loans to be repaid with profit generated by increase in share prices. Ones in the year October 1929 prices began to falls and thus created panic among the people holding shares.It resulted in huge lose and industrial downturn.

2. Gold standard - Gold standard played a crucial role in spreading great depression from United states to other nations.United states ran a trade surplus with other nation as it bought very few imported goods from other nations. American exports were cheap. It gave rise to foreign gold outflows to united states. Due to which it started to devalue the currency of United states. Thus in order to counteract the central bank of other countries rose the interest rates which were having affect of reducing output and increase in unemployment.

3. Downfall in international lending - Lending by US banks fell tremendously due to high interest rate charged by US.American agricultural interest suffered due to overproduction and competition between European countries. Congress adopted steep tariff on wide agricultural products.

4. Banking panic - Many bank customers feared bank insolvency so they attempted to withdraw all the deposited money. Due to large bank panic even very healthy bank financial condition also affected. Main cause of bank failure was due to decrease in consumer spending. Very few banks were left who still lends money. There was very few amount of money left to lend as most of the customer holded the money in the form on cash. Due to lower money supply in-turn reduced the prices and in-short people were in doubt for any kind of investment to be made.