Causes of great depression:
Great depression spanned between 1929 and 1939 which caused huge
damage to world economies, especially US economy. It produced
unemployment and deflation. Following were causes of great
depression:
- Crash of stock market: Many firms listed in
stock exchanges posted very dismal results and it lost confidence
and faith of public in firms. Investors withdrew their money and
market crashed immensely. It was called black Monday.
- Bank run: over 700 banks went bankrupt in firm
ten months of 1930. There was huge bank run and people were
standing in long queue to withdraw their savings. Numerous people
lost their savings.
- Monetarist holds that great depression was caused by the
disproportionate rise in supply. Federal Reserve could not increase
supply sufficiently. And it caused depression and fall in
demand.
- Keynes does not agree with Monetarist explanation and contends
that great depression was caused by the fall in aggregate effective
demand. Negative business sentiments and deflation further
exacerbated problem of depression.
- Drought condition in USA: US agricultural sector was facing
drought, thus agricultural output had fallen and farmers were
unable to pay off debts.